Capital One and Discover: What Their Merger Means for the Subprime Credit Market

In an industry already controlled by a few giant players, Capital One’s $35 billion buyout of Discover has raised alarms among some lawmakers and regulators over its effect on competition — particularly for subprime consumers. 

Opponents say that the merger will limit credit availability for high-risk consumers and result in higher costs or reduced product offerings. However, based on a recent issue brief by the International Center for Law & Economics, these concerns may be exaggerated. 

The document explores the character of the subprime credit market and undermines presumptions regarding its dynamics and structure, proposing that the anticipated merger is not as anticompetitive as first thought.

The International Center for Law & Economics contends that among the most pervasive misconceptions regarding the subprime market is that it is a fixed and static segment. 

The market is, in fact, fluid. Consumers will often move into or out of subprime status with changes in their credit scores, a major life event, or changes in financial behaviors. Such movement makes it difficult to delineate a clear boundary around the “subprime borrower” category.

More significantly, the brief shows that consumers with poor credit are not a captive clientele. Even with credit constraints, they tend to have alternative competing offerings at their disposal and can shift among providers. 

Such demand-side substitutability has the effect that even lower-credit consumers have competitive choices exerting influence on the market.

The International Center for Law & Economics’s analysis explains that Capital One and Discover target different niches within the credit card market. 

Capital One has traditionally concentrated on tech-enabled underwriting and marketing to near-prime and subprime customers. Discover, on the other hand, has targeted prime borrowers and maintained its proprietary card network.

Capital One has long focused on near-prime and subprime borrowers, in contrast to Discover’s focus on prime borrowers.

Discover’s payment network will give Capital One a chance to innovate. As Capital One CEO Richard Fairbank phrased it on a recent earnings call, by marrying Capital One’s lending expertise with Discover’s platform, they would have a chance to “build something really special.“

Fairbank also stressed that the purchase would allow Capital One to provide more integrated offerings, with more control over the life cycle of a transaction. This may include savings through costs lowered by efficiencies, improved data capabilities, stronger margins, and improved terms for subprime consumers.

Critics are unconvinced. Senator Elizabeth Warren contended that, “This merger is bad for consumers…. In addition to harming consumers and small businesses, bank consolidation poses increased systemic risk in the financial system.”

Some commentators argue that the merger will further concentrate power in an already concentrated market and decrease consumer choice. Curbing issuers with extensive subprime reach might make interest rates move higher or tighten lending terms.

Critics are worried that the merger will lead to decreased consumer choice. Proponents argue that the rise of alternative lenders ensures that there are still a variety of options.

The International Center for Law & Economics, however, answers that there have been new players in the market, including fintechs as well as alternative lenders, (e.g., Buy Now, Pay Later) that have eroded the monopoly position played by behemoth banks. 

These players, typically employ alternative data and credit models that use artificial intelligence to create new options for consumers who are ineligible under traditional standards.

In short, subprime consumers still have choices — and more ways to switch than critics may think.

One other dimension regulators have to balance is how this merger may have a precedential impact on future consolidation involving subprime portfolios.

If the DOJ had determined that subprime credit is different enough to warrant separate consideration under antitrust statutes, it may have prompted greater scrutiny of mergers involving this borrower segment — perhaps discouraging future consolidation. 

However, regulators seem to believe in this segment’s fluidity and competitive dynamics, so they are more likely to consider it as part of an overarching market environment going forward.

Policy-wise, this poses serious questions. Should regulators consider subprime credit as a separate antitrust market if it’s really competitive and dynamic?

The International Center for Law & Economics argues against a “subprime” antitrust market because of its inconsistent definition, fluid dynamics, availability of demand-side substitution opportunities, and easy market entry of new competitive products from the large banks.

There are also larger ramifications for the credit system. If the Capital One-Discover merger is successful and the two companies can consolidate seamlessly, the move has the potential to increase product diversity and open up access across the board.

The other looming variable is more macroeconomic in nature. A slowdown in the economy due to tariffs or other policy actions may weaken consumer confidence and spending, potentially cutting back on new credit demand — particularly in the subprime space.

A slowed economy would also compel lenders to tighten credit standards, further constraining credit availability. In that scenario, the success of the merger would depend as much on integration as on how robust Capital One and Discover’s risk models are when combined.

Recent economic shakeups, like proposed tariffs, may threaten the success of the merger.

Fairbank said Capital One has “seen a recent increase in retail spending, particularly electronics, in the past few weeks. Maybe that’s a pulling forward of purchases in light of the tariffs. We’ll have to see over time.” 

Nevertheless, execution is key. Deals this large pose real challenges: systems integrations, culture conflicts, compliance with regulations, and stakeholder trust. If Capital One falters, then the merger has the potential to backfire, diluting Discover’s network and frustrating cardmembers.

Subprime issuers and lenders should keep a close eye on events. Regardless of whether one defines the market as a distinct antitrust segment, it’s obvious that differentiation and innovation will still be fundamental.

There are more options than ever for consumers with imperfect credit — and that’s the regulatory story that needs to be told.

The Capital One-Discover merger will reshape credit access for subprime consumers, but how much it will reduce or increase entry hinges less on market design and more on how effectively the combined company addresses changing needs among riskier borrowers.