Capital One's acquisition of Discover will be a win for consumers

Angus Mordant/Bloomberg

Critics of Capital One's acquisition of Discover have made unfounded arguments about the deal's financial stability, payment processing and compliance with anti-redlining laws. The proposed merger is rife with benefits for American consumers, merchants and small businesses in the form of varying payment options, stability, access to capital in all communities and higher deposit rates. 

Consumers will have more options if the acquisition is approved. Visa is offering a new product that allows flexibility in choosing between debit, credit and installment loans without needing separate cards. Capital One can choose different payment rails in addition to using Discover for debit card transactions. More payment options are good for consumers and merchants. According to one article, "the card industry is not so concentrated that the acquisition would result in a lack of consumer or merchant options." All else equal, providing different payment network options creates competition and lowers costs for merchants without having to pass restrictive and unnecessary legislation such as the Credit Card Competition Act. 

Deposit rates do not necessarily decrease after every bank merger. One paper found that deposit and loan rates converge to the acquiring bank's rates. Capital One and Discover offer 12-month certificates of deposit with annual percentage yields of 5% and 4.7%, respectively. Based on the paper's findings of "uniform pricing," Discover would adopt the acquiring bank's rate — in this case Capital One. Consumers will see certain deposit rates increase. 

Opponents of the merger have wrongly criticized how it will affect credit access for low- and moderate-income communities. Capital One most recently received a Community Reinvestment Act, or CRA, rating of "outstanding" and Discover received a rating of "satisfactory." There is no tangible evidence to suggest their ratings would worsen after the acquisition is finalized. 

The real threat to a sound banking system is allowing activists to weaponize CRA ratings. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are already amending bank merger guidelines that would make it easier for activists to halt mergers. 

Artificial intelligence

Consumer groups to CFPB: Make banks fairness-test AI lending software

The Consumer Federation of America and Consumer Reports sent a letter to the Consumer Financial Protection Bureau urging it to require banks to search for less discriminatory models. Later the same day, the CFPB issued a report saying it's doing just that.

By Penny Crosman

June 27

According to an article published by the North Carolina Banking Institute, "[a]ctivists have used the statute to magnify their political importance, to gain special favors for themselves and their leaders, to obtain funding for pet projects, or garner direct logistical or financial support for their operations." Abusing the CRA ratings process "to further these goals represents a distortion of its original purpose." Regulators should not allow activists to control the bank merger review process. 

The combined Capital One and Discover entity will likely continue to be regulated as a Category III bank. Three out of four bank mergers that remained Category III banks were approved by regulators. Since Capital One has experience with the regulatory and capital requirements for a Category III bank, financial stability concerns should not be an issue. Ironically, federal regulators' proposed implementation of Basel III endgame capital requirements is the real threat to stability. As drafted, the proposed capital requirements would significantly burden Category III banks by applying stricter capital standards for deferred tax assets, which includes Capital One's and Discover's rewards programs, and mortgage servicing assets. 

The proposed regulations would also require Category III banks to account for unrealized gains and losses for available-for-sale, or AFS, securities in their capital calculations. The combined Capital One and Discover entity would be punished for unrealized losses in its AFS securities portfolio even though the supposed impetus for this provision, Silicon Valley Bank suffered from overexposure to long-term securities classified as held-to-maturity, or HTM. If there is any future instability, it will likely be the result of regulatory interference not internal bank weaknesses. 

The reasons for denying Capital One's acquisition of Discover are few and far between. More competition in payments and compliance with current anti-redlining laws give no credence to activists claiming the merger will harm Americans. On the contrary, if there are any hiccups after the acquisition is complete, it will be because federal regulators instituted a new capital regime designed to punish regional banks in the aftermath of three bank failures. The fate of Capital One's acquisition should be determined based on its own merits and not be maligned for the foibles of other failed banks.