Capital One yesterday announced plans to buy Discover Financial Services in a $35.3 billion tie-up that would create one giant credit card company.
Wall Street seems pleased by the deal, as investors sent Discover's stock 13% higher on Tuesday. But consumer watchdog groups are decidedly less enthused, and regulators are all but certain to push back on a merger that would marry two already huge financial companies into an industry behemoth.
The deal, which the companies expect to complete in either late 2024 or early 2025, would make the merged company the largest credit-card issuer in the US. In announcing it, Capital One said in a statement the merger would be good for merchants and offer "great deals for consumers."
That's pretty much the boilerplate language for any merger in Corporate America. The companies are going to argue that the cost-savings and operational streamlining will generate savings that they can pass along to the consumer through lower prices or better service.
Of course, those "synergies" are far from guaranteed. And even if they are achieved, the savings are just as likely to wind up in shareholders' pockets as they are customers.
"The cynical point of view is they're going to realize the synergies and pass them straight on to the shareholders and ignore the consumers, or even realize additional market power and make the terms worse for borrowers and for consumers," John Sedunov, professor of finance at Villanova University, tells me. "So, they're going to have to fight that battle and make their case for why this can be beneficial to consumers."
It won't be an easy case to make in Washington, where federal regulators have taken a firm stance against consolidation across industries. (See also: The FTC's wrecking-ball action against the tie-up of JetBlue and Spirit , or its ongoing fight to quash Microsoft's Activision Blizzard acquisition.)
And just last week, on Friday, the Consumer Financial Protection Bureau put out a report that puts the idea of big-bank consolidation in a rather unflattering light. It turns out, the largest credit card companies, including Capital One, are charging "substantially higher" interest rates than smaller banks and credit unions, according to the report. Part of the reason for that, the report found, was a "lack of competition."
Ding ding ding! Paging Lina Khan...
The Discover-Capital One merger would be "nothing but a raw deal for American consumers," the left-leaning nonprofit Accountable.US said in a statement Tuesday.
"Banking giants like Capital One have long exploited the lack of competition to price-gouge families with predatory credit card interest rates and hidden junk fees," wrote Liz Zelnick, director of Accountable's Economic Security & Corporate Power Program. "Even less competition under this merger means these companies will have less incentive to check their greedy practices."
There are also systemic risks that will surely become part of the regulatory grilling.
It's the old "too big to fail" conundrum.
"There are questions of links to other parts of the financial system and how distress at such a large institution, should it happen, could cause wide scale problems in banking," Sedunov said. "I'm not saying any problems are imminent, but this creates potential for compounding issues if one does arise."
My colleague Elisabeth Buchwald has more on what the potential merger could mean for consumers.
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