Capital One-Discover merger may face stiff antitrust review in Washington

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One day after announcing a blockbuster, $35.3 billion megamerger, the top executives for Capital One and Discover Financial Services started trying to sell their deal to Washington, hoping to woo federal regulators who have pledged to crack down on corporate consolidation.

The tie-up quickly emerged as a fresh test for the Biden administration, which has aggressively challenged or blocked attempts by a slew of airlines, biotech firms, grocery chains and tech giants to expand in ways that the government sees as a threat to competition or consumers.

In a formal unveiling to Wall Street, the two companies’ leaders began Tuesday by presenting their deal as a boon to cardholders and shareholders. Richard Fairbank, the chief executive of Capital One, told investors that the merger would “position us to compete more effectively against some of the largest banks and payment companies in the United States.”

“We believe that we are well positioned for approval,” Fairbank added.

But that final determination rests in the hands of federal antitrust watchdogs and banking officials, who must weigh the economic costs and potential consumer benefits or harms. The process immediately appeared complicated and fraught with politics for Biden — a fierce public foe of large companies growing larger — right in the heat of an election year.

Under his leadership, the U.S. government has aggressively sought to police corporate consolidation, arguing that the absence of competition is partly responsible for rising prices throughout the economy. As the news of the merger spread, some policymakers Tuesday sounded skeptical about the merits of a combined Capital One and Discover, which stands to become the largest credit card lender in the United States.

“A rubber-stamped merger that makes powerful financial companies even bigger and more powerful will do nothing for families,” Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, said in a statement. “We will be monitoring all developments to ensure that this merger doesn’t enrich shareholders and executives at the expense of consumers and small businesses.”

Asked about the potential megamerger early Tuesday, Lael Brainard, the director of the White House National Economic Council, told CNBC that she could not “speak to any particular cases.” But she stressed that Biden is “very committed to restoring competition across the landscape in the United States,” adding: “For too long, we saw a lot of consolidation, which did not have benefits, but rather came at some cost.”

“And so we’ve really seen a reinvigoration of the commitment to competition, which levels the playing field for small businesses,” Brainard said.

If the government ultimately gives the deal a green light, Capital One stands to see a dramatic change to its business.

The McLean, Va.-based company issues its own credit cards, boasting about 100 million cardholders, but it also relies on Visa and Mastercard to process those transactions. By taking over the Riverwoods, Ill.-based Discover — which issues credit cards and controls its own payment network — Capital One would gain a foothold into a new and vast global platform that spans more than 200 countries.

After assuming Discover’s banking business, the combined entity would also have more than $450 billion in deposits, making it the country’s sixth-largest bank, surpassing Morgan Stanley, Truist Financial Corp., PNC and Goldman Sachs.

“We believe this is the right opportunity for Discover at this time,” said Michael Rhodes, Discover’s chief executive, on a call with investors, adding that Capital One “shares our values, including our commitment to outstanding customer service. … This transaction represents an advancement for both of our companies.”

Both companies’ shares posted gains on Tuesday, though Discover stock — which Capital One would buy at a premium — rose more.

Introduced by the department store chain Sears nearly four decades ago, Discover long has been known for high credit limits, generous cash-back options and relatively low interest rates. The company has experienced significant difficulty in recent months, including compliance troubles that cut deeply into revenue followed by the departure of its last top executive. But observers have questioned whether the loss of a competitor could prove costly to millions of consumers, some of whom say they like Discover’s services, such as its customer support.

“This is now going to be another ‘Too Big To Fail’-type institution,” said Mayra Rodriguez Valladares, managing principal at financial risk consulting firm MRV Associates. “Executives are salivating over potential revenues, but my worry for consumers is that they’ll have one less option now. Any time you start reducing entities, the question becomes: Are these starting to turn into oligarchal monopolies?”

In Washington, the proposed deal would mark the first major bank merger under Biden, who has been fiercely critical of the financial sector at times. Last year, though, his administration mounted an extraordinary intervention to prevent a failing institution — Silicon Valley Bank — from destabilizing the banking system more broadly.

The formal review is the chief responsibility of the nation’s banking regulators at the Treasury Department as well as the Federal Reserve, who must assess the competitive effects of the deal on communities nationwide. Investigations can take months — Capital One expects the deal to close in late 2024 or early 2025 — potentially resulting in an overlap with this fall’s presidential election.

“Whichever way this goes, it’s going to serve as a bellwether for how regulators are thinking of financial services deals,” said David Schiff, head of consumer and retail banking at West Monroe, a digital services consultancy. “Now we’re going to see how that actually plays out.”

The Justice Department generally advises banking officials, and it can negotiate terms with merging companies or sue to block a deal. A spokesman declined to comment on the potential merger, as the agency customarily stays silent about transaction reviews. The Treasury Department did not respond to a request for comment.

But the deal is likely to face an uphill battle in the nation’s capital, where antitrust regulators under Biden have acted with renewed speed and aggression — and challenged corporate transactions that officials might have approved under past administrations.

Last year, for example, the government moved to block the proposed combination of JetBlue and Spirit Airlines, and they tried, but failed, to prevent Microsoft from taking over Activision Blizzard, a video game company, in 2022. The Federal Trade Commission may also be nearing a lawsuit to stop a merger between Kroger and Albertsons, two grocery chains.

With Capital One and Discover, the pending merger is likely to generate “significant public pushback and will raise heightened regulatory scrutiny,” predicted Jeremy Kress, the co-faculty director of the Center on Finance, Law and Policy at the University of Michigan. He pointed to “the stance of this administration and the priority the Biden White House has put on promoting competition throughout the economy.”

In a sprawling July 2021 executive order, Biden called for “more robust scrutiny” of bank-related deals. In a speech at the White House, the president pledged broadly: “No more tolerance for abusive actions by monopolies. No more bad mergers that lead to mass layoffs, higher prices, fewer options for workers and consumers alike.”

The White House directive ultimately led the Treasury Department this January to begin crafting rules that essentially make the merger review process more streamlined. Other financial regulators have focused on specific practices, like price gouging and excess fees, that banks and credit card companies can impose in the absence of regulations blocking them.

The Justice Department, meanwhile, promised to probe financial megadeals extensively: Jonathan Kanter, the agency’s top antitrust official, said last June that the government would not shirk from overseeing “the largest and most powerful actors.” He added that the government would take special interest in the extent to which a “transaction threatens to entrench power of the most dominant banks by excluding existing or potential disruptive threats or rivals.”

The banking industry, for its part, largely has rejected calls for heightened oversight.

“Banks don’t merge to get bigger. They are always looking for some kind of efficiency,” said Lindsey Johnson, the president of the Consumer Bankers Association, whose board of directors includes Capital One. She added that the industry is a “highly competitive space.”

Some supporters of the deal believe the combination of Capital One and Discover could result in more favorable terms for businesses and cardholders, since it would create a formidable competitor to Mastercard and Visa’s card networks. Capital One may also feel pressure to “step up their perks” to win over Discover cardholders, who typically have good credit scores and high incomes, according to Marbue Brown, a consultant and former head of customer experience at Chase.

“Capital One would be getting a whole new group of premium customers — and they’ve got to play harder to make sure they can keep them,” he said.

But others worry that the takeover will result in fewer choices for consumers — leading to higher fees, increased interest rates and worsening customer service as the combined company looks to cut costs.

On Capitol Hill, some lawmakers even called on the Biden administration to reject the merger outright. Sen. Elizabeth Warren (D-Mass.), a longtime advocate of antitrust enforcement, blasted the deal as one that “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families.”

“This Wall Street deal is dangerous and will harm working people,” she said.

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