Corporate Finance Expert Shares 5 Surprising Results of the Capital One/Discover Merger

The announcement that Capital One is buying Discover® has shaken up the credit card industry. But what does this merger really mean for credit card customers? Is this good news for consumers, or just for one big bank?

We talked with a corporate mergers and acquisitions expert, Phil Alberstat, Managing Director of Embarc Advisors, to see what surprising results might come from the Capital One/Discover merger. Alberstat believes that this deal could make the future of credit cards more creative and consumer friendly.

Let's look at a few of Phil Alberstat's top insights and predictions for the Capital One/Discover merger.

1. New (and better) Capital One credit card rewards programs

Now that Capital One will own Discover's payment network, the bank will have a higher level of flexibility to offer better credit card rewards. Alberstat believes that Capital One might launch a wide range of rewards and perks, which could include:

• Better cash back rewards (perhaps similar to Discover's current cash back cards)
• Travel perks and benefits with airlines, hotels, and car rentals
• Exclusive deals with a wider range of merchants

"By processing cards through its own (Discover) payment network, Capital One would save money and potentially be able to offer these improved perks and rewards," Phil Alberstat said.

2. American-Express-style perks, mass market prices?

American Express is known for offering premium rewards cards like The Platinum Card® from American Express, which offers luxury travel benefits and charges an annual fee of $695 (see rates and fees). Phil Alberstat believes that, over time, by utilizing the advantages of the Discover payment network, Capital One could start to offer a premium line of credit cards that is competitive with American Express -- including what Phil describes as "a Platinum Card for the masses."

"Capital One would probably borrow some of the American Express playbook by offering special perks at different levels of card membership," Alberstat said. "Credit cards that offer high cash back percentages in categories where Discover traditionally excels, paired with Capital One's technological innovations and banking services, could create a highly competitive product suite."

3. Better deals for merchants -- and credit card customers?

From the first announcement of the Capital One/Discover merger, Capital One said that it wants to use the Discover payment network to create more sales for merchants, and better deals for consumers and small businesses. No one knows yet exactly what this might look like, but it's likely that Capital One will be able to help merchants create a wider range of special offers that can be presented to credit card customers.

"The credit card industry in general is synonymous with high fees and interest rates and this merger will not change things drastically in the long term," Phil Alberstat said. "But in the short term, the Capital One/Discover merger will enable the new entity to intensify their competition against Chase, American Express, and Citi. This will benefit consumers and lead to more appealing offers to consumers and small businesses."

4. The Capital One/Discover merger will increase competition -- and deserves FTC approval

The Capital One/Discover merger still needs to pass federal regulatory scrutiny. One criticism of the deal from some Democrats in the Senate is that Capital One will get "too big" after acquiring another credit card company (Discover), and this could be anti-competitive and bad for consumers. But Alberstat believes that one of the best arguments for this deal to get FTC approval is that it would create extra competition for the biggest payment networks (Visa and Mastercard).

He believes that the ultimate outcome of this merger is that it would create better deals and discounts for merchants who pay credit card processing fees. "The Capital One/Discover merger will certainly create a bigger bank but it significantly shakes up the payment network landscape," Alberstat said. "It introduces a strong contender to Visa and Mastercard's dominance and could create better conditions for merchants."

5. Capital One buying Discover could create better conditions for credit card customers

There is currently a piece of legislation being considered by Congress called the Credit Card Competition Act (CCCA). This bill intends to increase competition for credit card payment networks, with the hope of driving down prices for consumers by lowering credit card processing fees. Critics of the CCCA have warned that it could kill credit card rewards programs.

Ironically, if the Capital One/Discover merger receives regulatory approval, it would accomplish the major goal of the CCCA: increasing competition for payment networks. Phil Alberstat believes that Capital One buying Discover is an opportunity for much-needed reform in the credit card industry -- increasing competition for the benefit of consumers.

"The credit card industry is currently under heavy scrutiny from antitrust regulators and is ripe for genuine reform," Alberstat said. "If consumers do not see changes to fees and rates, the government will enact more rules mandating competition in payments."

He believes that Capital One's newly acquired Discover payment network is ultimately going to take some credit card payment business away from Visa and Mastercard, which could reduce credit card processing fees. "I believe more credit card issuers will move some or all of their payment volume to Capital One's payment network post-merger," Alberstat said. "It is likely that fees between the platforms will come down in the short term as Capital One competes in this newly acquired space."

Bottom line

There are exciting possibilities for the Capital One/Discover merger, if it gets approved by the FTC. More competition between payment networks could give merchants and small businesses a better deal on credit card processing fees. Credit card customers could see innovative new rewards programs, special offers from their favorite brands, and more good reasons to keep using credit cards.