Competition and Consumer Banking: Bank Mergers, Credit Cards, and the Capital One-Discover Deal

Edith Harold: Hello everyone and welcome to this Federalist Society virtual event. My name is Edith Harold and I'm an Assistant Director of Practice Groups with the Federalist Society. Today we're excited to host this FedSoc forum called "Competition and Consumer Banking: Bank Mergers, Credit Cards, and the Capital One-Discover Deal." Speaking on the panel today we're joined by Professor Todd Zwicky, Dr. Diana Moss, and former Senator Patrick Toomey. Joining us as our moderator today is Jelena McWilliams, who is the managing partner and head of the Financial Institutions Group practice at Cravath, Swain and Moore. If you'd like to learn more about today's moderator or speakers, their full bios can be viewed on our website fedsoc.org. Throughout the program, we may turn to the audience for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window, and we will do our best to answer as many as we can. Finally, I'll note that as always, all expressions of opinion today are those of our guest speakers and not the Federalist Society. With that Jelena, thank you for joining us today and I'll hand things over to you.

Jelena McWilliams: Thank you very much, Edith and hello everybody. Welcome to the FedSoc webinar on Competition and Consumer Banking. Today we're going to discuss very time-appropriate and always exciting topics of bank mergers, credit cards, and the pending Capital One-Discover deal. Our panelists, I'll introduce them briefly. I think they're well known to the crowd, but nonetheless, I'll make very, very quick introductions and then we'll open up the floor for opening remarks by each and engage in a discussion. We will leave about 15, 20 minutes at the very end for your questions, so please pose your questions in the Q&A session and we'll try to cover them in the time we have remaining at the very end. With that, I would like to introduce Professor Todd Zwicky, and I always love how long the titles are for professors. Todd is the George Mason University Foundation Professor of Law, Antonin Scalia Law School, George Mason University, and he has been in the bank regulatory and financial services space for a long time.

Dr. Diana Moss is the Vice President and Director of Competition Policy, Progressive Policy Institute. She has held a number of very interesting positions in her career and she is currently at the Progressive Policy Institute, but prior to that she was president of the American Antitrust Institute. Both Diana and Todd have published papers on this topic and they're available at the link to this event. And last but not least, we have former Senator Patrick Toomey, who from my time on the Senate Banking Committee was one of the incredibly engaged members on all topics financial services, and I have to tell you, their senator, whenever we had to brief you as staff, we were very concerned that we can fully prepared because you always ask tough questions. So I fully expect that to continue today. With that, I will turn the floor over to you, the panelists for your opening remarks and we'll start with you Todd.

Todd Zwicky: Thanks, Jelena and I can relate to that experience of testifying with Senator Toomey as well and being prepared, and I would encourage everybody on the call to look at Diana Moss's paper as well as hopefully ours. I'm just talk about a few minutes to kind of frame this up, how I'm thinking about and how all these topics fit together. Competition is really the engine that has made American banking and consumer finance system works so well. Going back to the seventies, really, the deregulation of interest rates, the effective deregulation of interest rates in the Marquette case by the Supreme Court, that led to massive expansion of access to credit for consumers, the development of debit cards over time, that led to the widespread adoption of free checking. Up until that time, consumers had to basically pay, everybody had to pay a monthly fee, you had to pay for your own checks and the like.

And so these innovations in the competition has been the engine that has really modernized consumer finance and unleashed all this innovation, which really saved the day during Covid, for example, when we could so seamlessly switch over to electronic payments, online payments and the like. And that's what I think is at stake here is understanding how competition innovation and financial inclusion all go together. And the topics that, as you said, Yan, are so timely right now. Touch on all of these. So first, let's talk about the Credit Card Competition Act or what's often called Durban two modeled on the Durban amendment to the Dodd-Frank, which placed fee caps on interchange fees and certain routing requirements. We could talk about the details, but the effect was to basically cut in half the average interchange fees, which are the fees remitted back to the bank every time you swipe your card at Target or Walmart or whatever.

What was the impact of that? Well, as I said, when debit cards are first adopted, we got as high as 78% of bank accounts in America were free checking as a result of that. Since the Durbin amendment that is plummeted down the 39%. And how has that happened? By raising monthly minimums, by raising monthly fees and the like. Who has impacted the most by that low income consumers who lost access to free checking, who millions of consumers potentially lost access to bank accounts once they had to pay 15 or $20 a month. The plan for the Credit Card Competition Act is to basically do pummel credit cards the way that they did debit cards to place these routing requirements that would reduce payment security, but also with the intent of driving down interchange fees on credit cards. What will happen, low income consumers will lose access credit cards, free credit cards will go away, rewards will go away.

Consumers are not going to be made better off by that. But it also requires understanding competition. Competition works differently in the credit card market from the debit card market. Consumers carry one debit card. Most consumers carry four credit cards every time you go to the gas station, they're competing over your business for credit cards. And so it's a completely unnecessary idea. When you look at the Capital One Discover merger, you see another element of competition. So it's a complicated merger from the standpoint that you both have horizontal effects, which is competition and bank accounts and credit card accounts, but you also have very important competition and vertical effects, which are very important, which is Discover has its own network. Right now we have four major networks in the United States, Visa, MasterCard, American Express and Discover. Discover has its own network, three party network, but Discover for 20 years has only had four or 5% of the market.

