If two of the country’s largest credit card issuing banks merge, will the combination create a behemoth that limits consumer choice and pushes up card rates? Will it benefit the public or just the new bank?
Those are among the concerns of critics of Capital One’s $35.3 billion planned acquisition of Discover Bank, a deal that has continued to face considerable headwinds since it was announced last month.
The latest group to question the proposed merger is a coalition of 30 community, consumer, civil rights and public interest groups. In a March 21 letter to the federal agencies reviewing the deal, the group said the merger between the bank and payment processing network "presents unique anticompetitive considerations and potentially negative impacts on depositors and customers," who should have the chance to voice their concern.
The group — which includes the Consumer Federation of America, Consumer Reports, and the National Community Reinvestment Coalition (NCRC) — urged that a public hearing be held on the matter. It called on the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Department of Justice (DOJ) to move quickly to provide a transparent review with ample opportunity for the public to engage and comment.
In a March 21 Reuters report, Capital One appears to be trying to quell at least some of those fears.
Per the report, which cites people familiar with the matter, the bank said the merger would not be problematic for credit card competition because, combined, the companies account for only about 13% of credit card purchasing volume, a metric that the bank likens to market share, according to the report.
The bank, in the report, also makes the point that the merger with Discover — a card issuer as well as payment network operator — would allow it to better compete against network giants Visa and Mastercard.
Capital One and Discover did not return calls for comment.
David Robertson, publisher of The Nilson Report, told Kiplinger last month that combining the two banks will have no impact on consumers but that, "in time, merchants could benefit because the new company could offer more competition to Visa and Mastercard.”
A network-level disruption is the "the big play that's going on here," according to a recent report by Lulu Wang, assistant professor of finance at the Kellogg School of Management. The disruption could come about, for example, if Capital One decides after the merger to move some of its card business from the Visa and Mastercard networks, to Discover's proprietary network, he said.
Wang noted that more consumers are using credit cards over cash these days and that the two banks command less than 20% of consumer card balances and about 10% of card spending. As far as consumer benefits, the deal may allow Capital One to issue rewards debit cards through the Discover network, products that Visa and Mastercard do not offer, he said in the report.
The power to 'extort' consumers — Sen. Hawley
The banks expect the merger to close in late 2024 or early 2025, pending shareholder and regulatory approvals. But whether it is actually completed remains an open question until, and if, it receives those approvals.
Soon after it was announced, several lawmakers raised red flags, objecting to what they said would be a combination that consolidates market power and harms consumers by pushing up credit card rates.
Sen. Josh Hawley (R-MO), who wrote to DOJ antitrust chief Jonathan Kanter last month, is among those calling for the deal to be blocked.
"This is destructive corporate consolidation at its starkest. If consummated, this merger will create a new juggernaut in the credit card market, with unprecedented powers to extort American consumers," Hawley said in the letter.
The day after the transaction was announced, Sen. Elizabeth Warren (D-MA) said in a post on X, the platform formerly known as Twitter, that it "threatens our financial stability, reduces competition, and would increase fees and credit costs for American families.”
Days later, Warren led a group of other Democratic lawmakers in calling for the Fed and OCC to block the merger. Combining the banks would consolidate the credit card market, create the nation's sixth-largest bank and limit customer choice, the group said in a letter.
Credit card rates at large banks are higher than those at small banks, according to a study last month from the Consumer Financial Protection Bureau (CFPB), which regularly surveys 150 credit card issuers nationwide. The study found that the 25 largest card issuers charge interest rates that were 10% higher on average than interest rates charged by smaller financial institutions.
A total of 15 issuers — including Capital One (fourth on the list) — have at least one product that has a maximum purchase APR over 30%, according to the CFPB study. The agency said it is working on improving competition in the credit card market.
