What I Saw at the Discover-Capital One Merger Hearing

This analysis was published as part of The Bottom Line, my weekly newsletter reflecting on the challenges of addressing affordability, inclusive economic growth and access to capital. Subscribe to keep up with what I’m writing, thinking and reading every week.

The Community Reinvestment Act of 1977 is as special as it is frustrating.

What makes the Community Reinvestment Act special is that, rather than saying what banks shouldn’t do, it says what they should do. Specifically, it says that banks “have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.”

But the Community Reinvestment Act is very vague when it comes to how federal regulators are supposed to evaluate whether the banks they regulate are actually meeting their obligations under the law. It made sense for it to be vague. It empowered federal banking regulators to change and adapt their evaluation methods over time, especially as banking and technology change. As a result, the CRA evaluation process has changed over the past few decades, and banks have responded with different ways of showing how they’re meeting their CRA obligations.

Around the ‘90s, it became a common practice for banks to demonstrate they are meeting their CRA obligations by funding different nonprofits that served the neighborhoods where banks had customers. That funding could take various forms, from corporate philanthropy to investments in affordable housing, cultural, or economic development projects built or owned by those nonprofits.

The Community Reinvestment Act has undeniably made connections between groups doing important work on the ground and financial institutions who otherwise wouldn’t give them the time of day.

But there’s another side to the story: During a nearly 10-hour hearing on the proposed bank merger between Capital One and Discover, many were out testifying in support of the merger based on the fact that Capital One or Discover had funded their organization.

I counted 147 witnesses who testified during the July 19 hearing, from nearly 40 cities or other locations across more than 20 states. A total of 115 witnesses testified in support of the merger. Of those, 83 brought up work funded by either Capital One or Discover; of those 83, 57 only mentioned work that had been funded by Capital One, giving no other reason for why regulators should approve the merger.

It shouldn’t be necessary for anyone funded by a bank as part of the bank’s CRA obligations to come out and testify at a merger hearing for that bank. All that work the bank funded, whether it’s through grants, loans or investments made in exchange for tax credits, is already part of the bank’s CRA examination materials for regulators to consider. Capital One received a rating of “outstanding,” the highest possible grade, on its most recent CRA examination.

As I wrote previously about Capital One’s most recent CRA examination, those ratings should be taken with a grain of salt. More than 98% of CRA examinations result in a passing grade, even in cases where there is clear evidence that a bank is excluding populations based on race — or worse, preying on them with predatory products and debt collection practices.

Despite the flaws of CRA examination grading, all this great work funded by Capital One has already been submitted to regulators for consideration. Some of it is very interesting work, like the new YMCA location on Louisville’s West End, one of the first large-scale recreational investments for decades in the historically Black area where Muhammad Ali grew up. There’s also Capital One’s support for Accompany Capital, a federally-certified community development financial institution in New York City that specializes in small business lending to immigrants and refugees. Representatives from both of those initiatives were among the witnesses supporting the merger.

Parading dozens of organizations funded as a result of Capital One’s CRA obligations had one clear effect: drowning out the sharp criticisms levied by the 26 witnesses who opposed the merger, citing reasons much more directly related to the potential impact of the merger on consumers and communities.

In between the dozens of Capital One funding recipients were witnesses like Jesse Van Tol from the National Community Reinvestment Coalition, who referenced broken promises Capital One made in conjunction with its acquisition of ING Direct back in 2012. According to the coalition, as part of the approval process for acquiring ING Direct in 2012, Capital One pledged $28.5 billion in new mortgage lending for low-to-moderate income communities, but made only $11.5 billion of those mortgages before Capital One announced in 2017 that it was exiting the home mortgage business entirely.

Seven other witnesses also mentioned broken promises related to Capital One’s 2012 acquisition of ING Direct. Those broken promises left them with skepticism about whether Capital One will keep all the promises it’s now making with a $265 billion community benefits plan announced in conjunction with its proposed merger with Discover — the largest such agreement ever made in conjunction with a bank merger.

At least 20 witnesses brought up competition and pricing concerns related to the potential merger. Currently, Capital One is the ninth largest bank in the country by assets, while Discover is the 28th. The merger would create the sixth largest bank in the country. Several of these witnesses mentioned recent research from the Consumer Financial Protection Bureau showing that larger banks offer worse credit card terms and higher interest rates than small banks and credit unions.

