US consumer finance watchdog raises alarm over credit card megadeals

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The top US consumer finance watchdog has raised doubts about megamergers in the credit card industry, just as Capital One attempts to close its $35.3bn takeover of card issuer Discover Financial Services.

Rohit Chopra, director of the Consumer Financial Protection Bureau, warned about the effects of large deals on competition and financial stability. His own agency has also been sharpening its focus on segments of the credit card industry including subprime, cashback and third-party rewards.

Capital One agreed in February to acquire Discover in one of the banking industry’s biggest deals since the 2008 financial crisis. The takeover is now undergoing scrutiny by banking regulators.

The CFPB cannot block this deal as Capital One has filed an application with other agencies. But Chopra said his agency “is regularly consulted on merger issues”.

He declined to comment “specifically” on Capital One and Discover, but made clear his concerns about the combination of two “large issuers . . . that compete in a number” of credit card sub-markets, calling it “a very significant transaction”.

“That’s going to require some very, very close analysis,” he said.

The warning shots underscore the scepticism that regulators will allow the deal to go through, which Capital One in February said it expected would close in late 2024 or early 2025. Discover’s stock is trading at a roughly 15 per cent discount to the all-stock deal price, reflecting investor doubts about the acquisition. 

The proposed tie-up comes as President Joe Biden’s administration has unleashed a crackdown on anti-competitive conduct across the US economy, and federal regulators have proposed new limits on big bank tie-ups.

“There has been a shift in thinking in Washington about bank mergers. There really is no more rubber stamp,” said Chopra, an ardent consumer champion and progressive official who also supported tougher enforcement and rulemaking as an antitrust regulator at the Federal Trade Commission. 

Credit card reform has become a pillar of Chopra’s regulatory agenda at the CFPB as he seeks to revitalise an agency that was sidelined during Donald Trump’s presidency. The CFPB last month finalised a rule that slashes the largest credit card issuers’ late fees from an average of $32 to $8. The measure is being challenged in court.

To get the merger approved, Capital One is making a case that there is little overlap between the two banks’ credit card businesses. It has argued that the tie-up would produce a stronger competitor among card networks. Discover’s is the smallest after Visa, Mastercard and American Express.

Capital One filed an application to complete the transaction to the Federal Reserve and the Office of the Comptroller of the Currency. The Fed sent back a list of questions last week. Capital One declined to comment. 

Chopra called for scrutiny of “past acquisitions” to avoid “catch and kill” deals that smother competitors. Mergers in the credit card sector in the past 10 to 15 years have not “really turned into lower interest rates and fees”, he added.

“More broadly, there is an unpersuasive talking point that fewer competitors is better for competition and I think we always need to assess that claim very sceptically,” said Chopra. 

According to a CFPB report published last year, more than 80 per cent of the credit card market is controlled by 10 of its approximately 4,000 issuers. In 2023, cardholders paid $157bn in card fees and interest, which was the most on record and a 50 per cent jump from what they paid three years earlier.

Large transactions also raise questions around financial stability, Chopra said. “There will need to be careful scrutiny of two quite large financial institutions, combining them and what might be the effect if they failed,” Chopra said. “Anytime you’re talking about large players like this merging, one has to not just look at competitive effects, one also has to look at the impact on financial stability.”