The Federal Reserve Bank of Richmond demanded more information from banking giant Capital One regarding its proposed acquisition of card company Discover as the Fed bank follows up on public feedback it has received on the deal.
The Fed bank, which has oversight of the transaction based on CapOne’s McLean, Virginia-based headquarters, asked the bank’s lawyers, Wachtell, Sullivan & Cromwell, for additional information in a Nov. 4 letter posted on the Fed’s website this week.
CapOne proposed the $35-billion purchase of the Riverwoods, Illinois-based credit card company in February and has been waiting on federal authorities to approve the deal since then. Discover, which also includes a bank, operates the fourth-largest credit card network in the U.S. The Office of the Comptroller of the Currency is also reviewing the transaction.
Noting that it has received “comments objecting to the proposal,” the regional Fed asked CapOne for more information on whether it plans to increase fees that merchants pay when they route card payments over the network and what factors might influence that decision. Conversely, it also asked for information about the factors that might lead the bank to lower those fees; decrease interest rates it charges consumers on their cards; or improve customer service.
The Fed also noted some comments pointed to a disparity in customer service levels between the two companies, saying that Discover offers better service than CapOne. As a result, the Richmond Fed asked how CapOne plans to incorporate Discover’s approach to customer service.
“Commenters allege that Discover provides better customer service than Capital One and that the combined organization would not have sufficient incentives to maintain Discover’s current customer service standards,” the Fed letter said.
On another front, CapOne has proposed a community benefits program as part of its bid to win approval for the proposed transaction. Nonetheless, the Fed said that some commenters question the deal’s impact on low-income and minority populations, so the Fed asked CapOne to respond to such concerns.
In an effort to understand the competitive stakes, the regional Fed demanded information on the average fees that merchants paid to CapOne-issued credit cards for transactions processed over Discover rival networks Visa and Mastercard in 2022 and 2023. Looking ahead, the Fed also asked CapOne to provide the average merchant fee it expects to derive from the Discover network, in addition to its expectations about the shift of its business to Discover from Visa and Mastercard.
“Provide the percentage of Capital One’s credit card business that Capital One expects to move from the Visa and Mastercard networks to the Discover network during the next one to three years,” the Fed requested.
The Fed bank also asked questions about Discover’s business, seeking the number of credit card issuers on its network in 2022 and 2023 and the share that each of them makes up, based on transactions and dollar value.
The Richmond Fed bank also asked CapOne to provide average fee information paid by merchants for its debit card transactions using Visa and Mastercard transactions in 2022 and 2023.