And even though it has more credit cards issued than American Express, it doesn't have the same high spend consumers that American Express has. So the Credit Card Competition Act wants to create more competition among networks. That's exactly what Discover and Capital One is going to do, is by linking these two companies together, capital One with its innovation, discover with its existing network, can supercharge competition and create a viable fourth competitor that will eliminate essentially the need for the credit card competition act without the central planning, without the designs on that. And so I think what we need to do is we need to understand the way in which competition has benefited consumers in the past, the way competition in these markets will actually benefit consumers and take that approach as we're thinking about merger policy, antitrust, and the like. Thanks.

Jelena McWilliams: Yeah. Thank you Todd. Dr. Moss?

Dr. Diana L. Moss: Thank you. Thank you. It's an honor to be on this panel. It's a great topic. Very timely. As you pointed out. Let me just set out some high points, and most of these come from the white paper that we wrote several months ago. It's on the Progressive Policy Institute website. I would also commend Todd's paper as well. The white paper really looks directly at the Capital One Discover merger, and it only looks at the credit card side of that deal. There's obviously a debit side of that deal. There's a banking side of that deal. So enforcers and regulators have their hands full unpacking this merger, but the credit card side is really important for some really, really good reasons. This is the first big merger in the banking financial services sector. Since the two thousands, things have been very quiet, not a lot of M and A, and it comes at a time when players in financial services and banking are really becoming a big part of the digital transformation, which is spurring growth and innovation and is a highly dynamic sector, right?

We're seeing the digitalization of many of our sectors. So a lot of these players are building out what are now ecosystems, right? Todd mentioned horizontal and vertical, which I'll talk about as well, but we also think about these as ecosystems where you have platforms for lending and for banking. Capital One, for example, has been acquiring FinTech assets, software, web and mobile apps, data analytics assets, AI and machine learning. So this is where the industry is going and that can potentially be transformative to consumers, but it is going to be very important for antitrust to do its work and look very carefully at this transaction and at other transactions. And the reason why is because antitrust is really there to protect consumers. Antitrust enforcement, referees, the markets competition is a lifeblood of a market system, but we don't have competition when we have powerful dominant players or tight oligopolies in markets.

So antitrust enforcement is really, really critical right now. Consumers have about 1.1 trillion of outstanding balances on credit cards. That was as of first quarter of 2024. That has skyrocketed since the pandemic. And that debt weighs really heavily on consumers very heavily. And so we're worried about effects of any consolidation on interest rates and fees, card features and perks, reward systems. And so absolutely DOJ should give this a very hard look. The deal has also been proposed at a time when the Biden antitrust agencies have messaged out on much stronger enforcement, and they are one of the cooks in this big kitchen along with the Fed, obviously, and OCC. And so we have different sets of guidelines. It's very clear based on what DOJ issued recently in their addendum, their banking addendum to their 2023 merger guidelines that they will be applying the 2023 guidelines to this merger. And this was the assumption that I relied on when I performed our analysis months ago before DOJ had made that announcement. So just to dovetail on what Todd has said, there are absolutely horizontal effects of this deal in combining a credit card issuer with a payments processor, discover that creates a vertical combination. So we ask, well, will that create stronger incentives to frustrate access to important channels or distribution or inputs for rivals in the credit card lending and purchasing markets?

Will the horizontal combination create a more powerful player, a player that will have significantly more market power to affect interest rates and to degrade rewards programs and other types of perks, so horizontal and vertical? But my guess is DOJ will also look at what I call ecosystem issues, where if the combined entity is in fact building out an ecosystem and we look at sort of bundles of financial services products around payments, payment processing and credit card issuing, they may well give that some attention. And DOJ, I'm sure we'll be looking at submarkets where we unpack consumers, for example, with lower credit scores. And so that would be the impact on the subprime or the non-prime markets. The analysis we did very, very, very quickly indicated that under the 2023 guidelines, if we look at an all credit card market, if we look at a non-prime credit card lending market and a credit card purchasing market, remember, consumers use their credit cards differently.

Some borrow, some borrow on their cards, others pay their balances every single month. So those are very different uses for consumers. We see that the merger is triggering some thresholds, but they are very, very close, very marginal calls based on the 2023 merger guidelines. And so the conclusion is that this deal should get a very, very hard look, but it does raise issues around very marginal calls, which will raise the burden on the Department of Justice to push back against any efficiencies defenses that are put forward by Capital One and discover, in other words, lower costs, economies of scale, building out the networks, increasing services, products and services faster to market a new or better business model, for example. So that efficiencies defense is going to be harder for DOJ to push back on if the anti-competitive effects of the deal are very marginal calls, which is what the analysis we have done indicates.

