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CapOne tells regulators Discover deal will boost competition and stability, sources say

[March 21, 2024] By Michelle Price

WASHINGTON (Reuters) - Capital One's $35.3 billion merger with Discover Financial will boost competition and be good for financial stability, the bank says in its regulatory application, according to people familiar with the matter.

CapOne also argues the deal will not harm credit card competition because the combined entity will account for roughly 13% of credit card purchasing volume, which they argue is the best measure of credit card market share, the people said.

The deal unveiled last month will create the biggest U.S. credit card issuer by balances and the sixth-largest bank by assets. It will give Capital One control of Discover's credit card payment network, which is the fourth major payment network operator after Visa, Mastercard and American Express.

The potential for the merger to create a viable competitor to Visa and Mastercard, whose dominance of card payments has been criticized by lawmakers, is CapOne's leading argument for the deal, the people said. Discover has ceded market share over the past decade and CapOne can provide the additional scale and volume its needs to be competitive, the major U.S. consumer bank says in its filing.

It also makes the case that the deal would be good for financial stability by ensuring Discover is taken over by a safe pair of hands that will invest in risk management, the people said. The credit card company's share price and profits have been battered by compliance lapses and declining credit quality.

The bank was expected to file the application late on Wednesday evening, the people said.

When unveiling the deal, CapOne said that it would scale up Discover's network, which some antitrust experts speculated would be its key selling point. But the arguments CapOne makes in its filing to the Federal Reserve and Office of the Comptroller of the Currency (OCC), which will review the merger with input from the Justice Department, have not been reported.

They will be scrutinized by investors and likely draw pushback from antitrust advocates and Democratic lawmakers who have called for regulators to block the deal, arguing it will increase costs for consumers and threaten financial stability.

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A screen displays the logo and trading information for Capital One Financial as a trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 20, 2024. REUTERS/Brendan McDermid/File Photo

JUSTICE DEPARTMENT SCRUTINY

While the Justice Department has traditionally focused on depositors and branches when assessing the competitive impact of bank mergers, the agency said last year that it will look at a broader scope of issues.

It may review the CapOne deal under new 2023 guidelines that take a tougher stance on deals in highly concentrated markets, think tank American Economic Liberties Project (AELP) said in an analysis published on Thursday.

Shahid Naeem, AELP's senior policy analyst who wrote the report, said the Justice Department had taken a dim view of the type of "vertical integrations" CapOne was proposing in its takeover of Discover's network when reviewing deals in the tech sector.

A court dismissed similar "merge-to-compete" arguments JetBlue made defending its Spirit Airlines takeover, he added. "It seems very unlikely that those arguments will hold up," said Naeem. "It's not about pros and cons, it's about whether a deal will reduce competition in a market."

AELP is an antimonopoly group and opposes the merger. Its founder Sarah Miller last year become chief of staff at the Federal Trade Commission, another competition watchdog.

"This analysis from AELP is a great window into how people like Jonathan Kanter and other Biden administration officials might be approaching this deal," said Jeremy Kress, a University of Michigan professor, referring to the Justice Department's top antitrust attorney.

While the bank regulators are leading the review, it is unlikely they would ignore major Justice Department objections, especially given they are under pressure from the White House and lawmakers to take a tougher stance on deals, lawyers said.

Spokespeople for the Fed, OCC, and Justice Department did not immediately respond to requests for comment.

(Reporting by Michelle Price; Editing by Jamie Freed)

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