ANALYSIS: Capital One-Discover “Community Benefits Plan” Contains Less Than $5 Billion In New Value

Capital One is seeking to bolster its chances of successfully acquiring Discover Bank through what it calls its Community Benefits Plan (CBP). Capital One describes this CBP as a $265.2 billion commitment to products and services for low- and moderate-income (LMI) communities – actions the plan promises to take if regulators approve the Discover merger. 

This misleading characterization is a 40-fold exaggeration of the merger-tied CBP’s benefit to communities. 

Less than $5 billion of the activities laid out in Capital One’s CBP is new money, meaning an increase in the investments, lending, grants and services currently happening at Capital One and Discover. Capital One misleadingly presents the plan as an increase over “planned activities” rather than over their current level of performance.

The premise of the CBP is that if the banks are allowed to merge, $265.2 billion will be invested in underserved communities. But the reality is that that check is already in the mail: Even if the banks don’t merge, $260.3 billion of that total is already on pace to happen. Operating today as separate entities, Capital One and Discover’s combined output in the areas described in the CBP press kit is 98.2% of what the splashy proposal envisions, as detailed below.

Negotiating community benefits agreements (CBAs) with merging banks is a mainstay of the National Community Reinvestment Coalition’s (NCRC) work over the past decade. The law requires regulators to reject any bank merger that does not benefit the public – which is why NCRC has long insisted that no merger should be approved without a robust, enforceable CBA. Despite the bank’s cosmetic branding efforts and mathematical subterfuge, the Capital One CBP falls miles short of what NCRC and our approximately 700 member organizations nationwide regard as a robust and enforceable CBA commitment to disadvantaged and historically marginalized communities.

While NCRC and many of our members have long been on record opposing this merger because of its many harmful effects – which are so numerous and so clear that NCRC declined Capital One’s invitation to participate in the negotiations that produced the CBP – we nonetheless expected that any such agreement the bank announced would contain meaningful, ambitious and specific goals.

Capital One’s CBP does not meet this expectation. Here’s why:

Nearly all of the total monetary value of Capital One’s CBP is already set to be realized under the existing practices of the two pre-merger banks.

The vast majority of the CBP – some $200 billion – is in the form of credit card and auto lending to LMI borrowers and communities. Capital One itself does not describe this as an increase over existing levels, despite taking pains to detail the purported increases in each of the other CBP categories. This suggests that the bank has padded out the CBP topline dollar figure by lumping in its existing core business model. In fact none of the CBAs we have worked on include credit card and auto lending in the total.

Because that business model is particularly egregious relative to other credit card and auto lenders – and because most community organizations do not consider such activity to be an efficient driver of wealth-building and economic opportunity – this $200 billion should not be counted as presenting a new or robust benefit to the public. A more detailed breakdown of the problems with this portion of the plan is below.

After stripping out credit card and auto loan commitments the bank itself implies are not new spending, we combed the bank’s merger materials, lending data and other sources to identify which parts of the remaining $65.2 billion in purported community benefits are new, and which amounts communities could expect from these banks without them being merged.

$44 billion of the CBP’s total falls under the heading of community development lending and investments (CDLI). 

The CBP promises another $15 billion in small business lending, sets a $5 billion supplier-diversity goal, pledges $600 million in funding to Community Development Financial Institutions (CDFIs) and $575 million in philanthropic giving.

In each category, those dollar figures from the CBP are almost entirely accounted for by the banks’ existing activities, plans and forecasts. 

COMMUNITY DEVELOPMENT

Capital One CBP Claim: $44 billion if merger approved

Reality: $144 million in new money

Of the $44 billion in CDLI promises made in Capital One’s CBP, just $144 million is new money.

The two banks are already on track to do $43.9 billion of CDLI activity over a five-year window, according to the numbers Capital One and Discover provided in their earlier merger application to federal regulators. 

The figures in the application cover the four years from 2020 to 2023 for each bank. Capital One reported $34.5 billion in CDLI activity in those four years, with another $604 million provided by Discover. Extrapolating that four-year total of $35.1 billion out to a five-year baseline forecasts that the two banks’ current practices would generate $43.9 billion in these same activities without any merger being necessary.

NCRC understands that the 2020-2023 figures include a nearly-unprecedented period of economic upheaval during the height of the COVID-19 pandemic. But the figures above do not include any Paycheck Protection Program (PPP) lending by Capital One. 