Pricing concerns also extend to small businesses by way of the interchange fees, also known as merchant fees or swipe fees, charged by card processing networks. At least four witnesses opposing the merger mentioned potential hikes in swipe fees.

Every time you make a purchase using a credit or debit card, the price you pay for the purchase includes a small percentage for the swipe fee — currently average swipe fees are just over 2%, according to the National Retail Federation. While it’s a small slice of the transaction, it adds up over time. The average household paid $1,100 in swipe fees over the course of 2023, according to the Merchant Payments Coalition.

Visa and MasterCard combined account for a majority of credit and debit card processing market share, but they aren’t banks themselves, they’re just card processing networks. They split each swipe fee with the bank that issued the credit or debit card. Capital One founder and CEO Richard Fairbank has made no secret that the big prize in this acquisition is Discover’s card processing network, as one of only two major banks (the other being American Express) that also owns its own card network.

Debit card swipe fees are highly regulated, including a cap on debit card swipe fees under a law known as the 2010 Durbin Amendment, named after U.S. Senator Richard Durbin, who passed the legislation. Debit card transactions that involve a single company as the issuer and the network, like Discover, are exempt from that cap, resulting in average debit card swipe fees for Discover that are nearly three times higher on average than debit card transactions subject to the swipe fee cap, according to Federal Reserve data. If Capital One was allowed to merge with Discover, the combined institution would also be exempt from the debit card swipe fee cap.

Capital One has argued, and a handful of witnesses in support of the merger on Friday mentioned, that allowing it to merge with Discover and own its own card network will allow it to compete with Visa and MasterCard. But another handful of witnesses opposing the merger with Discover on Friday expressed concerns that Capital One gaining access to the debit card swipe fee cap exemption would result in significant swipe fee hikes.

At least six witnesses opposing the merger on Friday also brought up Capital One’s debt collection practices. The company often touts its ability to provide credit to subprime borrowers, those with credit scores typically below 600, who are disproportionately low-income or people of color. But when those clients aren’t able to pay, Capital One is known for pursuing court cases against them more than any other bank by far. Debt collection is a big part of Capital One’s business model. According to ProPublica, in 2020, when the company reported $5.5 billion in net income, it recovered $1.4 billion from previous card account holders whose accounts and cards were already closed because of non-payment.

Parading a bunch of funding recipients for a hearing about a merger approval seemed to pit one group of community organizations against the other, when in reality these organizations are more likely on the same side.

But even more frustrating was the way Friday’s hearing presented the argument that Capital One has funded all this great work, therefore any harm it has caused or might cause is either worth it or negligible, and the company should be rewarded with an approval of this merger — an action that would dramatically boost the company’s already considerable market power and profits for its shareholders.

It’s a heartbreaking perversion of the CRA’s original intent.

Today it’s easy to forget that at the time of the CRA’s passage, most banks were local. As of 1976, the year before the CRA’s passage, more than 50 percent of bank branches were located in the same county as the bank headquarters. Some states like Illinois had strict regulations that limited banks to a single office or just a handful of offices that had to be in the same county or neighboring county as the bank’s main branch. So the CRA’s original intent was for communities to hold their own local banks accountable for meeting their own local needs. Holding massive global megabanks accountable for meeting local needs was not something anyone envisioned as necessary at the time.

By the 1990s, state and federal policymakers had eliminated geographic restrictions on banks, and the decades-long consolidation of the banking industry was underway. That’s also when the practice of funding local nonprofits as a way to meet CRA obligations started to become a common practice. All those mergers in the 1990s — an average of 510 bank mergers a year between 1990 and 1998 — solidified the practice of banks funding nonprofits as part of meeting their CRA obligations in anticipation of applying for a merger.

The CRA’s original authors and advocates never envisioned any of that. Back when the CRA passed, it just wasn’t possible – or legal — for such massive global megabanks to hold the market shares they hold today after decades of industry consolidation.

The CRA is still special. To me, it still represents a major achievement by organizers and policymakers at the time, and a powerful statement that banks have a particular obligation to the public at large and not just to their shareholders. But it’s still frustrating, because the CRA can’t live up to that original purpose given the changes to the banking industry since its passage. Friday’s hearing made that more apparent to me than ever before.