Capital One is on a quest to grow to be a bank card juggernaut.
The financial firm announced Monday that it plans to build up rival Discover Financial Services in a $35 billion all-stock transaction that can mix two of the most important bank card firms in america. If the deal is approved by regulators, the firms expect the transaction to shut in late 2024 or early 2025: a development that could have a serious impact on people’s wallets.
Though it’s from a done deal, some officials and consumer advocates say they’re anxious a merger could limit competition throughout the already-concentrated bank card industry and possibly end in higher fees and rates of interest for cardholders. Nevertheless, it’d boost bank card rewards.
Either way, experts expect the merger goes to face intense regulatory scrutiny.
“The merger of Capital One and Discover threatens our financial stability, reduces competition, and would increase fees and credit costs for American families,” Sen. Elizabeth Warren, D-Mass., tweeted Tuesday. “Regulators must block 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 scrutinizing the announcement.
“The FTC will undoubtedly take an in depth look,” says Cris deRitis, deputy chief economist at Moody’s Analytics. “Whether or not it takes motion to halt all or parts of acquisition will rely on its findings.”
Capital One and Discover declined to comment.
How the Capital One-Discover merger could impact consumers
If regulators approve the deal, the mixture of two major bank card firms is predicted to have major effects on the industry along with on individual cardholders.
Generally speaking, consolidation is viewed as a negative thing for consumers. Less competition often means higher prices for the regularly person.
Inside the case of the merger of Capital One and Discover, it’s no more more likely to be so clear cut. Capital One isn’t necessarily making the acquisition so that it has one less bank card company to compete with. In its place, Capital One executives on an investor call Tuesday spoke at length about their plans to utilize Discover’s payment network.
Network, network, network
While popularly known for its bank cards, Discover also runs its own payment network, competing with those run by Visa, Mastercard and American Express. Currently, Discover is way smaller than the alternative three major payment networks, but Capital One goals to differ that.
By being each a serious bank card issuer and a payment network provider, Capital One would grow to be an industry behemoth. The one other two-in-one financial company like this throughout the U.S. is American Express. Combined, Capital One and Discover would dwarf American Express by asset size.
“We’ve got on a regular basis had a belief that the holy grail is to have the chance to be an issuer with one’s own network,” Capital One CEO Richard Fairbank said on an investor call Tuesday.
Latest cards
Capital One says it will move all its debit cards onto the Discover payment network as soon the deal clears. It has plans to maneuver a number of its bank cards over in stages, as well.
During this process, Adam Rust, director of economic services on the nonprofit Consumer Federation of America, says current cardholders will probably be mailed a modern card, possibly with latest terms.
For purchasers who shop mostly throughout the U.S., getting a modern card with a definite payment network shouldn’t matter much.
Switching to a modern Capital One card on Discover’s network from, say, Mastercard or Visa wouldn’t be very noticeable because the overwhelming majority of U.S. businesses accept payments via all three. Nevertheless, it could limit shoppers’ payment options overseas, where Mastercard and Visa have larger footprints.
Bank card rewards
In relation to bank card rewards, an all-in-one card-issuing payment network is likely to be a boon for consumers.
Some experts say Capital One could beef up its rewards. The speculation goes that by having its own payment network, Capital One would get monetary savings because it wouldn’t need to be paying others, allowing it to produce higher rewards for this reason. Similarly, Discover’s network could grow to be a stronger competitor, forcing Visa, Mastercard or American Express to lower the fees that they charge businesses to easily accept payments on their respective networks.
“The interchange fee that merchants pay to utilize these networks is also reduced,” deRitis with Moody’s says, “with savings passed on to all consumers.”
If the merger goes through, analysts told USA Today that cardholders may expect higher service, rewards points and improved access to airport lounges.
It’s value noting that on the equivalent 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 can require large bank card issuers to make their cards available to businesses on not lower than two payment networks in an attempt to lower bank card swipe fees. Card issuers have come out vehemently against the bill, saying the dearth of revenue would mean they might need to reduce bank card rewards programs for this reason.
Fees and APRs
Flashy rewards like a refund and travel points are major draws that get people to enroll in cards. But the reality is that the perks often overshadow the positive print — that’s, the annual fees, the late-payment charges and the annual percentage rates.
“Most people don’t pick a card imagining that they won’t use it accurately,” Rust says. “That’s just human nature.”
In other words, consumers are inclined to cope with all some great benefits of using a bank card’s rewards program perfectly, and don’t on a regular basis think concerning the penalties and drawbacks within the event that they slip up.
That’s where various firms’ terms come into play. Comparing Capital One and Discover’s current terms on the Consumer Financial Protection Bureau’s bank card database, Rust explains that Capital One’s bank cards are inclined to have higher maximum APRs and charges.
“In relation to rates of interest, I don’t think everyone knows, for now, what’s going to occur,” Rust says. “But we might be concerned that Capital One’s approach will grow to be the brand latest norm at Discover.”
But no changes immediately
Overall, experts say a Capital One-Discover merger is more more likely to be a mixed bag for consumers: possibly higher rewards on the expense of upper APRs and charges.
All of this comes with the caveat that the deal should be approved by regulators who’re laser-focused on keeping the industry competitive. And if the merger is approved, these changes aren’t more more likely to surface until next yr.
For now? It’s wait and see.
“There’ll probably be no impact on consumers throughout the immediate term since the merger is reviewed and challenged by regulators,” deRitis says.
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