Capital One-Discover Merger Class Action: Consumers Fear Higher Costs

Case: Overview: A class action lawsuit has been filed against Capital One and Discover, seeking to block their proposed merger. Consumers argue that the merger will lead to reduced competition, higher costs, and lower credit card rewards.

Who's Impacted: Credit card users, particularly those who hold Capital One or Discover cards.

Court: U.S. District Court for the Eastern District of Virginia

A reduction in credit card rewards, higher costs for consumers, and less competition in banking would be the results of a proposed merger between Capital One and Discover, consumers argue in a new lawsuit.

In the lawsuit seeking to stop the merger, the consumers argue that consolidation between the two credit card giants will significantly reduce competition in two key U.S. antitrust markets: the General Credit Card Market and the Credit Card Payment Processing Market. The effect: harm to consumers, they say.

Merger threatens reduced credit card rewards and higher costs for consumers

Tyler Baker and Lora Grodnick, both long-time Capital One credit card holders, filed the proposed class action lawsuit against Capital One and Discover, alleging that the planned merger will lead to higher interchange fees and reduced competition, directly impacting their financial interests and those of other consumers.

Capital One, headquartered in McLean, Virginia, is the third-largest issuer of Visa and Mastercard credit cards in the U.S., offering a range of financial services including banking, auto loans, and consumer lending. Discover Financial Services, based in Illinois, is a digital banking and payment services company that offers credit cards, loans, and payment processing services. 

Capital One is connected to either Visa or Mastercard networks and competes with other issuers, such as Chase, by offering rewards like cash back and travel points to cardholders. Baker and Grodnick argue that that competition is crucial for consumers, as it allows them to get better rewards. 

Vertically integrated card issuers like American Express and Discover, which own their payment networks, help maintain competitive pricing pressure on Visa- and Mastercard-affiliated issuers, and the merger would eliminate one of these key competitors, reducing the competitive landscape and potentially leading to lower rewards and higher costs for consumers, the lawsuit argues.

Concerns raised over potential harm to credit card payment processing market

According to Baker and Grodnick, the merger's implications extend further into the U.S. credit card payment processing market, which includes only four main players: Visa, Mastercard, American Express, and Discover. 

“Even more concerning—and per se illegal—are the implications of the proposed merger on the U.S. Credit Card Payment Processing Market,” the lawsuit states. 

Visa and Mastercard dominate with a combined market share of 87 percent, the lawsuit states, and they have been previously accused of colluding to raise interchange fees, harming both consumers and merchants. Capital One has traditionally maintained vertical agreements with Visa and Mastercard, setting prices for interchange fees. 

However, the merger would make Capital One a direct competitor, while it still had price agreements with the two of its three competitors—effectively disrupting the market's already limited competition, the lawsuit alleges.

The merger would only strengthen existing barriers to the credit card payment processing market, the lawsuit adds, further isolating the markets from new competition and harming consumers through increased fees and reduced benefits.

Capital One faces multiple legal challenges in 2024

The proposed class action lawsuit isn’t the only issue Capital One has been in court for this year. In June, the company reached an undisclosed settlement with Walmart, ending a lawsuit brought by the retail giant which alleged Capital One’s customer service wasn’t up to scratch.

The lawsuit stemmed from a deal between the two companies that had Capital One as the issuer of Walmart-branded consumer credit cards. Walmart sued Capital One alleging it was too slow to post transactions to cardholder accounts and alleged that it didn’t replace lost cards in prompt fashion. 

Also this year, Capital One agreed to pay $16 million to end a proposed class action lawsuit alleging it charged consumers unlawful fees for returned check or ACH debit transactions.

In the Capital One Discover merger class action lawsuit, Baker and Grodnick are suing for alleged violations of the Clayton Act and the Sherman Act, and are seeking “injunctive relief to halt, unwind, or otherwise remediate the anticompetitive impact of the challenged Capital One-Discover merger.”

Case Details

• Lawsuit: Baker, et al. v. Capital One Financial Corporation, et al.
• Case Number: 1:24-Cv-01265
• Court: U.S. District Court for the Eastern District of Virginia

Plaintiffs' Attorneys

• Brian J. Dunne, Edward M. Grauman, Andrew M. Williamson, Yavar Bathaee, and Andrew C. Wolinsky (Bathaee Dunne LLP)

What are your thoughts on the proposed merger between Capital One and Discover? Do you think it will lead to higher costs and reduced competition in the credit card market? Share your opinions in the comments below.