An Update on the Capital One/Discover Merger: Is There a Subprime Market for Credit Cards?
- Author(s):
- Todd J. Zywicki
- Posted:
- 05-2025
- Law & Economics #:
- 25-06
- Availability:
- Full text (most recent) on SSRN
ABSTRACT:
The proposed $35 billion combination of Discover Financial Services Inc. and Capital One Financial Corp. has faced scrutiny regarding its impact on “subprime” credit-card customers. Though the deal has been approved by federal regulators, there remains the potential that states could object to the combination on grounds that it harms subprime consumers. This issue brief examines whether such consumers constitute a distinct market for antitrust purposes and concludes they do not.
A fundamental challenge is the absence of a standardized definition of “subprime.” Credit bureaus, lenders, and government agencies use different credit-score thresholds to classify consumers—e.g. VantageScore considers scores between 300-600 to be subprime, while FICO uses different terminology entirely. This inconsistency makes it impossible to clearly delineate a market segment. Additionally, credit scores are highly dynamic, with research showing that about 40% of subprime borrowers improved to higher credit tiers during the pandemic.
Consumers with lower credit scores have numerous alternatives to traditional credit cards, including secured cards, buy-now-pay-later services (used by 21% of consumers with credit records in 2022), and personal loans. These substitutes prevent the merged entity from exercising market power. Major banks like JPMorgan Chase, Citigroup, and Bank of America already serve subprime borrowers, and could expand these offerings if needed.
Rather than harming competition, a merged Capital One-Discover could benefit consumers with lower credit scores by expanding the reach of Capital One’s sophisticated analytics, which identify lower-risk individuals among those with subprime scores. While the combined company would control approximately 30% of subprime credit-card balances, this falls far short of monopoly power, given the competitive constraints from other issuers and alternative credit products.