Karen Petrou: The Unintended Consequences of Blocking the Credit-Card Merger

2024-04-12T09:46:02-04:00February 26th, 2024|The Vault|

There is no doubt that the banking agencies have approved all too many dubious merger applications along with charter conversions of convenience.  However, the debate roiling over the Capital One/Discover merger harkens to an earlier age of thousands more prosperous small banks all operating strictly within a perimeter guarded by top-notch consumer, community, and prudential regulators.  Whether this ever existed is at best uncertain.  What is for sure is that all this nostalgia for a halcyon past will hasten a future dominated by GSIBs and systemic-scale nonbanks still operating outside flimsy regulatory guardrails.

The best way to demonstrate this awkward certainty is to run a counter-factual – that is, think about what the world would look like if opponents of the Capital One/Discover deal get their way.  Would we quickly see a return to card competition housed firmly within a tightly-regulated system?  Would the payment system be loosed from Visa and Mastercard’s grip?  Would merchants see the dawn of a new era of itsy-bitsy interchange fees?  Would card rates plummet and rewards stay splendiferous?  I very much doubt it.  Space here does not permit a detailed assessment of the analytics underlying my conclusions, so let’s go straight to each of them.  

First, banning the CapOne/Discover deal would not ensure robust card competition under strict bank regulation.  JPMorgan’s and American Express’ formidable stakes could grow because credit-card lending is a business dependent on economies of scale and scope vital to capital-efficiency through the secondary market.  However, large banks will