CBAs should always be transparent about which commitments represent new activity and which reflect the status quo. Capital One’s CBP press kit takes pains to portray the $44 billion CDLI promise as a major increase from what it claims is a $35 billion baseline. This misleads the public, the press, community organizations and regulators.

SMALL BUSINESS

Capital One CBP Claim: $15 billion if merger approved

Reality: $2.06 billion in new money

From 2018 to 2022 – and excluding pandemic-tied PPP lending – Capital One reports making $12.9 billion in small business loans to firms with $1 million or less in annual revenue or in LMI census tracts. That’s according to CRA commercial loan data, which can be found on the FFIEC’s Disclosure Report. (When NCRC analyzed that data, we filtered out PPP loans – listed on page 64 of the merger application – because that anomalous pandemic surge would distort the baseline figures in unfair ways that would have exaggerated the extent of Capital One’s deceit in this portion of the CBP.)

The $15 billion LMI small business lending goal described in the new CBP is therefore just a 16% increase above prior levels, even after excising the ahistorical blip of the PPP program.

The CBP’s small business loan goal is also entirely dollar-based – which means that the high inflation rates plaguing the economy might devour the nominal-dollars increase pledged in the CBP. The bank could fulfill this $15 billion five-year target without actually increasing the purchasing-power credit it provides to LMI small businesses.

SUPPLIER DIVERSITY

Capital One CBP Claim: $5 billion if merger approved

Reality: $2.06 billion in new money

Capital One’s historic levels of supplier diversity spending amount to roughly $2.9 billion over a five-year timeline, according to information provided in the CBP.

Here, the actually-new spending promised in the CBP does stand as a major percentage increase over existing activity that does bring new opportunity and income to marginalized communities.

CDFIs

Capital One CBP Claim: $600 million if merger approved

Reality: $500 million in new money

Capital One’s existing pre-merger plans include providing $100 million in support to CDFIs over five years, according to numbers in the CBP itself.

The CBP’s description of its CDFI promises is worded in a way that creates confusion: Capital One describes “an additional $500 million in capital” over the five-year plan as “totaling 6X our planned activities,” but elsewhere states that the two banks “committed nearly $100 million in lending to CDFIs” in 2023 alone. It is unclear whether the goal is based on planned activities as reported, or is actually just an increase of $100 million over five years based on prior performance. Since it’s unclear, we used the $500 million figure to calculate additional financing, but it could be as low as $100 million.

CDFIs are a vital and innovative force-multiplier tool for building economic prosperity in marginalized communities. They can do much with $500 million – but that is a vanishingly small figure in the context of this merger proposal. Capital One is offering $500 million in new CDFI funding as an inducement to let a bank with almost half a trillion dollars in total assets buy another with over $150 billion in assets.

PHILANTHROPY

Capital One CBP Claim: $575 million if merger approved

Reality: $133 million in new money

Capital One’s existing, pre-merger plans include $442 million in philanthropic giving to organizations that serve marginalized communities, according to the CBP documents themselves.

Some of the remaining $133 million that is actually new money – or roughly $27 million per year, from a pair of companies that notch annual profits in the billions – may be forecasted based on promises Capital One has made to various community groups in exchange for their support of the merger application. NCRC is aware of several local organizations who have been offered such inducements in the months since the merger was first announced. 

CREDIT CARDS & AUTO LOANS: The Elephant In The Room

Of the $65.2 billion of CDLI, small business lending, supplier diversity efforts, CDFI supports and philanthropic activity that the Capital One CBP describes as resulting from the merger, roughly $60.3 billion is already taking place without the merger being approved. Just $4.9 billion of this tranche of CBP-claimed spending is actually new.

The remainder of the package – some $200 billion, according to Capital One – is in the form of promised credit card and auto lending to LMI borrowers. 

Lender-specific credit card and auto lending data is not currently publicly available, making acute comparisons to the status quo all but impossible, but even Capital One makes no claim that this is an increase over its current LMI credit card and auto portfolio. That is a noteworthy omission, considering the pains taken elsewhere in the CBP to depict the more directly beneficial activities detailed above as significant increases from the status quo. 

Credit card lending is of dubious value in the wealth- and opportunity-building efforts that community organizations like our members prioritize when we convene CBA negotiations with our banking partners.

NCRC and our members have never included credit card or auto lending in the CBAs we have negotiated with some 21 different banks over the past decade – because the core goal of CBAs is to build wealth and opportunity, rather than consumer debts. 

