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Last Friday, the Consumer Financial Protection Bureau released a report showing that larger credit card issuers charge higher interest rates, costing consumers with an average balance of $5,000 between $400 and $500 a year on average, relative to those with credit cards at the small banks and credit unions. Bigger banks are also more likely to charge an annual fee.
The problem, of course, is that the credit card business is heavily concentrated; the top ten credit card companies represent more than 80 percent of total outstanding loans. So there isn’t much of a mom-and-pop market in credit cards, at a time when credit card debt is skyrocketing and higher interest rates translate into more profits.
The situation potentially got worse on Monday, just three days after the CFPB released its report, when Capital One and Discover announced a proposed $35 billion merger. Both firms are in that top ten of credit card issuers, and the deal would create the largest issuer in the country with a 19 percent market share. While Visa and Mastercard are seen as a credit card platform duopoly, thanks to Discover’s payment network the combined company would operate more like a bigger version of American Express, a stand-alone integrated system that could use its millions of customers to push higher fees onto merchants. And the CFPB report is all you need to know about what it might mean for cardholders.
The question becomes whether regulators will approve the deal. And to understand the calculus there, you have to go back to a speech made last June by Jonathan Kanter, the assistant attorney general for antitrust at the Justice Department, where he issued a warning to bank regulators to get moving on revising merger policy or get out of the way. This merger forces that issue even more.
It’s no secret that financial regulators, which have traditionally been granted primary responsibility over approvals under the Bank Merger Act, have been extraordinarily permissive. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) have greenlit over 4,000 mergers since 2006 with essentially zero denials. In his executive order on competition in July 2021, President Biden explicitly called for a review of the bank merger guidelines, which haven’t been altered in nearly 30 years. The deadline for this review was January 2022; it is now February 2024 and almost nothing has been done.
The Capital One–Discover announcement throws a $35 billion monkey wrench into that delay. “I think this deal will force the issue of necessitating that the agencies rethink a broader approach to bank merger policy,” said Jeremy Kress of the University of Michigan, who advised Kanter at the Justice Department on bank mergers last year. “They were granted a reprieve for the past two and a half years, because outside of emergency situations no deal was on the table.”
Kanter’s speech took place on the 60th anniversary of the Philadelphia National Bank decision, when the Justice Department stepped in to block a merger between two large financial institutions that OCC had approved. Kanter said that the Justice Department would return to a formal advisory role in the bank merger process. While the bank regulators would have the first say, DOJ would issue “competitive factor” reports to comprehensively analyze deals, and would avoid negotiations with banks on divestitures or other remedies.
It’s no secret that financial regulators, which have traditionally been granted primary responsibility over merger approvals, have been extraordinarily permissive.
More importantly, following the Philadelphia National Bank precedent, Kanter maintained that he would not hesitate to challenge a bank merger that regulators approved, if he believed it violated the relevant antitrust laws.
The Justice Department declined to comment on the specifics of the Capital One–Discover case.
Capital One–Discover actually gives Kanter a good opportunity to test that scenario. Unlike a traditional bank merger that combines entities with a bunch of loans and branches, Discover is a combination of a card issuer and a payment network; it only has one tiny bank branch in Delaware. That puts it much more in the wheelhouse of the Justice Department, which has taken an interest in payment networks before. Even at the tail end of the Trump administration, DOJ blocked a merger between Visa and a fintech firm called Plaid.
As Kress told Politico this week, “I wouldn’t be surprised if the DOJ has a stronger view on this deal than it would on the average bank merger.”
Kanter’s speech was properly seen as a shot at the regulators to hurry up with the merger guideline updates. It didn’t really reach its target. The Federal Reserve has basically abandoned any attempt to revise the merger guidelines. OCC came out last month with a proposed revision to its procedures around bank mergers; specifically, OCC would no longer allow mergers to be approved automatically if the agency didn’t act for a certain number of days. Advocates generally saw the announcement as incomplete and performative, and certainly not an update of the bank merger guidelines. The FDIC has yet to act as well.
Treasury Secretary Janet Yellen has not only done little to push the financial regulators on merger policy, she suggested last year that regulators should be encouraging mergers with banks hobbled by high interest rates, one of several comments where Yellen showed comfort with more consolidation in the banking industry.
CAPITAL ONE CEO RICHARD FAIRBANK HAS SAID that the merger positions his company to compete with other banks and payment networks like Visa and Mastercard. But the experience of American Express, whose merchant fees are actually higher than Visa and Mastercard’s, suggests that the public shouldn’t necessarily cheer for ersatz competition. While some have suggested that a larger Capital One could do with lower fees and make up for it through volume, the history of market power and recent history in the credit card industry would suggest the opposite.
Retailers have been fighting for lower fees on credit card purchases, which have increased by 50 percent since the pandemic. Visa and Mastercard control about 80 percent of the market, and even with a bigger competitor in Discover, it doesn’t change the underlying exclusionary tactics the duopoly uses to force banks that issue their cards to use their payment networks.
“Visa and Mastercard lock banks that issue credit cards into a centrally set scheme of fees and prohibit them from allowing competitors on their cards,” said Doug Kantor of the Merchants Payments Coalition, a group of smaller retailers, in a statement. “No merger can change that bar to competition—only legislation can.” That legislative vehicle is called the Credit Card Competition Act, spearheaded by Sens. Dick Durbin (D-IL) and Roger Marshall (R-KS). It would require large banks that issue credit cards to allow them to be processed on multiple payment networks, adding competition into the market.
Another walled garden like Discover wouldn’t really change the dynamic where one card can only be processed in one place, thereby forcing merchants to accept the terms of that card or to forgo the sale.
Already, several advocacy groups have come out against the merger proposal, including the National Community Reinvestment Coalition, which has fought Capital One in particular for several years. Sen. Josh Hawley (R-MO) said on Wednesday that the deal should be blocked, joining Sen. Elizabeth Warren, who opposed the merger a day earlier.
After Yellen made those comments about looking favorably on mergers, Greg Baer of the Bank Policy Institute told Politico that talk is cheap, and the regulators actually moving forward to approve a deal was necessary to change the hesitancy in the industry. “If you’re thinking about doing a deal, some tangible evidence that the mood has changed would be helpful,” Baer said.
Capital One–Discover could provide that evidence. But the Biden administration has carved out an aggressive position on antitrust policy, and rubber-stamping a merger creating the largest credit card issuer in America would completely contradict that. It brings the conflict between banking regulators and the DOJ antitrust to a head, and could force long-delayed action on how the regulators will handle mergers now and in the future.