The last thing I'll say is, and this is in the context of the DOJs case against Visa, there absolutely will be interrelationships between the Visa case, which looks at the debit card market and the Capital One discover market where there will be impacts on the debit market. So I think DOJ is in a position of really having to carefully articulate its theories to make sure that they have a consistent story market power story across all of these enforcement actions and that they don't get crosswise with each other given that the and the Visa case are relatively new. So I'll leave it at that. We'll talk more a little bit later about more of these interrelationships between the two cases.

Jelena McWilliams: Thank you so much, Diane. Senator Toomey?

Hon. Patrick J. Toomey: Thanks very much and thanks for your kind words. It was always a pleasure having you before the committee, Todd. Thank you. Also, let me make just a quick disclosure. I do serve on the boards of several financial services firms, including Apollo Global Management. I'm an advisor to several businesses across a wide spectrum of industries, including Capital One. All comments and opinions that I make are entirely my own. I'm not speaking for anyone else at all. Let me start with a big picture difference of opinion that I have with the current administration. And I guess it comes down to my thinking that in a free market economy, the government should have a presumption in favor of allowing firms to merge, to make acquisitions, to divide up their firms. It's a really important part of a dynamic innovative economy to allow combinations and recombination. And clearly this administration is not of that view.

I think their recent guidelines intend to move in a direction of at least somewhat raising the bar, making mergers and acquisitions more difficult, not less. And I should point out they're doing this without the benefit of any legislation. Congress has not passed legislation suggesting that they should establish new and more difficult criteria for mergers and acquisitions. Now admittedly, the legislation that's on the books is very vague. Congress's fault should be much more specific, I think, than it is. But I do think it's worth noting that the actions of the DOJ and the FTC in particular do not occur with the benefit of legislative backing. Now that said, certainly, and especially in the banking space, we do have a regime around acquisitions. I think the sort of macro level justification for that are really two categories. One that we shouldn't lose sight of, and I'm sure the financial regulators are very keen on is the impact on systemic risk, which could be positive or negative.

And then the second is something that has already come up, which is the nature of competition and how it will serve consumers. Now, let's take the first one first. Let's take systemic risk. I think it was the unintended series of unintended consequences of Dodd-Frank, that have led to a big concentration among the very biggest financial institutions in the world. Actually, when you establish and you codify the notion that the government will confer a systemically important financial institution designation upon a handful of firms, I think that's a very clear signal to the world that these companies are too big to fail and they will not be allowed to fail. And so that has big costs of compliance, but also it confers benefits like the universal belief that they can't fail, that enables them to raise capital at a lower cost than they otherwise would. It probably allows them to attract uninsured deposits in a way that otherwise wouldn't.

And look, we've seen it happen, right? So JP Morgan is now a $4.1 trillion bank has 12% of all American deposits. And so when we think about systemic risk, I think furthering that concentration probably all else being equal, increases systemic risk and enabling more mid-size players to join forces, increase their scale, gives them a chance to compete against the giants. And that frankly, I think is healthy from a systemic risk point of view. And then you take the case of the Capital One Discover merger, if that goes through, which I'm very confident it will, there's no real reason why it shouldn't. It's still going to be a bank that's only one six the size of JPMorgan Chase. It's not going to be close to the scale of the real Giants, but it'll have more scale than it has today. And that will allow this merged entity to better compete with the giants that they have to compete with on a regular basis.

So this is of course, directly related to the question of, well, is this good for consumers? Is this good for this segment of the industry? It's hard not to believe that this is a huge net plus for competition. First of all, right now there's wide open competition for issuing credit cards, right? There are probably what, 4,000 credit card issuers. There's virtually no barrier to entry to get into the issuance of credit cards, but the network payments is a totally different story. There's really only three players and combined, they have 96% of the market. As Todd pointed out in his opening comments, there's this sort of continuous drumbeat of legislative proposals to do something about that merger does something really important about that. It would marry the tremendous resources and expertise and capital of Capital One with a relatively underutilized network that could then really directly compete with Visa and MasterCard and American Express in a way that it doesn't today.

That has all kinds of benefits, benefits for merchants who will probably be able to choose among competing networks, benefits for consumers, because for Capital One, this creates a new revenue stream which allows them to further expand on the low cost checking and credit card and no cost and no fee checking and credit card accounts that they have famously distributed. So when I think about the big pro issues that ought to guide the way the government thinks about the merger of significant relatively large institutions, I think of systemic risk and competition. And in both cases, as a general matter, it's probably healthy to allow medium-sized banks to scale up this way. And in the case of the Capital One Discover transaction, I think it clearly meets that criteria.

Jelena McWilliams: Yeah. Thank you Senator Toomey. So maybe we start discussion keying off of what Senator Toomey just said about competition in financial services and some of the legislation of recent years that has impacted this space. And so I'll go to Dodd-Frank. The most recent big, big legislation that became law, one of the stated goals of Dodd-Frank, was to increase competitiveness in financial services. Yet since the enactment of Dodd-Frank, some have argued that the regulatory environment has allowed the two big to fail banks to become even larger. As Senator Toomey pointed out, while at the same time the trend on the regulatory side of giving all these mergers an extremely high level of scrutiny and seeing very few mergers actually get approved, some are saying that that made it harder for smaller players in the market space to become effectively capable of challenging the incumbents and the two big to fail firms. Some have dubbed this too small to succeed. In general, do you agree with this assessment? And if so, do you think that the anterior positioning is a factor? If it is not, what is driving this trend? And do you believe that the current regulatory actions vis-a-vis the mergers are good for the consumer and the economy? Are they bad for the consumer and economy? And I'll start with Dr. Moss.

