After a sleepy President’s Day weekend, U.S. lawmakers and federal government regulators were jolted late Monday by this news: two the nation’s largest credit card companies, Capital One and Discover Financial, plan to merge.
If the sale of Discover to Capital One is successful, the combined company would be the country’s largest credit card issuer.
For anyone following the Biden administration’s rhetoric and regulatory agenda regarding the financial services space, the reaction to this news probably came as no surprise. Democrats like Sen. Elizabeth Warren (D-Mass.) quickly and forcefully denounced the planned acquisition. On social media, Sen. Warren, who chairs the Senate Banking Subcommittee on Economic Policy, said, “The merger of @CapitalOne and @Discover threatens our financial stability, reduces competition, and would increase fees and credit costs for American families.”
So what is the likelihood this merger will make it past federal regulators? We will examine that question and others in this week’s blog post.
Washington Responds To Capital One-Discover Merger News
As NBC News pointed out, Monday’s merger announcement came just a week after the Consumer Financial Protection Bureau (CFPB) released a report that found the country’s 25 largest credit card companies charge customers interest rates eight to 10 points higher than the rates that small- and medium-sized banks and credit unions charge.
In other words: the Biden administration is in no mood to give two the country’s largest companies even more power. White House Press Secretary Karine Jean-Pierre was asked by reporters for President Biden’s reaction to the merger on Air Force One yesterday.
Jean-Pierre let the administration’s skepticism show. “Bank mergers are reviewed by bank regulators on a case by case basis,” she said. “As we have said, we need a diverse banking sector with a healthy mix of large, regional, and community banks. And, as the president says, capitalism without competition isn’t capitalism. It’s exploitation.”
But what about Republicans? How did they react to the Capital One and Discover news?
So far, at least those who oversee financial services policy have not. House Financial Services Committee Chairman Patrick McHenry (R-N.C.) did not issue a statement or have anything to say on social media, for example, and neither did Senate Banking Committee Ranking Member Tim Scott (R-S.C.).
No news may not be good news, however. Jeremy Kress, University of Michigan professor of law and a former Fed M&A attorney, told Reuters, “I think the bigger question is what do we see out of the populist wing of the Republican Party. There’s a potential that some of the more vocal populists on the right could push back as well.”
Past also could be precedent. According to lawyers at Kirkland and Ellis, by the end of 2020 and the Trump administration, “the trajectory of merger enforcement seemed to have changed, clearly and decisively pointing towards increased intervention and diverging from recent Republican administrations.” The law firm found that the Trump administration’s first two years in office were “relatively quiet” on the antitrust enforcement front. That pattern did not hold for 2019 and 2020. In those two years, the Trump administration launched as many merger challenges as any year during the Obama administration. In 2019, the Trump administration’s number of challenges equaled the number put forward by the Obama administration in 2015, that administration’s toughest enforcement year.
Advocacy groups, meanwhile, are already lining up against the Capital One-Discover deal.
“We should be worried about the functionality of the credit card market in general. This merger probably heightens that,” Adam Rust, director of financial services at the Consumer Federation of America, told NBC News.
The National Community Reinvestment Coalition, an advocacy group that looks to funnel private investment into underserved communities, also wasted no time criticizing the merger, and neither did others. “The Capital One-Discover deal will create another colossal too-big-to-fail bank while supercharging consolidation in the credit card sector,” said Shahid Naeem, senior policy analyst at the American Economic Liberties Project, told The Hill. “Greenlighting the creation of the nation’s sixth-largest bank and the largest credit card issuer is indefensible, particularly as the harms of bank and credit card consolidation are already causing enforcers and Congress to chart a stricter approach to both.”
Where Antitrust Policy Has Been Headed
Sen. Warren’s initial reaction to Capital One’s proposed acquisition of Discover falls right in line with where the party has been in the past, and is headed, when it comes to antitrust policy. Indeed, the party’s stance on mergers and acquisitions is clear: they want more oversight, and they want it now.
