Federal approval granted for Capital One and Discover's partnership deal
In a move that has stirred controversy, the Federal Reserve and the Office of the Comptroller of the Currency have given their approval to Capital One's acquisition of Discover, marking the last two regulatory approvals needed to close the largest merger in the banking space in at least six years. The transaction, announced in February 2020, is valued at $35.3 billion.
The approval comes amidst a wave of antitrust concerns and regulatory investigations. The core arguments against the merger centre on market concentration leading to less competition, potential harm to consumers through higher prices or fewer choices, dominance in the subprime credit card segment, and vertical integration that could entrench market power.
The merger would create a dominant player in the U.S. credit card market, combining two of the largest credit card issuers. This could control about 19% of the loan share and roughly 30% of the subprime credit card market. This level of market concentration raises fears of reduced competition in credit card issuing and payments processing.
Consumer groups and some regulators argue that the deal could reduce competitive pressure on fees and services, potentially harming consumers by limiting choices and allowing the merged company to exert greater pricing power. A federal class action lawsuit was filed by Capital One cardholders claiming the merger violates antitrust laws, highlighting consumer concerns about the detrimental effects on market competition.
New York Attorney General Letitia James initiated an investigation into whether the acquisition breaches state antitrust laws, demanding documentation from Capital One for her inquiry. The deal has advanced despite these investigations, reflecting a more permissive antitrust enforcement stance.
Critics have also voiced concern that the merger could facilitate vertical integration advantages, combining issuing and processing functions, which might reduce transparency and create barriers to entry for smaller competitors.
However, the deal has received comparatively favorable treatment from the DOJ under current leadership, which some allege favors negotiation and deal facilitation over litigation to challenge large Wall Street mergers; this raises questions about the vigor and direction of antitrust enforcement in this case.
Despite the antitrust concerns, Capital One has announced a five-year, $265 billion community benefits plan. The plan includes $200 billion in consumer lending to low- and moderate-income consumers, $44 billion for affordable housing, economic development, public infrastructure, and alternative energy. The combination also comes with conditions, including a $100 million fine for Discover over a pricing misclassification issue.
The FDIC issued three orders against Discover, including a $150 million fine, restitution of at least $1.225 billion to overcharged customers, and an amendment to a 2023 consent order related to the price misclassification issue.
The deal is expected to unlock $1.2 billion in annual revenue for Capital One. More than 90% of the comments received by the OCC regarding the merger were negative. The vast majority of comments received by the Fed were "substantially identical form letters" expressing concerns about competition and financial stability.
NCRC has urged state Attorneys General to intervene against the Capital One-Discover merger. New York Attorney General Letitia James has asked for an out-of-state subpoena related to an investigation of the antitrust implications of the Capital One-Discover deal.
The transaction is set to close on May 18, 2020. The approval represents a significant step towards consolidation in the banking sector, but the antitrust concerns and regulatory scrutiny are likely to continue.
- The approval of Capital One's acquisition of Discover by the Federal Reserve and the Office of the Comptroller of the Currency has raised concerns within the industry, finance, and business communities, due to potential market concentration, reduced competition, and the impact on consumers in banking-and-insurance sectors.
- Despite the controversy surrounding the Capital One-Discover merger, some argue that the deal could lead to significant revenue increases for Capital One and foster vertical integration advantages, which could potentially create barriers for smaller competitors within the banking-and-finance industry.