Dr. Diana L. Moss: Thanks for that question. And I'm going to dodge any questions about bank financial services regulation and really stick to the antitrust issues. I'm sure we'll have Senator Toomey and Todd chiming in on that. As I said in my opening remarks, I think it's really, really critical for antitrust enforcement to play a vigorous role. I just did huge study of merger control in the United States over the last five administrations. So that goes back to the Clinton administration in 1993. And interestingly, the Biden enforcers are not the most vigorous enforce enforcers on the planet. In fact, the Obama administration was pretty vigorous in its enforcement and the Trump administration, Trump 1.0 was pretty vigorous. And of course the Biden enforcers are vigorous as well, and that's based on a bunch of different metrics. So I think there's really a growing bipartisan support for the role in the importance of antitrust enforcement in our market economy to protect our markets and all the democratic principles that they rest on.

And consumers are really front and center here in terms of consolidation that affects credit card markets, debit markets, banking markets, and any sort of more sophisticated ecosystem type markets and the financial services. So I think we have a situation here where multiple regulators are looking at this deal, and they are going to coordinate as they have in the past, and they are going to bring their own guidelines to bear as they have in the past. And I think we will probably have a good example of a whole of government approach that works for the consumer and works in the interest of promoting competition. So I think it's really important to have that antitrust enforcement mechanism working efficiently and working well. I will say this and sort of response to one of Senator Toomey's remarks, the 2023 merger guidelines when they came out in draft form absolutely contained, sort of were pushing the envelope on creating new metrics like measures of bigness as opposed to using the traditional consumer welfare standard.

There was an enormous amount of pushback on that from the center, the center and the center left in terms of competition advocacy. And they really reeled that back in. We didn't end up with bright line tests. We ended up with much more robust guidelines, much more lengthy guidelines, but I think guidelines that were really designed to support strong and vigorous enforcement. And so this movement to sort of replace existing standards with more bright line tests, for example, for business really has not gotten off the ground. I think it's wasted a lot of important time and resources in our antitrust enforcement system, but it's an ideological debate that we needed to have. So I think the 2023 guidelines are probably very well positioned for the agencies to use to look at this deal.

Jelena McWilliams: Thank you, Diane. Professor Zwicky, would you like to either comment on Dr. Moss's comments or maybe go back to the question of do you believe that Dodd-Frank help competition made it better for consumers or not? And whether or not the current regulatory environment is and the anti-merger sentiment among the regulatory agencies is good for the consumer and the economy or not?

Todd Zwicky: Yeah, I'd like to pick up on that, and you said it exactly right. The flip side of too big to fail is too small to succeed. And Senator Toomey talked about the entrenchment of the two big to fail subsidy that allows the mega banks to be able to borrow to access capital markets lower costs than others. But the other thing that we've seen is just the sheer regulatory cost of Dodd-Frank. And it's been long known in economics, the regulatory costs do not scale one-to-one with the size of an institution because a lot of it is paperwork and that sort of thing. And so it may be a rounding error for Citibank to hire another a hundred compliance officers where it could be the difference between a profit and a loss for some community bank that has 12 employees or something like that. And so one of the reasons we've seen this consolidation and what we've seen is that banks are consolidating one estimate was twice the size since Dodd-Frank as they were before.

So even though Dodd-Frank was supposed to get rid of too big to fail and promote competition, instead what it's done exactly the opposite, it's promoting consolidation and the like. And so it has had the contrary effect, and it's not just banking, it's sort of every industry that it is touched. The regulatory costs have led to this merger approach and what the response has been from a lot of quarters just feels like rather than addressing the underlying problems has been either just sort kind of arbitrary carves out or kind of readopting this mindset that big is bad, that we just don't like big businesses, we don't like consolidation without looking at the underlying problems. But more importantly, this idea of just looking at big as bad and not thinking about and weighing the pro-competitive effects against any anti-competitive effects. And as Senator Toomey said, this bank would only be the sixth largest bank in terms of assets.

It would be a quarter of the size of JP Morgan Chase. They would have about a fifth of the credit card loans outstanding by dollar amount, but that's still very low when you consider sort of what the thresholds are for mergers. Some people have pointed to the subprime market, but turns out the subprime market is not a static market. Consumers subprime market is often a transition product, so consumers move in and out. And the reality is that a lot of businesses just don't want to be in the subprime market. One other effect of this regulatory cost has been to affect other financial services. So for example, a lot of small banks just exited the mortgage market after Dodd-Frank because the regulatory risk and compliance was so high. And so we've ended up recreating a lot of the non-bank lenders having a large role in the mortgage market that we were concerned about prior to Dodd-Frank.

