Key Summary
- Capital One acquires Discover in a $35.3 billion merger amid Discover’s Q4 profit drop.
- Critics argue the merger reduces competition in the credit card sector, already dominated by major firms.
- The acquisition aims to bolster Capital One’s global network and compete with industry giants like JP Morgan and Citigroup.
- Concerns arise over antitrust laws as the SEC and DOJ analyze the merger’s validity.
- Solutions include regulatory balancing and legislation mandating multiple credit card networks to enhance competition.
Capital One, the bank holding company, has just acquired Discover, the financial services company. This $35.3 billion merger comes amidst Discover’s Q4 profits plummeting by 64%. This acquisition has already received pushback as many believe that the merging of two of the largest credit card companies in the United States is collapsing the playing field. This acquisition of Discover is part of Capital One’s strategy in developing a global network where it directly works with merchants and small business payments. This would allow Capital One to not only make up ground on competing with credit card companies like JP Morgan and Citigroup but also with payment networks like Mastercard and Visa. However, the critics of this merger have highlighted the issues that the US already has limited competition in the credit card sector. It’s inevitable that regulators, the FTC and the DOJ analyze this merger on the basis of violating antitrust laws, and the validity of this merger rests on those regulatory conclusions.
The United States equity market is the largest in the world, which represents roughly 45% of the global equity market and makes up $49.0 trillion of the global equity cap of $109 trillion. Further the United States boasts the largest debt market in the world, which constitutes 39% of the global debt market, which is equivalent to $51.3 trillion. These huge markets in the United States makes the country an ideal place for credit card companies and financial institutions. However, it can also make for a very volatile sector and one dominated by major firms. US citizens have already advocated for higher standards of antitrust laws, stricter regulation on credit card companies, and highlighted the lack of competitiveness of the credit industry. In light of these grievances, Senator Durbin of Illinois proposed the Credit Card Competition Act of 2023, which was introduced and then referred to the Committee on Banking, Housing, and Urban Affairs. This bill, as introduced, addressed the concerns of American consumers over rising interest rates, inflation, and credit card swipe fees. The duopoly of Visa and Mastercard make up roughly 80% of the credit card network market, which charge a fee on 576 million US credit cards. This networking fee, which is roughly 2% on credit card transactions, is imposed on the merchants which reflect back in the prices to consumers.
Market competition in the US economy, at large, is vital in maintaining a stable economic environment. However, Visa and Mastercard have structured their networks as a take it or leave it situation which pigeonholes merchants into using the Visa/Mastercard network. Senate bill 1838 attempts to decentralize the duopoly of Visa and Mastercard by mandating that these companies offer a second network for transactions that aren’t one of their own. This addition of another credit card network would stabilize the credit card fees at lower levels just by adding another network into the competition. This bipartisan bill, however, will face difficulties as the classic debate will re-emerge of whether the government should intervene in the financial markets. While this bill has been pushed into 2024, financial institutions have taken the issue to heart as Capital One bought Discover. This buyout could alleviate the effects that the Visa-Mastercard duopoly has posed despite the antitrust concerns of two major credit card companies merging. Discover, prior to the merger, controlled roughly 7% of the credit card network sector and managed 1% of the credit cards owned globally. This acquisition by Capital One is part of their strategy of controlling a larger share of the credit card network market, while maintaining their respectable measures of issuing credit cards. The future of the deal lays in the hands of the SEC and DOJ but should not worry consumers because if Capital One is able to utilize Discover’s credit card network effectively, it could stabilize inflation, interest rates, and credit card fees by providing a third network to compete against the duopoly.
Despite the arguments above about this merger leading to greater competition in the credit card network market, the United States already suffers from a lack of competition in the credit card industry. A merger between two of the top six largest credit card companies which amount to a combined $378.4 billion dollars, measured in purchasing volume, already leads to a contraction in competition between credit card companies. Large credit card companies have already been observed charging higher interest rates, between 8-10% higher than small and medium sized banks and credit unions. This merger doesn’t aid in fixing that imbalance and instead could further exacerbate these higher rates. Another major implication of this merger is the time it will take for the merger to complete and the time it will take to understand whether this merger will benefit the public and the insiders, since mergers must meet these two standards. We forecast that due to the horizontal and vertical integration that would occur if the merger did go through, there will be a scrutinous investigation done by the Federal Reserve and the Department of Justice’s antitrust division.
Due to the inevitable long term investigatory process that will occur, there are no obvious short term solutions to the two problems at hand; First, the issue of the lack of competition in the US credit card market. Second, the possible antitrust issues associated with the Capital One and Discover merger. The former issue must be tackled by regulators in a way that balances the credit card and credit car network industry while benefiting both consumers and insiders. The possible problems posed by the Capital One and Discover merger must be addressed through the standardized process by forecasting how this acquisition will affect the market. We propose that US regulators allow the merger to go through but also follow up with legislators passing a version of the Credit Card Competition Act that mandates that Visa – Mastercard – and Capital One allow transactions to be held on two separate credit card networks which include one that’s not one of each other. This solution, although paired with stricter government regulation, will increase overall competitiveness in the credit card network industry. This would lower transaction costs for merchants, which would trickle down to lower costs to consumers. It would also create precedent for large financial institutions to merge, especially in times when one institution is facing earnings and revenue pressure.
The merger has gained a lot of attention with critics throwing our antitrust claims, causing lots of public discomfort. However, this merger poses a market solution to the credit card network duo-opoly of Visa and Mastercard. A deeper analysis into the mergers effects on consumers and insiders is vital towards the success of this purchase which we forecast will take around a year.
Author: Tucker Henry
