Capital One and Discover sued for merger; plus a recap of last Friday's public meeting

In today’s edition, we’ll dedicate our coverage to all things Cap-One/Discover, which was initially planned to just be a recap of Friday’s public meeting and my thoughts, but has now expanded to take a look at the class action lawsuit filed by two Cap One cardmembers earlier in the week.

The Cardmembers Strike Back

As we mentioned earlier in the week, two Capital One customers filed a class action lawsuit in federal court against both Cap One and Discover, seeking to block the planned $35 billion marriage of the two credit card issuers. The lawsuit was filed in the Eastern District of Virginia. A link to the full lawsuit can be found here.

The lawsuit was co-filed by Lora Grodnick of Skillman, NJ and Tyler Baker of Underhill, VT. Baker in particular is a fascinating figure. He is no stranger to leading class action lawsuits, having shown up as the lead plaintiff in a 2023 action against the University of Vermont’s Medical Center Plan, a 2020 action against Ignite International for TCPA violations, a 2023 action against the Hartford Life and Accident Insurance Co for a data breach, a 2022 action against Bloomberg for sharing subscriber information with Meta, and probably more that I am missing. And it should also be noted that two of the four cases previously mentioned resulted in federal regulators getting involved after the fact and piling on; revealing these aren’t just frivolous suits. The other two suits are also still in progress, meaning his track record as far as I can see is fairly solid.

As far as the case itself, the suit is about 56 pages long and hits on the following points:

• The interchange situation is inherently anti-competitive, with Capital One now having leading issuer power over not just two networks (Visa and Mastercard) but three with Discover, having the ability to continue to threaten (or collude, if you believe things never changed from the 2005 lawsuit that took 14 years to settle for $5.4 billion, eventually) interchange pricing with the big 2, by using Discover as its now bully tool to force the big 2 to give it more of the interchange pie or else. This is a much more complex view of the claim that has been thrown around that the merger will create more competition for Visa and Mastercard, which admittedly does only look at things from the network side (and pretends like Capital One isn’t already a massive issuer).
• The Payment Network and Issuer Rewards Barrier to Entry aka “PNIRBE” is noted, and the lawsuit highlights that the four US credit networks have remained as such for the last several decades without any new entrants, and more tellingly, the top five issuers (of which Capital One is one) have also remained as-is for a long time, showing a similar barrier to entry on the issuer side as well. This model is used to point out how Capital One has no incentive to continue to remit rewards to Discover customers from its interchange fees, and also highlights how Capital One’s ability to play as both an issuer with Visa/MC and also with themselves via Discover will massively decrease the value of Amex particularly because Cap One can ramp up the remaining acceptance gaps that Discover has (and that in many cases Amex also has).
• The lawsuit also calls out the potential direct horizontal agreements that it claims would be in direct violation of antitrust law, and brings the customers back into focus with not just the repeated reference to rewards but also refers to Capital One’s penchant for high interest rates, as evidenced by this angry customer who witnessed their APR on a Cap One card skyrocket to over 32%.

It remains to be seen what will actually happen with this suit, and the points aren’t anything earth-shattering that we haven’t heard about before, but the bottom line is that there is a decent chance the case could in fact lead to the merger being put on ice when you look at some of the history of the co-plaintiff and previous notable merger-adjacent suits.

The Public Meeting

Alright, so if you missed my liveblog, here’s my summary - the meeting felt like a big disappointment. Mostly because of the fact that the heavy majority of the speakers (a few of whom directly attested that they had been asked to speak by Capital One and/or Discover) were in favor of the deal and we really didn’t get a variety of views, but also because of the fact that the majority of these speakers were community partners and non-profits - important to be sure, but almost laughable to think that this is going to be the primary criteria the regulators will think about when considering the deal.

To be sure, there were a number of speakers who did in fact use arguments beyond just “we love Capital One (and Discover!) because they do nice things in the community, so you should absolutely trust them to do the right thing if you approve this merger (even though they’ve both had a bunch of embarrassing consent orders and lawsuits over the years)!”. Most notable was private citizen Todd Zywicki, who is writing a white paper on the benefits of the deal (as many of his fellow Federalist Society members who contribute to its Regulatory Transparency Project members also do) and was able to thoughtfully lay out his 5 industry/operational reasons why the deal would be a good thing.

Another thing that stood out to me were the handful of local Virginia politicians, many of whom sit in the State House of Delegates, who decided to hop on and throw their support behind Capital One. Naturally, I was intrigued and found the following in their respective campaign coffers:

• Todd Willett - $5,750 from Capital One
• Rip Sullivan - $9,500 from Capital One
• Irene Shin - $1,250 from Capital One
• Anne Ferrell Tata - $2,500 from Capital One

The company has also spent over $3 million in the state on lobbying efforts, dating back to 1996.

Of course there were some views that did not support the deal, and the main thing that came (back) to light is the ING Direct-related community benefit plan of $180 billion that Capital One promised back in 2012 when it purchased the banking company for $9 billion. Namely, led by the NCRC, the claim was made that none of the promises of the associated community benefit plan that was made back then were fulfilled. Obviously, the goal was to bring into question the $265 billion community benefit plan announced by Capital One a few weeks ago and just days before the hearing, which promises a host of community initiatives if the deal goes through.

As of the time of this newsletter, the Fed and OCC have yet to publish the minutes of the meeting (they said they would do it eventually), but in lieu of that you can revisit our live blog from that day which I’d like to think is pretty comprehensive (we did take a few small breaks here and there).

So what’s next? The Q2 earnings calls from both Discover and Capital One revealed nothing that we hadn’t already heard, and both companies seem to be hard at work already acting as though they will integrate, with Discover hiring ex-Cap One veteran Karl Werwath to be the Chief Integration Officer and selling off its student loan business. Beyond that, it’s all up to the regulators. My gut feeling is a decision will come before the election. Stay tuned, as always!