Top 10 Reasons to Block the Capital One-Discover Merger

By Patrick Woodall, Managing Director for Policy

Today, Americans for Financial Reform and many allies will take our case directly to federal banking regulators and demand that they block the proposed Capital One-Discover merger. Federal regulators have rubber stamped thousands of bank mergers over the past few decades, consolidating the industry to create risky megabanks, reducing choices and raising prices for depositors and small businesses. The wave of mergers beginning in the mid-1990s contributed to the contagious fragility of the banking system during the 2008 financial crisis.

This proposed takeover doesn’t pass the laugh test. Federal antitrust and banking laws forbid banking mergers that substantially lessen competition, fail to meet the convenience and needs of communities, have a poor track record of regulatory compliance, or could pose a risk to financial stability. A combined Capital One and Discover meets none of these statutory requirements. It might be a fantastic deal for the bank executives and shareholders that could pocket millions, but it is a raw deal for depositors, credit cardholders, small businesses and communities.

AFR has filed extensive comments describing how the proposed merger raises serious concerns under both the Clayton Antitrust Act and the Bank Merger Act. This big, complex merger would create the sixth largest bank and combine a bank with a credit card and payments network. It raises a host of concerns, any one of which should be sufficient for federal antitrust or banking regulators to reject this merger application.

Here are the top 10 reasons to block this merger:

1. The merger would create a credit card lending monopoly for people with non-prime credit scores: The takeover would create the biggest U.S. credit card lender, with nearly one-third of the credit card loans to people with non-prime credit scores. Capital One could use its market power to raise prices on virtually captive consumers. People cannot simply switch to a new card if Capital One hiked prices; more than 80 percent of subprime credit card applications are rejected. Even if people could secure a new card, switching can be expensive and damage their credit score. The merger would also eliminate the current rivalry between Capital One and Discover for middle-income consumers. Instead of greater competition, the new megabank would reduce choices and raise prices for families with non-prime credit scores, who are disproportionately Black and Latine families.

2. The merger would worsen the anticompetitive practices by the credit card oligopoly: The takeover would reduce credit card competition. It would not — as Capital One contends —confront the credit card network duopoly of Visa and Mastercard; it would merely rearrange the deck chairs in a hyper-consolidated market. Capital One’s cards are overwhelmingly on Mastercard, moving everything to Discover would make Capital One the number two issuer. The overall market structure would remain essentially unchanged. Now, Discover plays the role of a maverick in the market, offering better service and lower prices —about 2 percentage points cheaper than other cards. The merger would eliminate this alternative and make the card market worse for consumers and merchants, not better.

3. The merger would create a new megabank that could pose risks to financial stability: The combined bank would be heavily weighted in credit card loans that would make up 40 percent of its assets — more than 5 times the credit card asset concentration as JPMorgan Chase and Citibank, the current market leaders. Both Capital One and Discover have far higher credit card delinquency rates than other big banks and a recent Federal Reserve stress test found that Capital One’s credit card assets could decline by 23 percent under macroeconomic stress before the merger; the combined firm could lose nearly $54 billion. The combined bank would be more susceptible to losses that could destabilize the financial system and spread contagion to other banks.

4. The merger would ignore Capital One’s record of deceptive marketing and aggressive debt collection: Capital One’s primary product is credit cards that target lower-income, Black, and Latine families and it has the highest number of Consumer Financial Protection Bureau complaints per billion dollars in credit card lending. Since 2006 Capital One has paid $225 million to settle deceptive credit card marketing cases and paid $87 million to settle cases that alleged it had unlawfully pursued or collected debts. Capital One routinely increases the credit cap of cardholders with subprime credit scores without their permission, effectively encouraging borrowers near their credit limit to take on additional debt.

5. The merger would reward Capital One’s broken promises in prior merger approvals: Capital One shut down two-thirds of its branches after promising to maintain its geographic footprint as a condition of acquiring Hibernia, North Fork, and Chevy Chase regional banks. It stopped making home purchase and home improvement mortgages after promising to maintain service levels in previous merger approvals. And it promised to improve regulatory compliance to secure the ING purchase after a raft of deceptive marketing and aggressive debt collection settlements. But within a few years it paid nearly $700 million in penalties and settlements over money laundering lapses and a preventable privacy breach. Banking regulators should not reward these broken promises with yet another merger approval.

6. The merger would expose merchants to debit interchange price gouging: The merger would allow Capital One to evade federal debit interchange fee caps by shifting its debit business to Discover’s debit network and impose higher prices on merchants, which get passed on to consumers. (Due to an exemption in regulations, federal debit interchange fee caps do not apply to Discover because it both owns the network and issues the debit cards.) Capital One plans to shift all its debit cards to Discover, which currently charges interchange fees that are double the fees other banks are allowed to charge. Capital One itself predicts this shift would generate $1.2 billion in higher revenues, in part from higher interchange fees which will be paid by merchants and passed on to consumers.

7. The merger would harm communities by leading to widespread layoffs: The proposed merger is likely to include significant layoffs as Capital One eliminate duplicative credit operations. When Capital One bought the HSBC credit card company, it laid off at least 1,700 workers at customer service centers across the country. Capital One estimated that the Discover merger would generate $1.4 billion in synergies, which really means eliminating jobs, most likely in the greater Chicago area, where Discover is headquartered. The Chicago Tribune noted that the region could lose a “hefty number of good-paying jobs,” including at the recently opened call center in Chicago’s South Side that employed hundreds of local workers in a predominantly Black neighborhood.

8. The merger would expose Discover cardholders to far weaker privacy protections: The merger would increase Capital One’s control of consumer data and enable it to exploit consumers’ personal information and undermine their privacy, especially for the 300 million Discover cardholders whose data would be shifted to Capital One’s weaker privacy policies. In 2019, Capital One failed to protect its customers from a preventable data breach that released the personal information of 100 million customers. Capital One also deploys its data collection, aggregation, and analytics in 80,000 annual experiments to test consumers’ willingness-to-pay (the upper limits of what interest rates and fees they would accept) in order to lock in higher prices and extract economic value from its consumers.

9. The merger would give Capital One power over smaller banks that use Discover’s debit network: Capital One would have new leverage over its banking rivals that use Discover’s debit network to process its ATM and point-of-sale transactions. Currently, more than 4,100 banks rely on Discover’s network. Once Capital One controlled this network, it could charge rival banks higher prices or otherwise impede their access to the debit network. It creates a conflict of interest between Capital One’s role as a competitor with other banks and its role providing a critical service to the banks on Discover’s network that could harm rival banks and their customers.

10. The merger is just too darn big:  The merger would create a much larger and more complex bank whose financial distress or failure could spread across the financial system and compromise the viability of other banks. The Capital One-Discover takeover would create the sixth-largest bank by assets ($624 billion domestic assets) and the fifth-largest by deposits ($470 billion). Macroeconomic stress at bigger banks like Capital One-Discover has a significant effect on the economy and size alone is a key predictor of systemic risk. The merged bank would be twice as big as Washington Mutual and more than three times larger than Silicon Valley Bank when they failed and spread financial contagions to other banks.

Bank mergers must be subject to strict scrutiny because of the unique and vital role of federally chartered banks for the economy, communities, and families. The proposed Capital One-Discover merger fails to fulfill the federal antitrust and banking statutory requirements and must be blocked.