And so one of the things I think that's important, and Dr. Moss put her finger on it, she talked about efficiency defenses, but I think it's even more complicated than that. It's weighing the pro-competitive effects, the manifestly clear competitive effects in the network, which I think dominates all of this with the marginal at best concerns about anti-competitive effects in the retail banking market, but also the possibilities of innovations in security that comes with a larger network. The putting together the particular strengths of these two companies discovers network with Capital One's sort of innovation in markets and their innovative attitude towards consumer security. And so there's a little bit of an apples and oranges situation here. And given that, I think just sort of taken a sort of, and I'm not accusing Dr. Moss, lemme make this clear, but a lot of people have sort taken a reflexive "big is bad" sort of approach to this.

It's just not a very useful way to think about it. It's not a very useful way to think about it for consumers for what is really a very sophisticated inquiry, which is the clear manifest benefits to consumers and competition on one hand versus very speculative concerns about very marginal potential anti-competitive effects on the other, and like Senator Toomey, I guess in my view is when you tote up that balance in a free market economy, the burden is on the government to carry the burden rather than, and the presumption is the merger should go through unless you can really show detailed and precise harms.

Jelena McWilliams: And I'll just add this, what I found fascinating is in my first year as FDIC chairman, we had zero bank failures and we had an incredibly strong economy, very low rate of unemployment, and yet in such a very, I would say positive environment for bank, we ended up with something like 200, 220 mergers in very, very, very small banks. And then I had a thought that for a five-year tenure of an FDIC chairman, if things go well and we don't have massive bank failures in a normal operating environment, if we lose 200, and I use the word loosely, 200 banks to a merger, there would be 1000 pure banks in the United States by the time my tenure would be done, which would be basically 20% of the market would shrink for five years, which was really an interesting point to think about the consolidation in the industry and whether or not regulatory costs, market efficiencies, economies of scale, et cetera, played a role there. Which brings me to, well, senator, to me, I would like for you to have an opportunity to comment on Dodd-Frank and the competitiveness in the marketplace.

Hon. Patrick J. Toomey: Yeah, a couple of points regarding Dodd-Frank, I think it's worth noting for either eight or 10 years after Dodd-Frank was signed into law, the number of de novo banks in America, startup banks launched in communities by local business folks who wanted to provide a local service in their community and saw that it was lacking. By the way, prior to Dodd-Frank, on average, we launched about a hundred new community banks de novo every year, year in and year out, sometimes more, sometimes less, but that was the average, but I'm forgetting right now, Jelena, you probably know off the top of your head, I think it was either eight or 10 years, we went without a single new bank charter, without a single case of a group of folks sitting around a table saying, you know what? We can make this work. And the reason is they couldn't make it work.

The numbers didn't work. Now, it was a combination. It wasn't all regulatory costs. We were in a zero interest rate environment for much of that period. And it's very, very hard to make a bank work when you have virtually no net interest income. But I think most of the folks that I talked to and I helped launch a community bank back in 2005, so I got pretty deep in the weeds on what it takes to make a startup bank work. And I think we had a long spell there where we just didn't have that happening. And that's not good for our economy. We really should be in an environment where people feel they are able to launch new banks on a pretty regular basis. One other point I would make, just a quick follow up to something that Diana mentioned, and I acknowledge Diana's point that the final guidelines are substantially different from the initial drafts, but I do think it's fair to say that the intent of this final set of guidelines is still to raise the bar for permissible mergers, permissible acquisitions, the new set of fact patterns that they've established.

It seems in some cases they're relying on legal theories that have recently not gone over well with courts and hearkened back to a prior period of time. I do think it's part of a overall administration view that they're not friendly to consolidation. They are reflexively, at least they tend towards being reflexively skeptical about consolidation. In the case of this transaction, I don't think it's going to matter because I think the merits so far outweigh any theoretical downside that I doubt very much there'll be any problem with the regulatory approval. But as a general matter, let's be honest, we read every day about the FDC going to court with a new theory about why somebody needs to be broken up or some acquisition must not be made.

Dr. Diana L. Moss: Jelena, can I just dovetail on that really quickly because Senator to me has really raised a really important point, and that is sort of the optics of surrounding this transaction. Right? And this also links back to what Todd was saying. If you really do the deep dive into the numbers in an all credit card market, a non-prime credit card lending market, a credit card purchasing market, you're looking at a market share for the merge company anywhere between 20 and 30%, right? And with other more equal size players or slightly smaller players, this is not a structured market which screams out dominant firm or an oligopoly of firms where you would have stronger incentives to collude as opposed to compete. It's just not that fact pattern, nor do we have a fact pattern that would give any support to a vertical theory of harm. You have to have a pretty hefty market share to have incentives to start foreclosing rivals access to say, discover or access to Capital One.

So the point is this, it's a marginal call and the efficiencies defense is going to be really, it's going to be a strong one. So DOJ, if they decided to challenge would be going into court, assuming an enormous amount of risk and the risk of losing in federal court would add to an existing record of losses that we have on record right now. FTC lost Meadow within on a potential competition theory, DOJ lost United Healthcare Change, FTC lost Microsoft, Activision. So they have a record of bringing a lot and joining a lot of cases, but the win rate is still far, far below the historical average. And I think optically and litigation risk wise, that creates a scenario where DOJ would be probably thinking very, very, very hard about whether to challenge this deal or not, given where they sit right now with the administration's win record.

