Regulators right to approve Capital One/Discover merger

On Friday, federal financial regulators made the right decision in approving the merger of Capital One and Discover. In their joint approvals of the merger, the Federal Reserve and Office of the Comptroller of the Currency (OCC) seemed to recognize points made by CEI in its favor. Namely that, far from being anticompetitive, the merger could introduce new, game-changing competition into the markets for credit and payments.

In its letter approving the merger, the OCC pointed to comments from the public stating that the merged financial entity “may be able to compete more effectively with the largest players in the payments network industry, enhancing innovation, decreasing fees, and potentially generating cost-saving efficiencies that could be reinvested in efforts to increase financial access.”

CEI has made similar points since the companies first announced the planned merger last year. In my article for National Review, I urged regulators to focus on the dynamics of the relevant market rather than the size of the combined entity.  I noted that while the combined entity would be among the largest issuers of credit cards, as a credit card network, it would still be far behind the two dominant networks of Visa and MasterCard. Noting that Discover’s share of the credit card market was 7.13 percent by purchase volume, while market share held by Visa and MasterCard combined comes to almost 70 percent, I concluded:

In the case of market dominated by a few large players, often a “new juggernaut” is exactly what’s needed to bring lower prices and other benefits to consumers and entrepreneurs. While small start-ups create many innovations, it is the process of smaller players becoming larger — both through organic growth and mergers and acquisitions — that is often necessary to bring meaningful competition to the biggest players.

An example of companies injecting competition into a market by growing bigger, I cited Southwest Airlines, which started out as a regional airline, but eventually became larger through both organic growth and acquisitions. Today, Southwest is a major airline, once-dominant carriers such as Pan Am and Eastern have gone by the wayside, and airlines regularly compete on prices and perks. Unfortunately, as Southwest has recently angered customers by abandoning popular policies such as bags included with the fare price, and other major airlines have racked up a litany of complaints, the Biden administration’s recent blocking of a merger of two smaller rivals may have prevented a new, effective competitive force from entering the airline market.

In the credit and payment markets, traditional credit card issuers and networks are also facing significant competition from new options such as buy-now-pay-later (BNPL) and other fintech innovations. (See my colleague Patricia Patnode’s work on BNPL giving consumers new options to access goods and manage debt.) No one knows the fate, in the long run, of a combined Discover and Capital One, but regulators were correct in allowing this merger to proceed. Consumers and merchants deserve to have this option available in the marketplace.

Other regulators should take note and start focusing on the market as a whole – rather than the size of a combined entity – when reviewing mergers.

Disclosure: Author John Berlau owns shares in Capital One.