Even if the credit card and auto lending goals in Capital One’s CBP did mark an increase the bank isn’t bragging about, Capital One’s business practices cast such an increase in dim light: It is a commitment to subject more LMI borrowers to Capital One’s exorbitantly high interest rates. The company is also aggressive in collections court, a strategy that is essential to its profitability: In 2019, according to Pro Publica, the bank reported $1.4 billion in revenue from collecting balances it had previously “charged off” as losses, roughly a quarter of its $5.5 billion total net income for that year.

Debt collection lawsuits are highly predatory, with customers sued rarely having legal representation and often not even being aware of the lawsuit: More than 70% of debt collection lawsuits result in default judgments because the defendant does not show up to court or respond to the suit. These cases often result in heavy fines for defendants as courts routinely order customers to pay accrued interest as well as court fees that together often exceed the amount owed. 

The litigious approach Capital One uses so aggressively as to generate more than a billion dollars of annual revenue can also result in a court garnishing the borrower’s wages. Wage garnishments are most common in suits against customers earning less than $40,000 a year. They often create financial emergencies where customers are forced to let other bills go unpaid, further trapping them in a vicious cycle of debt. 

Capital One argues that its credit card products bring significant improvement to the economic standing of marginalized communities by providing LMI borrowers an opportunity to build credit scores that will let them eventually access better and more valuable financial services products.

While building credit for subprime borrowers is enormously important, the price Capital One charges these borrowers for that privilege is exorbitant. And a large number of those customers end up seeing their financial futures worsen rather than improve – thanks to the bank’s business model.

Capital One’s median APR is 43% higher than small issuers for customers in the lowest credit tier. The customers that Capital One claims to help would be much better served taking their business elsewhere. 

Capital One’s practice of raising credit lines on non-prime borrowers as they approach their limit is certainly a contributing factor to the rise in persistent credit card debt, with Capital One receiving more than $800 annually in interest payments alone from many of their customers. It has also been reported that in at least one instance Capital One used $100 credit card line increases to borrowers living in LMI census tracts that would not have ordinarily qualified in order to artificially inflate its CRA performance.

OTHER CONCERNS

The dollar figures in Capital One’s CBP do not add up. The core premise of the package’s marketing materials is that this money only gets spent if Capital One successfully buys Discover, when in fact nearly all of it is already happening.

But the deficiencies with the CBP do not stop there. The proposal also fails to address two of the main concerns with the merger: Capital One’s high interest rates, and the ability to raise debit interchange fees that it would gain from absorbing Discover’s payments network.

Interest Rates 

Capital One already charges some of the highest interest rates in the country, including higher than Discover’s. Capital One and Discover both specialize in making credit card loans to borrowers that have lower credit scores and are less likely to be able to pay off their balances each month, creating more interest revenue. 

Capital One’s CBP makes no commitments to cap interest rates. 

Acquiring Discover could allow them to raise interest rates even further as one of their top competitors for non-prime credit card customers will be gone. The CBP is silent on this opportunity, which would generate vast new revenue for Capital One if the bank chose to exercise the market power regulators would be granting it by approving the deal.

Debit Interchange Fees 

The CBP makes no commitment to reduce, or at least maintain, debit interchange fees if they acquire Discover’s payment network. Debit interchange fees are what businesses pay when customers use debit cards for purchases. 

This merger is attractive to Capital One because owning their own payments network would exempt them from the cap on these fees established by the Durbin Amendment. This loophole gives Capital One the legal ability to raise debit interchange fees for American businesses, who would be forced to accept its debit cards or lose access to customers. One of the main ways that Capital One would be able to convince other banks to move over to their network is by charging higher debit interchange fees.

PROCESS CONCERNS: Secrecy and Conflicts of Interest

A so-called Community Benefits Plan that exaggerates a merger’s monetary benefit to communities 44 times over while remaining silent on core business-model concerns is alarming enough. But the forgoing problems with the Capital One CBP are all exacerbated by the manner in which this deal was struck.

The plan Capital One announced was formed through a deeply flawed process. By requiring groups to sign an NDA prohibiting them from discussing the plan with community groups, Capital One ensured the process had no transparency or community accountability. 

A robust and verifiable CBA, by contrast, gets reviewed with dozens or hundreds of community groups prior to announcement. Capital One has made a mockery of the open, frank process by which NCRC-led CBAs are hammered out.

It is also problematic that government-backed NeighborWorks America was one of the four negotiating organizations, given that both the OCC and the Fed hold board seats at NeighborWorks. This creates the impression of a back-door endorsement of the merger and a serious conflict of interest just as OCC and Fed staffers review this merger application.

Kevin Hill is NCRC’s Senior Policy Advisor.