Jelena McWilliams: Well, that's actually a great segue to my next question, which is that we have seen the state attorney generals get more and more active in a number of different regulatory applications, including in this specific case for discovering Capital One. And we know that the New York AG Leticia James' office filed a petition asking a state judge to issue the Virginia-based Capital One an out-of-State subpoena related to her probe. I would be curious to see what is, and we'll start there and we'll start with you. What is your reaction to this and how do you think it'll affect the deal? Is there a place for the state regulatory bodies and the state ag offices to play a role in these probes and say from the antitrust or other perspectives? And just to get your opinion on that?

Dr. Diana L. Moss: Was that directed to me?

Jelena McWilliams: Yes.

Dr. Diana L. Moss: Sure, sure. And I don't want to take too much time answering this, but the state AGs are very active. They've become very active in the last five to 10 years. A lot of states have great antitrust shops, they have lots of incredibly talented lawyers and economists and other experts, and we find the states engaging more and more on cases, but also in terms of reframing some of their antitrust laws, California, for example, and the Cartwright Act, New York. And so the states have become activists in a good way. We see them joining on to federal complaints, for example, in the big digital cases. So that's all good. States are very concerned about their own consumers and their own workers. So that's why we see a lot of state involvement in things like airline mergers, which affects local commerce and economies and food and agriculture, mergers, energy mergers, that sort of thing.

And that's a great role for the states. I will observe this, and I think the same is going to be true of Capital One discover, especially for the banking side because banking markets, as we know, are defined on a much more local geographic basis. I will observe this though, with states joining on to a lot of complaints, we now have courts with really, really heavy workloads, consolidating cases, filtering out state types of state allegations versus federal allegations. We just saw this happen in the Google search case, and we'll probably see it in other tech cases where we have a lot of enforcers in the mix. And to the extent there's coordination, which of course there is between state and federal and private, that's really important. But we want the courts to run efficiently and to work efficiently with really strong theories of harm so that they can and strong evidence that they can use to work through these cases. If cases are weak on theory and week on facts, then that's what the courts are for, therefore they're there to weed out those types of cases. So I will be very curious to see how New York proceeds or any other states proceed in getting involved in this particular merger.

Jelena McWilliams: Thank you so much, Senator. To me, what is your view on the New York Attorney General's action and just the greater policy in general? Yeah,

Hon. Patrick J. Toomey: I can't help but observe, and maybe this is my background coming through a little bit, but attorneys General are usually elected to their office very commonly aspire to hire office. We're kind of watching that play out in a very big way right now. And here we have a case where I just don't see the jurisdiction. We have a federally chartered bank. One is regulated by the OCC and the Fed. Both of them are in the process of going through a very, very rigorous examination of this transaction and why it's necessary for a state attorney general to come into this by the way, and to demand documents that it would be illegal to turn over. This is very strange to me. I don't think we want to see a situation where who knows how many state attorneys general are deciding they're going to weigh in on something that is being very, very rigorously examined. So I really question whether this is a good use of the Attorney General's resources.

Jelena McWilliams: Thank you for that. Professor Zwicky?

Todd Zwicky: First, what a great question. It's a great way of getting at this, and I think it raises a larger question, which is I think what we're seeing right now to some extent is to some extent an unprecedented attacks on the dual banking system more generally. And it's not just in this area of going after antitrust. And it's worth thinking about why we have a federal charter as senator to was just talking about. The concern we've always had is that banking has fundamentally interstate effects, national effects. And as Diana was talking about, we often think about banking as being local markets, but that's not the case here, right? One of the reasons these two companies are being put together is that they're both really pretty much virtual banks. Capital One has some physical presences, but Discovers never had banks. They emerged out of the old Sears credit card.

And so originally you basically traded in your Sears card for a Discover card, which is how they got so many cards in consumers hands, and you could go into a Sears store and pay your bill and do things like that. Capital One has largely been online. It's always been, both of these are really virtual banks more than local banks. It's not clear why an AG has much interest in that. Clearly networks are national, global, really the networks, the way they end up working, and the concern we've always had and why we have the National Bank System is that there will be a tendency for local enforcers and legislatures to basically go after out-of-State banks for the benefit of in-state consumers to block competition and the like. And so whether it's banking or whether it's antitrust, the concern we've always had with antitrust is of using the antitrust laws to protect local competitors from more efficient out of state competitors.

So I mean, I acknowledge that there is certainly a role in some instances potentially for local antitrust concerns. As Diana said, maybe for local airline markets. Some haven't thought about it that much, but whatever it is, this is not the case. This is clearly something that has a national impact, potentially international impact in the way the markets work here. We're not talking about closing local branches of Discover because there are no local branches if this does this. And so I think some way or another there has to be a way of navigating the line between where ags belong, number one and number two, thinking about these various different attacks on what are effectively attacks on the National Bank system, whether it's this, it's the opt-out provisions from DMCA that we see in places like Colorado or various other things that ags are doing that I think are really threatening the National Bank system in an unhealthy way.

