New Class Action Lawsuit Aims to Block Capital One-Discover Merger

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A new proposed class action lawsuit looks to halt the $35 billion merger of financial giants Capital One and Discover, citing drastically reduced competition and higher prices for consumers nationwide as the reason the proposed pact should be enjoined.

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The 56-page antitrust lawsuit outlines that competition in the general-purpose credit card industry is what allows consumers to receive a higher percentage of money back to their credit cards as rewards points from issuers such as Capital One. Key to this competitive landscape are vertically integrated card issuers American Express and Discover, which, unlike Capital One and other card-issuers that use Visa and Mastercard as their payment processors, own and operate their own payment networks and can thus retain the full amount of fees charged to merchants, the suit explains. As a result, Discover and American Express can offer more valuable rewards to cardholders, putting substantial pressure on other card issuers to remain competitive by offering better rewards, the complaint states. According to the lawsuit, the proposed Capital One-Discover merger would significantly reduce price pressure on major credit card issuers given that it would eliminate Discover, one of only two vertically integrated competitors, from the competitive landscape. 

More concerningly, the case alleges, the proposed pact would disrupt the relationship between Capital One, the third-largest credit card issuer in the U.S., and Visa and Mastercard, with whom Capital One maintains express agreements with regard to setting interchange fees—a percentage of each transaction that is withheld from merchants and split between the card issuer and payment processor.

Should the merger close, the filing continues, Capital One plans to issue credit cards that use the Discover network—one of four competitors in the historically price-fixed credit card payment processing market—while expressly agreeing on interchange fees with two of the three other payment processors in the arena. Per the suit, this “mixed model” provides “a dangerous incentive” for Capital One, Visa and Mastercard to collude on interchange fees.

“To avoid the threat that Capital One will move its cardholder base to Discover, Visa and Mastercard may provide Capital One with a larger share of the interchange fees in exchange for refraining from expanding the Discover credit card payment processing network. Moreover, because Capital One will no longer face competition from vertically integrated Discover, it will have no incentive to remit its increase [sic] share of the interchange fees to its customers as rewards.”

Ultimately, the merger of Capital One and Discover would cause Capital One, one of the country’s largest Visa and Mastercard issuers, to become Visa and Mastercard’s horizontal competitor while at the same time maintaining its contractual counterparty relationship with the two firms, the suit summarizes.

“The net effect will be higher interchange fees, which are passed on to cardholders; fewer rewards because of decreased competition from vertically integrated Discover; and the insulation of Visa and Mastercard from competition in the Credit Card Payment Processing Market,” the complaint states.

More broadly, the proposed merger of Capital One and Discover would “supercharge” the barriers to entry that exist for the general-purpose credit card market and credit card payment processing market, sealing off both sectors from competition and harming consumers who pay inflated interchange processing fees, the lawsuit alleges.

Should Capital One and Discover merge, the proposed new entity would control more than 13.6 percent of the general credit card market, and Capital One would balloon to the sixth-largest bank nationwide and biggest credit card issuer, the complaint adds.

The Capital One-Discover merger lawsuit looks to cover all individuals, entities and/or corporations in the United States who directly or indirectly paid interchange fees as merchants or credit card holders from July 22, 2020 through the present.

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