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A financial markets reform group has called on US regulators to prevent the merger of Capital One and Discover, saying the "supersize" deal will lead to higher costs for Main Street Americans.
On Thursday (August 1), Better Markets called on the Office of the Comptroller of the Currency (OCC) to reject the proposed merger on competition grounds.
Dennis Kelleher, CEO, and Shayna Olesiuk, director of banking policy, at Better Markets, said the $35bn all-stock deal will harm US consumers who “already have the deck stacked against them”.
“The merger will reduce competition, provide less choice, enable higher fees and cause job losses,” they said.
“Approval of the merger would hurt small businesses, endanger financial stability and allow two banks with an egregious history of inadequate management, excessive risk-taking and repeated illegal behaviour to grow even larger.”
According to Better Markets’ research, the merger would combine the tenth largest bank in the US (Capital One) with the 26th largest bank (Discover).
Once merged, this would create the sixth largest bank and the single largest credit card issuer in the country, with more than $200bn in credit card loans outstanding.
Concentration risk
Kelleher and Olesiuk argue that regulators' previous light-touch approach to bank mergers has contributed to an excessive concentration of risk among a handful of firms.
This, they argue, was among the factors that led to the 2008 financial crash, which resulted in a $700bn bailout of the US banking sector, paid for by the taxpayer.
From 1990 to 2009, 13 banks were merged into Bank of America, 11 banks were merged into J.P. Morgan Chase, nine were merged into Wells Fargo and four were merged into Citigroup.
Together, these four banks now have a combined market capitalisation of more than $1.2trn.
“Not only would the proposed merger create another too-big-to-fail megabank, but it would also dramatically increase the market power of Capital One,” said Kelleher and Olesiuk.
“In short, Capital One would have enormous power to overcharge customers for everyday credit card transactions, and it would leave working Americans with fewer choices for credit card providers than ever.”
Larger issuers, higher interest rates?
To support its case, Better Markets pointed to new research by the Consumer Financial Protection Bureau (CFPB) published in February, showing that smaller credit card issuers tend to offer lower rates.
In the first half of 2023, the CFPB found that smaller issuers offered lower interest rates than the largest 25 issuers across all credit scores.
After analysing 643 credit cards from 156 issuers, the regulator also found that consumers can save an average of $400 to $500 per year in interest charges by using credit cards from smaller issuers.
However, banking industry sources Vixio spoke with described these figures as “skewed” and “misguided”.
In a response to the CFPB, published in February, the US Consumer Bankers Association (CBA) detailed a number of weaknesses in the regulator’s report.
First, it said, the CFPB focused exclusively on interest rates, overlooking the fact that credit card issuers compete on other factors, such as fees and rewards
Secondly, the CFPB’s inclusion of credit unions in its interest rate analysis is deceptive, the association claimed, as credit union APRs are statutorily capped at 18 percent.
“Removing credit unions from the CFPB’s analysis shows large issuers are much more likely to serve subprime consumers, as well as offer reward products than small issuers,” said the CBA.
“The CFPB frequently misrepresents the state of competition in the credit card market,” the association added.
US consumers’ growing reliance on credit cards
In an earlier research paper published in October 2023, the CFPB reported that, by some measures, “credit cards have never been this expensive”.
In 2022 alone, issuers charged more than $130bn in interest and fees — a new record for a single year.
Although the CFPB has not published its official figures for 2023, analysis from WalletHub indicates that the total could be as high as $230bn.
Either way, it is clear that Americans are spending significantly higher sums on credit card fees today than ever before, with the exception of the lockdown years of 2020 and 2021.
Americans are also more indebted to their credit card issuers than ever before, with total credit card debt surpassing $1trn for the first time in Q2 2023.
Nonetheless, key voices in the debate argue that these costs are not due to lack of competition.
Sheila Bair, former chair of the Federal Deposit Insurance Corporation (FDIC), said in an op-ed earlier this year that there are “no barriers to entry” in the US credit card business.
“With nearly 4,000 issuers of all sizes, consumers have thousands of product options,” she said.
“A combined Capital One/Discover could challenge the biggest banks’ supremacy, while providing competitive benefits to credit card users, merchants and subprime borrowers.
“Disapproving it will, at best, simply preserve the status quo, and, at worst, chill regional mergers and acquisition activity, further insulating the mega banks from competition.”