Jelena McWilliams: Yeah, thank you Todd. I will turn now to the Q&A. We have a couple of very interesting questions. And actually the first one nicely keys off of the discussion about pending litigation. It doesn't deal with the AGs offices, it does deal with the DOJ, and I'll read the question, does DOJs pending litigation with Visa handcuff them from opposing the Capital One-Discover acquisition if they wish to be intellectually consistent? And Diana, maybe we'll start with you because you mentioned Visa and the litigation that DOJ has been winning and losing recently.

Dr. Diana L. Moss: Yeah, I saw that question. That's a really good and tricky, tricky question, and I'll answer it by coming through the back door. And it actually goes to the question of would this merger create Capital One Discover merger, create a positive changes in the competitive intensity in the credit card payments markets or the debit payments markets? And I think that's a really key question and it ties into an efficiencies claim. It would be very important. So here's a really good happy scenario, right? Discover and Capital One keep an open network post merger. Let's assume they merge, they keep an open network, they continue to issue cards from competitors, visa, MasterCard, they issue Discover Cards that stands in contrast to sort of closing the network where they transfer all of their Capital One customers to a Discover Card. That would be probably not a great economic strategy because of Discover smaller size and less brand recognition.

But keeping that open network actually changes competitive intensity in that market that DOJ is going to be dealing with, I think in the Visa case. And that means if Capital One and Discover can be a more effective competitor and exploit those efficiencies, any claimed deficiencies that would materialize, I'm skeptical on efficiencies just as a general matter. But if they can, then if they get better at what they do, they can change that competitive intensity by stealing customers away from Visa that will rearrange the market shares in that market. So that competitive intensity is actually more productive and more conducive to competitive outcomes. And I talk about this in the paper, that is a possible outcome of that. So I think the answer to the question is I think Visa, in the Visa case, DOJ, is going to have to be very careful about how they define markets around debit cards and debit card networks.

They're going to have to be very careful, I think about how they look at the competitive process, how it is allegedly being harmed right now, versus the theories they might propose about how the competitive process would be changed by the merger, by the Capital One Discover merger. So there's a lot of walkways in there. I think that DOJ is going to have to be very careful, very careful on to make sure that there's consistency because it has happened before in unnamed cases where different types of analysis in very highly related cases, similar mergers in the same markets using for example, different experts or different models where there has some conflicts have been created. And I think that's absolutely not what DOJ wants in this particular case. Thank you.

Jelena McWilliams: And Professor Zwicky, how do you feel about the question about the what are you thinking? Actually, I don't care about your feelings. What are you thinking about pending litigation with Visa and whether or not it would basically if DOJ were to oppose the Capital One-Discover acquisition, if DOJ would be intellectually consistent or inconsistent given the Visa litigation,

Todd Zwicky: This runs through a lot of it, of course, they'd be intellectually inconsistent, the whole premise of the Visa litigation that there aren't enough viable competitors to Visa, which allows them to exercise market power. I don't think anybody under any circumstances in any scenario thinks that Capital One in Discover will be weaker and have less market competition to Visa, MasterCard and American Express after this. And by any measure, they're going to be more popular, right? They're going to grow market share. I think everybody agrees with that in the network space. So from that perspective, obviously this is at least a partial solution to what the case they're bringing in Visa. It's also the response to the concerns that are supposedly animating the credit Card Competition Act. And so I think if both the Visa case and the credit card Competition Act rests on the idea that there's inadequate competition among networks, rather than trying to go in and have government action trying to fine tune markets or redefine competition, that sort of thing, why don't you just allow competition to actually happen and then see what happens after this merger and see if it solves a lot of the problems that they claim to be trying to solve with these litigation and legislation activities and even some regulation.

Jelena McWilliams: Thank you, Todd. I will direct this next question to Senator Toomey. Earlier this week, JP Morgan, CEO, Jamie Dimon bemoaned that a Capital One discover merger would be anticompetitive to their debit card business. If the country's largest bank thinks this will negatively impact JPM. Isn't that indicative of this deal's competitiveness?

Hon. Patrick J. Toomey: Well, that's certainly the way it sounds to me. As I said in my opening comments, these gigantic banks and JP Morgan Chase is the biggest of all of them. They effectively have this moat around them. And I would argue that some of the unintended consequences of Dodd-Frank contributed to the creation of that moat. And one way to sort of overcome the mode and to introduce competition, one really important way and one of the few ways under the current regulatory environment is to allow medium size the super regionals, the big, but not enormous banks to team up and be able to spread the fixed costs that they have across a bigger balance sheet become more competitive. And it sounds as though Jamie Diamond might be implicitly confirming that notion.

Jelena McWilliams: Well, you may be getting a phone call after this, so if it shows identity of the call or unavailable, it's your choice whether you answer. So we are about six minutes away from our one hour mark, and I would like to give an opportunity to the panelists to give us each about two minute closing remarks. And Diana, we'll start with you, your final thoughts on the topics we just discussed.

