Capital One-Discover Merger Will Benefit Your Wallet

Angus Mordant/Bloomberg

The past four years have been an exciting time for those pushing for a more aggressive antitrust enforcement regime. Critics of the Biden administration’s competition policies say Federal Trade Commission Chairwoman Lina Khan and U.S. Deputy Attorney General Jonathan Kanter are pursuing knee-jerk “big is bad” policies that will harm consumers and the dynamics of the U.S. economy and its global competitiveness.

The basic test for the administration is Capital One proposed $35.3 billion merger with Discover. Because it’s a deal between two banks, the merger is being reviewed by the Federal Reserve and the Office of the Comptroller of the Currency — not the U.S. Department of Justice or the FTC. Announced in February, was met with criticism from the usual corners, like Sen. Elizabeth Warren, D-Mass., but also from new foes, like Sen. Josh Hawley, R-Mo. As we explain in a new paper published by the International Center for Law & Economics, the concerns raised are vague and unfounded. When weighed against the tangible and obvious benefits to consumers and the U.S. economy, it’s clear the merger should be approved.

Critics say the deal would be anticompetitive because the combined company would hold about one-fifth of the credit card debt in the U.S. But there are thousands of card-issuing banks in the U.S., and the combined company’s post-merger market share of 22% is well below the threshold that would prompt scrutiny under federal bank merger guidelines or the antitrust agencies’ own merger guidelines.

Moreover, while the merged bank would rank sixth in assets, it would have just 3% of all domestic assets and would be dwarfed by industry giants like JPMorgan Chase, Citibank and Bank of America. Even by strict “big is bad” standards, the merger does not pose a significant threat to competition.

Contrary to these speculative claims of harm, the merger potentially holds enormous benefits for consumers and the economy. While critics focus on unsubstantiated claims of reduced competition in the card-issuing space, they ignore the deeper ways in which the merger will increase competition in the card-network space. Discover—which launched in 1986 as a successor to the widely used Sears credit card (a popular way to shop through the Sears catalog)—pioneered innovations such as cash-back rewards. Yet for two decades, its share of credit-card volume stagnated, at about 4%.

Combining Capital One’s substantial cardholder base and innovative culture with Discover’s existing (but stagnant) network promises to revitalize the new company as a competitive online competitor to Visa, MasterCard, and American Express. Ironically, many of the same political voices opposing the merger also proposed ill-conceived legislation designed to impose an artificial structure of online competition on the industry. This merger effectively solves that problem.

The combination also promises additional benefits for consumers, particularly in the areas of consumer data security and the potential for increasingly personalized product offerings that leverage economies of scale, big data, and revenue streams. Discover has recently struggled with data breaches, while Capital One is considered a market leader in security. The expected move from Visa and MasterCard to Discover will lower costs, increase revenue, and strengthen the information flows needed to build better consumer data and usage profiles.

In addition, like American Express, Discover is a “three-party” payment network (it is the issuer, acquirer, and network processor of its cards), while Visa and Mastercard are “four-party” networks (Visa or Mastercard-branded cards issued by one bank, such as Citi, can be acquired by another bank, such as Chase, and the network processes those transactions). As a result, the new entity will be protected from federal price controls and regulations that apply only to four-party networks.

The implementation of these rules has been particularly burdensome for lower- and middle-income consumers, who have, among other things, lost access to free checking accounts while also seeing their monthly fees skyrocket. Combined with Discover and Capital One’s low-cost operating structures—Discover, for example, has no expensive branches to operate—these features can help preserve and expand access to financial services and offer consumers more competitive options.

Assessing the competitive effects of a merger in the retail banking sector is complicated by the bundled nature of the products. Small theoretical reductions in one narrowly defined horizontal market (such as subprime credit card issuance) may be overwhelmed by significant increases in competition in other vertical markets (such as payment card networks) or by scale-based gains in product quality (such as improved data security).

The combined entity’s overall size is still small compared to the industry giants. On net, it’s clear that the benefits to consumers from the Capital One-Discover merger far outweigh the speculated harms that have been warned about it.