Capital One’s planned merger with Discover, which has drawn early antitrust objections, could add competition in the payments space by making Discover a stronger rival to the biggest companies.
The deal, announced Monday, would cost Capital One $35 billion and result in the largest U.S. credit card company by loan volume. The deal would be a boost for Discover and could make it more of a player against larger rivals such as Visa, Mastercard, and American Express.
“Discover is currently in fourth place in card network size, far behind its competitors in its share of the credit card market,” said John Berlau, director of finance policy at the Competitive Enterprise Institute. “By boosting this card network’s resources, the merger could actually create more robust competition against Discover’s bigger rivals, leading to an increase in benefits for consumers.”
There are four major credit card companies: Visa, Mastercard, American Express, and Discover.
American Express and Discover process transactions and issue their own credit cards — so those companies operate the whole payment network individually. Meanwhile, Visa and Mastercard are not closed networks and allow several different banks, such as Capital One, Bank of America, or Wells Fargo, to affiliate with their networks.
“The issuing business is the consumer-facing [business], the network is kind of the wholesale, the plumbing business,” Boston College Law School professor Brian Quinn said. “It’s very different. Visa itself doesn’t actually reach out and call me up and say, ‘Hey, do you want a Visa card from Visa?’ … They work solely through the banks.”
Quinn told the Washington Examiner that while he does not have a view of whether the merger would be pro-competition, the best argument that it would be is that Discover is currently at the bottom of the pack in terms of its network.
“When Capital One acquires Discover, it raises the possibility that Capital One, with real resources, can take Discover and transform it into a bigger competitor,” he said.
Quinn said Capital One could take it in many directions.
For instance, Capital One could say it wants to make Discover’s network like Mastercard or Visa and allow other banks to issue the Discover card. That would make it compete directly with Visa and Mastercard, which would be very pro-competition. Or Capital One could go the other route and try to use its resources to build out Discover to make it as big as American Express.
The key difference, Quinn emphasized, is the structure of the companies involved.
“It’s not Amex acquiring Discover,” Quinn said. “If Amex acquired Discover, there would be less competition. It’s not Visa acquiring Discover.”
Mark Hamrick, Bankrate’s senior economic analyst, told the Washington Examiner that in terms of the payments network, Capital One has indicated it will look to move some of its business there.
“And therefore would presumably make that payments network a more viable competitor,” Hamrick said. “Whether that would translate to a reduction in fees, that’s a bit too difficult to speculate on.
“I think the sum of the parts is greater than them being two stand-alone companies,” he added.
A separate but important question is whether the merger will benefit consumers. Sen. Elizabeth Warren (D-MA), among other Democrats, quickly called for the deal to be blocked by regulators on the grounds that it would raise fees and costs for consumers.
Berlau, though, said it could benefit consumers, given that Discover could gain market share.
“To increase true competition that benefits consumers, policymakers should allow this proposed merger to proceed and reject regulations that put barriers on small and startup firms in credit and other markets,” Berlau said.
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Quinn said it really comes down to the way Capital One handles the acquisition to determine how it will affect consumers. For instance, if Capital One just forced its customers into using Discover cards, that would probably not benefit consumers.
If the merger is not blocked, Capital One predicts the transaction will close toward the end of this year or in early 2025.
