Some Concern with Capital One’s Acquisition of ING

ING customers and community advocates are voicing some resistance to news that Capitol One will buy ING’s US subsidiary.

In June, Capital One reached an agreement to buy ING Direct USA for $6.2 billion and approximately $2.6 billion in stock. The merger is schedule to finalize in the fourth quarter. When it does, Capital One will become a new member of the “too big too fail” club. Capital One reported $125 billion in deposits at the end of March 2011. ING reported that it had $82 billion in deposits at the end of June 2011.

Eighteen groups recently signed a letter challenging the Federal Reserve to extend time for comments and to hold special hearings on the acqusition. The opposition comes from groups as diverse as the Greenlining Institute, the National Community Reinvestment Coalition, the Political Economy Research Institute, US PIRG, and the NAACP.

Will Capital One Have to Jettison Some Accounts?

Capital One may have to reduce its market share of deposits in both Washington, DC and in Louisiana.

Federal law seeks to maintain competitive balance even after a merger. The Department of Justice uses a complicated data point, known as the Herfindahl-Hirschmann Index, to gauge when a merge will significantly reduce competition in an area. The Index grades the concentration of deposits across different financial institutions in each metropolitan area in the United States on a scale of 1 to infinity. Generally, scores above 2,500 are unusual.

The higher numbers indicate an area with greater concentrations. The rule says that any merger which increases the Index score by more than 100 points in a previously concentrated city should be given special attention by regulators for anti-trust concerns.

Capital One already has more than ten percent of the deposits in several metro areas. For instance, Capitol One has sixteen percent of all deposits in the Washington, DC metro area, which is more than any other institution in the area. It turns out that a leader with sixteen percent of deposits is a lot less than in other cities. In Charlotte, Bank of America has twenty-seven percent.

This analysis is made difficult by the way that the FDIC records the geography of deposits. Deposits are not attributed to the location of the account holder, but instead to the office where the money is kept. For ING, this means that all of their deposits are credited to the Wilmington MSA, even though their customers live throughout the country.

The system of regulatory scrutiny has not kept up with changes in how companies operationalize their savings account programs. This is a perfect opportunity to re-examine that system. In principle, the regulators should determine the extent of deposits made by ING customers in an MSA. If the act of shifting those deposits to Capital One would change the competitive landscape, then regulators should act.

But there are other areas where Capital One has a dominant position in a metropolitan area that is simultaneously uncompetitive. Capital One has more than 30 percent of all deposits in New Orleans, Louisiana. Significantly, New Orleans has a very uncompetitive banking marketplace. In the Crescent City, the HHI index is more than 1,500.  It is the same story in Shreveport (25 percent of deposits, HHI of 1,425), Lafayette (8.8 percent, HHI of 1159), and in Monroe (9.3 percent, HHI of 1220).

Clash of Cultures?

ING has built its deposit base by paying more interest and by offering low fees. In an era characterized by historically low interest rates, The ING Orange Savings Account pays 1 percent interest. There are no gimmicks to their accounts. Consumers don’t have to maintain a minimum balance and they never pay fees. ING runs its bank the way that Jiffy Lube fixes cars – they do one thing very well and they leave the rest to others. Online accounts at ING boast high interest rates on savings (currently 1 percent) and a commitment to good customer service. People don’t look to ING for much else besides a place to park their deposits.

Their success has proven that banks don’t have to generate more than five relationships with each customer (see Wells Fargo).

Capital One, on the other hand, does offer more than one product. Capital One is a major credit card lender. While most go for revolving debt to consumers, they also end up providing a fair amount of credit to small businesses. Capital One has mortgages, too.

The shift to Capital One will provoke depositors to re-evaluate their relationship with those accounts.

The comment period for the merger ended on Monday.