The proposed merger of Capital One Financial Corp. and Discover Financial Services Inc. would appear to be moving toward completion, as more than 99% of the companies’ shareholders voted last month to approve the $35.3 billion deal. According to at least one report, however, anonymous sources in the U.S. Justice Department (DOJ) suggest the agency might still challenge the merger on antitrust grounds due to alleged concerns about the significant market share the combined company would hold in the subprime credit-card market.
But as my International Center for Law & Economics (ICLE) and I demonstrate in a white paper we published last summer, the DOJ’s focus on subprime competition may be missing some key market dynamics. In particular, the combination likely would benefit consumers—especially those with lower credit scores—by creating new opportunities and potentially more competitive financial services.
Beyond Market-Share Numbers
Writing in RealClearMarkets, my white paper co-authors Julian Morris and Todd Zywicki note that this merger barely raises an eyebrow under traditional antitrust analysis.
- While the combined entity would be the sixth-largest bank by assets, it would hold just 3% of all domestic assets.
- While it would be the third-largest credit-card issuer by purchaser volume (after JPMorgan Chase and American Express), there are thousands of credit-card-issuing banks in the United States, and even the largest issuers only have a modest percentage of all volume.
Nevertheless, New York State Attorney General Letitia James has raised concerns that the combined company would control roughly 30% of the subprime credit-card market. While this figure might seem significant at first glance, it requires deeper analysis.
The “subprime” credit-card market (typically defined as borrowers with FICO scores of less than 660) represents a relatively small segment of all credit-card users. As of 2023, only about 13% of consumers with at least one credit card fell into the near-prime (8.6%) or subprime (4.4%) categories.
More importantly, the subprime market is not a static group of consumers, as consumers’ credit scores are constantly changing. Research from Fair Isaac has found that, over the course of just six months, 14% of accounts saw their scores fall by more than 20 points, while 19% saw their scores increase by more than 20 points. This fluidity makes it exceptionally difficult to define a reliable—or stable—“subprime market” for antitrust analysis.
Innovation and Competition
Capital One’s success in the subprime segment stems largely from innovation, not market dominance. The company pioneered data-driven strategies to identify relatively lower-risk individuals within higher-risk groups, allowing them to serve underserved consumers while managing default risk.
In 1991, Capital One became the first major credit-card issuer to introduce balance transfers, creating a new way for consumers to manage debt. They also implemented one of the first major secured credit-card programs, helping people with limited or damaged credit histories to build their creditworthiness.
These innovations explain Capital One’s substantial market share in the subprime space better than any anticompetitive behavior. In fact, their approach has created new pathways for borrowers deemed “subprime” to improve their credit and eventually access mainstream financial products.
The Network Effect
The proposed Capital One/Discover merger presents a unique opportunity to strengthen competition in the payment-networks space, which long has been dominated by Visa and Mastercard. The transaction wouldn’t reduce the number of payment networks; it would simply transfer ownership of Discover’s network to Capital One.
With Capital One’s technological sophistication and resources behind it, the Discover network could become a more effective competitor to the major players. This could potentially benefit both merchants (through lower processing fees) and consumers (through better services and rewards).
A More Nuanced View
Antitrust analysis should consider not just the number of competitors, but also the effectiveness of the competition. A market with fewer but stronger competitors often delivers better outcomes than one with many weaker players. A combined Capital One/Discover could be a more formidable competitor to industry giants like Chase, Bank of America, and Citibank in the credit-card-issuer space, and to Visa and Mastercard in the payment-networks arena.
While the DOJ’s concerns about subprime consumers deserve consideration, regulators should weigh them against the potential for increased competition in the broader credit-card and payment-networks markets; continued innovation in serving diverse consumer needs; and the fluid nature of credit categories. As regulators evaluate this transaction, they should take a holistic view that considers these complex market dynamics, rather than focusing narrowly on market-share percentages in a segment that’s difficult to define with precision.