The proposed merger of Capital One Financial and Discover Financial Services is the largest in the banking and financial services sectors since the 2000s. The proposed merger signals a fundamental shift in the motivation for consolidation in banking and credit card services since the last swath of mergers. That is, acquisitions by the top credit card payment processing networks and card issuers over the last 15 years have focused on building out digital payment technology “ecosystems” in the migration to digital financial services.
The merger affects a number of important markets, ranging from banking to credit card purchasing and lending, and even digital payments ecosystems where Capital One-Discover will compete with newer market entrants. The impact on consumer credit card lending is getting particular attention. Credit card debt has skyrocketed since 2021 and the cost of that debt weighs heavily on working-class Americans. Any post-merger threat of higher credit card interest rates and fees, or a degradation in non-price benefits such as card rewards programs, therefore, will get very close scrutiny by regulators.
With many cooks in the regulatory “kitchen,” including the Federal Reserve Bank (FRB), Office of the Comptroller of the Currency (OCC), and U.S. Department of Justice (DOJ), the $35 billion Capital One-Discover merger will be under the microscope. But it comes at a time when updated bank merger guidelines from OCC and DOJ are far from finalized. This leaves the 1995 bank merger guidelines and, potentially, questions about if and how the DOJ might apply the new 2023 Merger Guidelines to the transaction.
PPI’s analysis unpacks major competition questions that are likely to surface in the DOJ’s antitrust review of the credit card side of the Capital One-Discover merger. These issues range from a loss of competition and enhanced market power in credit card purchasing and lending, to vertically combining a credit card issuer with a payment processing network, and how the merger affects competition in digital payments ecosystems.
A major takeaway from PPI’s analysis, which is based on publicly available data, is that the Capital One-Discover merger is unlikely to present a clear-cut case of a merger that is likely to “substantially lessen competition or tend to create a monopoly” under Section 7 of the Clayton Act. This applies under existing banking guidelines followed by the DOJ and the new 2023 Merger Guidelines, should the government use them to guide an analysis of the competitive effects of the Capital One-Discover merger.
Challenging a merger in federal court that does not trigger, or strongly trigger, the thresholds in the merger guidelines would raise the government’s burden of proof. The DOJ would need to make a particularly strong case for anticompetitive effects in order to fend off rebuttal evidence from Capital One-Discover that the merger is pro competitive. These dynamics increase the Biden DOJ’s risk of losing in a litigated merger case, an outcome that could set a poor precedent at a time when strong merger enforcement will be particularly important in policing a new wave of consolidation in the financial services sector.
Please read on for PPI’s analysis of the Capital One-Discover merger and what it means for antitrust enforcement, consumers, and the financial services sector.
