A planned merger between Capital One Financial Corp COF and Discover Financial Services DFS has been met with sharp criticism from Democratic lawmakers and consumer advocacy groups. They caution that the merger could result in a decrease in competition and an increase in customer costs.
What Happened: The merger announcement by Capital One was swiftly followed by a backlash. The bank intends to purchase Discover Financial Services in an all-stock transaction valued at $35.3 billion. The deal, subject to approval from regulatory bodies and both companies’ shareholders, could be finalized as soon as late 2024, The Hill reported on Tuesday.
Chair of the Senate Banking Committee, Sherrod Brown (D-Ohio), emphasized the necessity of a vigorous and competitive financial system. He voiced concerns about the potential rise in power for financial corporations.
"With a merger this size, the regulators need to ensure our financial system remains strong and competitive, so that consumers continue to have access to safe, affordable financial products and services," said Brown.
"A rubber-stamped merger that makes powerful financial companies even bigger and more powerful will do nothing for families," he added.
Sen. Elizabeth Warren (D-Mass.), also urged regulators to block the merger, highlighting the risks to financial stability and customer costs.
Former Federal Deposit Insurance Corporation chair, Sheila Bair, and Liz Zelnick, director of the economic security and corporate power program at Accountable.US, have also criticized the merger proposal. Both have called on regulators to thoroughly examine the deal.
"Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies," said Richard Fairbank, founder, chairman and CEO of Capital One.
The merger, if approved, would result in the sixth-largest bank in the nation and the largest credit card issuer. A recent study by the Consumer Financial Protection Bureau indicated that smaller issuers generally offer lower interest rates than the top 25 credit card companies. The Consumer Bankers Association, however, has disputed the report, calling it “misleading”.
Why It Matters: This proposed merger comes amid heightened scrutiny of mergers, especially in the credit card industry. Jim Cramer, host of CNBC’s “Mad Money,” speculated that Capital One’s stock might rise notwithstanding the usual market positions since Discover typically maintains substantial put and common short positions.
Furthermore, the merger could pose a significant threat to Visa and Mastercard given the creation of the largest credit card operator in the U.S.. The synergies created by the merger could enable Capital One to transition its cards issued on the Visa and Mastercard networks to that of Discover, despite recently renewed partnerships with both Visa and Mastercard.
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