Dr. Diana L. Moss: Thank you. And to start just one dovetail remark or follow on to Senator Toomey's question, if you have a large competitor complaining about a merger that tells you a lot about what the theory of competitive harm is that they're thinking about, and that generally implies a vertical merger because vertical mergers are the ones that end up making it harder for rivals to compete, whereas horizontal mergers don't do that. They directly can harm consumers. So you don't often hear rivals complaining in horizontal mergers, but you certainly hear them complaining in vertical mergers. So I think that gives us a little bit of insight into how JP Morgan's CEO is thinking about this. So very quickly, I think I've said, made all my major points. I think this is going to be, this is a merger that is really the first in many, many years occurring at a time where we see financial services and banking changing dramatically.

I think consumers are really the folks that matter here. And I think a good hard look, hard scrutiny of the deal as any other deal should be scrutinized, is absolutely in order. But I do think that DOJ is going to have to make a call here depending on their own internal analysis, which of course is not based on publicly available data like mine was. They have the luxury of getting confidential information and the discovery process, but I think they're going to be in a position of really having to make that call about very marginal anti-competitive effects, the risks of dealing with a pretty powerful efficiencies defense, and a part of which is the change in this competitive intensity in the payments markets and what that would mean for the administration's current win-loss record in federal court. So I think it's a good dose of substance as it should be, right? But it's also a good dose of sort of agency strategy and how the agency wants to use resources and how it wants to coordinate and collaborate with other regulatory agencies in this that are going to be looking at this deal. So I think it will be very, very interesting to follow.

Jelena McWilliams: Thank you, Diana. Senator Toomey closing remarks, two minutes?

Hon. Patrick J. Toomey: Sure. Jelena, thank you very much. As I said at the beginning, I think in a healthy dynamic and economy, mergers and combinations are a natural part of that. The government's position should be in presumption of allowing that to take place unless there's a good reason not to. I think the criteria at a sort of macro level in the banking space should be systemic risk and consumer competition on both of those. This particular transaction, the Capital One and Discover merger certainly diminishes the tendency towards ever greater concentration by enabling a stronger competitor to get in the field against the giant banks. And it's clearly pro-consumer, right? The change to the payment network system, clearly nobody can dispute that it is going to introduce a much stronger competitor than what we have now when these firms have combined. So my view is it's very, very likely that the OCC and the Fed will come to exactly that conclusion, and I think the DOJ would be unlikely since they have such a weak case anyway, would they really want to try to rule contrary to where the OC and the Fed are likely to go? I very much doubt it.

Jelena McWilliams: Thank you. And Professor Zwicky, you have the final words.

Todd Zwicky: Thanks. I think that if I recall the context of Jamie Dimon's comments, it was the effect of the Durbin Amendment, which is just being a three party network. They would not be subject to the price controls of the Durban Amendment, which would mean that they could continue to offer free checking low cost services, that sort of thing, because of the idiosyncratic way in which the Durbin Amendment operates from Dodd-Frank. And there's a lesson in that, which is that once you try to intervene in these markets and come up with these ways of fine tuning competition and saying this is the way competition is or isn't, and when you clearly don't understand competition, for example, in the Credit card competition act, trying to take the logic of the Durban amendment and applying it to a completely different market where competition operates completely differently, you get disastrous results and it can beget all sort of unintended consequences.

And whether it's regulation or legislation or trying to fine tune the debit card market like in the Visa case, you're really opening a can of worms, a Pandora's box when you're looking at a market that over time has been so competitive and so vibrant and so innovative and that all that competition over the past many years has really benefited consumers and has really been the engine for financial inclusion, which is what this merger will really do is supercharge financial inclusion for middle income and lower income people. I think it really points out the dangers of the government regulators trying to fine tune these things, think they know better than the market, and to just what ends up really effectively just being a skepticism, a big as bad raised eyebrow type approach to these mergers without really being able to articulate any harm, weighing that against the manifest benefits to consumers in competition.

I think this really shows caution of trying to intervene in these markets more generally. And this is a classic beneficial merger. Discover used to be a market innovator. They created the idea of rewards of bonus categories and that sort of thing, but they've frankly kind of stagnated a little bit over time. And Capital One has been very innovative. You put these two models together and now I think you've got a very powerful competitor that's going to benefit consumers and benefit low income consumers, promote inclusion really, most of all. And those are the people who need it the most, I think.

Jelena McWilliams: Thank you so much, and first of all, thank you all for staying exactly on the mark when I said two minutes. And I also want to thank you for making the moderator's job the easiest job on the planet. You just ask inquisitive questions and let the smart people answer them. So thank you, Diana. Thank you, Todd. Thank you, pat. Thank you FedSoc for hosting this webinar, and thank you all who tuned in to listen to this lively discussion. Take care.

Edith Harold: Yes, and on behalf of the Federalist Society, thank you so much to Professor Zwicky, Dr. Moss, and Senator Toomey for speaking, and Jelena for moderating. We're so grateful for your time and expertise today. Thank you also to our audience for joining us. We really appreciate your participation. You can stay up to date with announcements and upcoming webinars on our website fedsoc.org or on all major social media platforms. Thank you once more for tuning in and we are adjourned.