Capital One’s Discover Buy Puts Antitrust Regulators to the Test

Capital One Financial Corp.‘s plan to take over Discover Financial Services is poised to reveal whether regulators are serious about policing consolidation in the financial sector.

The $35 billion deal would lead to a vertical integration of a major card issuer and the fourth-largest card network in the US, raising antitrust considerations for federal regulators. Agencies would have to consider the deal’s impact on the credit card issuer landscape, and its potential effect on market power over credit card transactions.

“Are these regulators going to walk the walk, or are they just talking the talk?” said Todd Phillips, an assistant professor at Georgia State University focused on banking and financial regulation. “They have talked about being more strict on bank mergers, and we’re going to see whether they’re really living up to that.”

Read More: Megabank Deals to Get Even Tougher Review From Key US Regulator

The merger requires approval from both the Office of the Comptroller of the Currency and the Federal Reserve, which will consider the potential competitive impacts of the deal alongside other implications, from financial stability to anti-money laundering controls. The Justice Department’s Antitrust Division also has the authority to file a lawsuit to block the deal, regardless of the banking agencies’ verdict.

Combined, Capital One and Discover would form the largest US credit card issuer—a dynamic that “raises red flags for me from a competitive perspective,” said Jeremy Kress, an assistant professor of business law at the University of Michigan. The competitive effects of Capital One’s ownership of Discover’s credit card network are murkier but are also likely to catch regulators’ attention, added Kress.

“I worry about Capital One’s potential ability to exert market power as a $600 billion bank—the largest card issuer that also operates a network,” Kress said. “The competition authorities are going to have legitimate questions about potential accrual of market power.”

Procompetitive Claims

Capital One has argued the deal will lead to more robust competition among credit card networks, which provide the communication systems banks and businesses use to process credit card transactions. The network market is currently dominated by Visa Inc. and Mastercard Inc., with American Express Co. and Discover also in the mix.

The Discover acquisition “adds scale and investment, enabling the Discover network to be more competitive with the largest payments networks and payments companies,” Captial One said in a statement announcing the acquisition.

Visa and Mastercard’s payment networks have also been the target of recent antitrust scrutiny from federal regulators. DOJ officials last year probed Visa over how it charges merchants for technology it uses to protect cardholder information and investigated potential anticompetitive conduct in Mastercard’s debit card business.

“Capital One could put some money behind it, maybe make them a stronger competitor,” said George Hay, a professor at Cornell Law School who specializes in antitrust.

But Jesse Van Tol, CEO of the National Community Reinvestment Coalition, said he worries Capital One’s ability to run its card business through the Discover network could give the bank too much market power over significant aspects of credit card transactions, and would likely result in higher costs for consumers. The NCRC works on bringing more capital to traditionally underserved communities.

“The more market power a company has, the more likely it is to charge people more,” Van Tol said, referencing a Consumer Financial Protection Bureau report last week that found the largest US banks charge 8% to 10% higher credit card interest rates than smaller financial institutions.

Van Tol’s concerns about the deal’s impact on consumers also echoed statements from Democrats on Capitol Hill, including from Senate Banking Committee Chair Sherrod Brown (Ohio) and Sen. Elizabeth Warren (Mass.).

Kress, of the University of Michigan, said he isn’t convinced by Capital One’s procompetitive arguments in favor of the deal, stressing the need for regulators to weigh companies’ competition claims against potential harm to consumers in specific markets.

“Even if you credit the argument that Capital One growing Discover’s network would better compete with Visa and Mastercard,” if consumers are hurt by the lack of competition, “then the deal violates antitrust law and can’t be approved,” Kress said.

‘Uphill Battle’

President Joe Biden’s 2021 executive order to promote competition called on the DOJ and banking agencies to more aggressively scrutinize consolidation in the financial sector, a commitment regulators have echoed in recent public statements.

The OCC, which approves mergers involving nationally chartered banks, explicitly outlined its reluctance to approve megabank deals in a proposed policy statement last month, pointing to the agency’s increased focus on concentration risk after the collapse of several midsize banks last year.

Similarly, the DOJ’s antitrust division “is modernizing its approach to investigating and reporting on the full range of competitive factors involved in a bank merger,” said Assistant Attorney General Jonathan Kanter in a speech last year at the Brookings Institution.

The DOJ will move beyond the traditional look at deposit concentration to examine fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service, Kanter said.

Capital One and Discover “may be facing more of an uphill battle than they realize,” Van Tol said, adding consumer groups are also opposing the deal.

While antitrust will factor into regulators’ assessment of the acquisition, the OCC and the Fed will also be focused on safety and soundness issues beyond the scope of competition concerns, said Max Bonici, counsel at Venable LLP who handles bank regulatory issues.

“Certainly after the 2023 bank failures, everything involving a bank,” Bonici said, “is subject to fine-tooth comb analysis.”

—With assistance from Leah Nylen (Bloomberg News)