Credit Sesame discusses Capital One’s buyout of Discover and how this may affect consumers.
Capital One and Discover recently announced they had agreed to an acquisition. Under the proposed deal, Capital One will buy out Discover shareholders and combine the two companies into one. It would be a massive acquisition, and there has been a lot of speculation about what it will mean to the credit card industry. But what about the customers of the two companies?
Much has to happen before the deal is finalized. It will take even longer for the plans and policies of the combined entity to become clear. How might this play out in the months ahead, and what might that mean for consumers?
The nature of the Capital One buyout
According to Reuters, the purchase price is $35.3 billion, to be paid in Capital One stock. Each of the two companies is already a major player in credit cards. According to the Nilson Report, as of the middle of last year, Capital One ranked fourth and Discover sixth among US credit card issuers by volume of customer purchases. The combination would move the new entity past Citi into third place, behind only Chase and American Express.
Another way of looking at the deal is in terms of the payment networks used to process credit card transactions. According to the Consumer Financial Protection Bureau (CFPB) 85% of accounts run through networks processed by MasterCard and Visa. American Express and Discover run the next two biggest networks, though they are considerably smaller than MasterCard or Visa.
However, adding Capital One’s purchase volume could give the Discover network the market presence to compete more effectively with MasterCard and Visa. Certainly, investors thought so when they first heard about the proposed acquisition. Visa shares fell 1.2% the day after the deal was announced, and MasterCard’s shares fell 3.5%.
So, measured by purchase price, market share, or impact on credit card infrastructure, this is a big deal. That means it’s bound to be controversial.
Expect regulatory challenges
A deal this size is certain to be challenged by financial regulators and may also draw scrutiny on anti-trust grounds.
Ultimately, much of the regulatory scrutiny will center around whether or not the deal would be good for consumers. There is already some concern that big isn’t better when it comes to credit card issuers.
A recent CFPB report found that, on average, larger credit card issuers charge higher interest rates and fees than smaller issuers. This will only add to a general bias against big financial companies that has persisted since the 2008 financial crisis.
Capital One executives face the challenge of convincing regulators that they wouldn’t use their combined market power to take advantage of consumers without making commitments that would overly restrict their future pricing policies.
A new major player could create precisely the competition regulators want
Perhaps the best shot Capital One has of winning approval is to point to the potential consumer benefits of buying Discover.
One of the biggest controversies surrounding credit cards in recent years has been over swipe fees. These are the fees credit card companies charge merchants to process transactions on their payment networks. There has been considerable regulatory criticism about these fees being too high, thanks to the fact that Visa and MasterCard dominate the market.
By adding Capital One’s huge customer base to Discover’s payment network, the combined company could challenge Visa and MasterCard for a greater share of payments volume. If they can convince regulators that this added competition would benefit consumers, the Capital One purchase of Discover might have a smoother path to regulatory approval.
What does the Capital One buyout mean for consumers?
If you are a customer of Capital One or Discover, you may be affected if the purchase goes through.
First of all, considering the legal issues involved, this is likely to take a long time to play out. You should have plenty of time to evaluate developments and react accordingly.
Discover cardholders may see their cards eventually replaced if the acquisition goes through. If this happens to you, just be sure to carefully check the new terms to make sure they are competitive with what you had before.
If you have a Capital One card, you might see slight changes where it is accepted. This assumes that Capital One switches its payment processing to Discover’s network. However, if they do this it is likely to be preceded by an all-out effort to expand that network.
Ultimately, there are a lot of unknowns about how this situation will play out. The acquisition may not even go through. If it does, the impact on consumers will take months or even years to become apparent.
This uncertainty is a reminder that it can be a good idea to have at least one backup credit card. If you have only Capital One and/or Discover in your wallet, this might be time to shop for an additional card. That will give you an alternative that won’t be impacted by the uncertainty surrounding this acquisition.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