NBC News offered two proof points:
- Last month, the Office of the Comptroller of the Currency (OCC), the lead agency that will ultimately have to approve the merger, announced plans to enhance and slow down its review of proposed mergers and acquisitions.
- Under the Biden administration, the U.S. Department of Justice (DOJ) has said it is focused on guarding against “excessive market power.” (To be sure, however, DOJ officials also have said they let regulatory agencies like the OCC and Federal Reserve take the lead on financial services antitrust concerns.)
As lawyers at Mayer Brown reported last fall, the Biden administration also has proposed revisions to the federal government’s rules governing pre-merger filings and it has offered a new framework for analyzing antitrust implications of U.S. mergers and acquisitions. The law firm said that, once implemented, the changes will add complexity and length to the federal government’s antitrust evaluations.
While GOP lawmakers have strongly criticized the Biden administration, and specifically, Federal Trade Commission Chairperson Lina Khan’s antitrust policy — calling it “America’s antitrust enforcement regime” — some members of the party have said the DOJ should use its enforcement powers to break up technology companies like Google and Amazon. Other Republicans have suggested that the federal government should be able to break up companies that are too “woke” when it comes to environmental or social policy.
Republican Rep. Andy Barr (R-Ky.), who reportedly would like the top spot on the U.S. House Financial Services Committee next year, is less skeptical of mega-banking mergers, however.
Four days before announcement of the Capital One-Discover merger deal, he introduced the Bank Failure Prevention Act, which would require that the Federal Reserve act on merger applications within 90 days. (Right now, time to approval is much longer.)
“Under the current administration, there has been a negative posture towards mergers where many have been substantially delayed with little transparency from Democrat-appointed regulators,” Rep. Barr said in a press release. “Mergers increase competition and make the banking system more dynamic. Allowing institutions to meet economies of scale through mergers fosters a vibrant economy and generates cost savings that are passed down to consumers. In the face of an administration that seems to fear healthy competition and growth in our banking sector, this bill sends a clear message: It’s time to cut through the bureaucratic delays.”
Will regulators prove Rep. Barr’s criticism incorrect when they consider the Capital One-Discover merger?
What Are The Chances Federal Regulators Approve The Capital One-Discover Deal?
While most Democrats and some Republicans want to toughen antitrust policy, those changes would not be in place before U.S. regulators need to review the Capital One purchase of Discover. That fact might be why, rather than using fiery rhetoric to express his opposition to the deal, Senate Banking Committee Chair (D-Ohio) opted to put the onus back on the agencies.
“With a merger this size, the regulators need to ensure our financial system remains strong and competitive, so that consumers continue to have access to safe, affordable financial products and services,” Chairman Brown told The Hill.
According to Isaac Boltansky, director of policy research at the global financial services firm BTIG, the Capital One-Discover merger will “face gale-force headwinds from a Washington that is deeply skeptical of consolidation [and] anxious regarding consumer-facing issues in an election year.”
Not everyone agrees with that assessment, however. Some analysts believe this merger may benefit consumers and, therefore, ultimately gain regulatory approval.
TD Cowen’s Jaret Seiberg told The Wall Street Journal he expects the merger to be approved since similarly-sized companies have been allowed to merge and since, by combining forces, Capital One and Discover might actually add “competition to a field currently dominated by Visa and Mastercard” – a reference to Capital One taking on Discover’s payment network.
While the regulators themselves have been largely silent since Monday (Reuters was unable to get spokespeople for the OCC, DOJ, the Federal Reserve, and the FTC to comment), Politico did get CFPB Director Rohit Chopra on record — sort of. He told the Capitol Hill newspaper, “In the U.S., our credit card market is really dominated by a set of issuers, so there will be very important questions for the regulators to look at.”
In other words: don’t expect any decisions soon.
Important questions, indeed, and while we do not know how those questions will be settled, one thing is clear: this deal could provide fodder for candidates on the campaign trail right up until November. Capital One has said it hopes the deal to close in late 2024, right around the time of the election.