Capital One is on a quest to become a credit card giant.
The financial company announced Monday that it plans to acquire rival Discover Financial Services in a $35 billion all-stock transaction that would combine two of the largest credit card companies in the United States. If the deal is approved by regulators, the companies expect the transaction to close in late 2024 or early 2025 — a development that would have a major impact on people’s wallets.
While the deal is far from done, some officials and consumer advocates say they are concerned that a merger could limit competition in the already concentrated credit card industry and possibly lead to higher fees and interest rates for cardholders of the cards. On the other hand, it could increase your credit card rewards.
Regardless, experts predict the merger will face intense regulatory scrutiny.
“The merger of Capital One and Discover threatens our financial stability, reduces competition, and would increase fees and costs of credit for American families,” Sen. Elizabeth Warren, D-Mass., tweeted Tuesday. “Regulators need to stop it immediately.”
The Federal Trade Commission (FTC) declined to comment to Money on the merger, but analysts say the regulatory agency – along with the Treasury Department’s Office of the Comptroller of the Currency – are carefully reviewing the announcement.
“The FTC will undoubtedly look closely,” says Cris deRitis, deputy chief economist at Moody’s Analytics. “Whether or not measures are taken to stop the takeover, in whole or in part, will depend on the results.”
Capital One and Discover declined to comment.
How the Capital One-Discover merger could impact consumers
If regulators approve the deal, the combination of two major credit card companies is expected to have major effects on the industry as well as individual cardholders.
In general, consolidation is seen as a bad thing for consumers. Less competition usually means higher prices for the common person.
In the case of the merger between Capital One and Discover, the situation probably will not be so clear. Capital One isn’t necessarily making the purchase so it has one less credit card company to compete with. Instead, Capital One executives on a call with investors on Tuesday talked at length about their plans to use Discover’s payment network.
Network, network, network
Although it is popularly known for its credit cards, Discover also operates its own payment network, competing with those operated by Visa, Mastercard, and American Express. Currently, Discover is much smaller than the other three major payment networks, but Capital One aims to change that.
Being one of the major credit card issuers AND as a payment network provider, Capital One would become an industry giant. The only other two-in-one financial company like this in the United States is American Express. Together, Capital One and Discover would dwarf American Express in terms of asset size.
“We’ve always believed that the holy grail is to be able to be an issuer with your own network,” Capital One CEO Richard Fairbank said on a call with investors on Tuesday.
New cards
Capital One says it will move all of its debit cards to the Discover payment network as soon as the deal closes. It also plans to move many of its credit cards in phases.
During this process, Adam Rust, director of financial services at the nonprofit Consumer Federation of America, says current cardholders will be mailed a new card, possibly with new terms.
For customers who shop primarily in the United States, getting a new card with a different payment network shouldn’t matter much.
Switching to a new Capital One card on the Discover network from, say, Mastercard or Visa wouldn’t be very noticeable because the vast majority of U.S. businesses accept payments through all three. However, it could limit the payment options of shoppers abroad, where Mastercard and Visa have a larger presence.
Credit Card Rewards
In terms of credit card rewards, an all-in-one payment network for issuing cards could be a boon for consumers.
Some experts say Capital One could grow its earnings. The theory goes that by having its own payment network, Capital One would save money because it wouldn’t need to pay others, consequently allowing it to offer better rewards. Likewise, Discover’s network could become a stronger competitor, forcing Visa, Mastercard or American Express to lower the fees they charge companies for accepting payments on their respective networks.
“The interchange fee that merchants pay to use these networks could be reduced,” says Moody’s deRitis, “with savings passed on to all consumers.”
If the merger goes through, analysts say United States today that cardholders can also expect better service, reward points and better access to airport lounges.
It’s worth noting that at the same time that regulators are deciding whether to approve the merger, a bipartisan group of lawmakers in Congress is attempting to pass the Credit Card Competition Act, a proposal that would require large credit card issuers to make their cards available to businesses on at least two payment networks in an effort to reduce credit card swiping fees. Card issuers spoke out vehemently against the bill, saying the loss of revenue would mean they would have to scale back credit card rewards programs accordingly.
Fees and APR
Flashy rewards like cash back and travel points are the main attractions that drive people to sign up for cards. But the reality is that the benefits often overshadow the fine print, namely annual fees, late fees and annual percentage rates.
“Most people don’t choose a card imagining they won’t use it properly,” Rust says. “This is simply human nature.”
In other words, consumers tend to focus on all the benefits of using a credit card rewards program perfectly and don’t always take into account the penalties and downsides if they make a mistake.
This is where the terms of various companies come into play. Comparing the current terms of Capital One and Discover in the Consumer Financial Protection Bureau’s credit card database, Rust explains that Capital One credit cards tend to have higher APRs and maximum fees.
“In terms of interest rates, I don’t think we know, yet, what’s going to happen,” Rust says. “But we may fear that Capital One’s approach will become the new norm at Discover.”
But no changes for now
Overall, experts say a merger between Capital One and Discover will likely be a mixed bag for consumers: perhaps better rewards at the expense of higher APRs and fees.
All of this comes with the caveat that the deal must be approved by regulators who are focused on maintaining the industry’s competitiveness. And if the merger is approved, these changes are unlikely to emerge until next year.
Currently? It’s wait and see.
“There will be no immediate impact on consumers as the merger will be reviewed and challenged by regulators,” deRitis says.
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