See What This Corporate Merger Expert Thinks About Capital One Buying Discover

The Capital One-Discover® merger is one of the biggest stories in the credit card industry in years. By buying Discover's payment network, Capital One has a chance to launch new credit cards, offer creative new rewards, and compete against Visa and Mastercard in new ways.

It's still too soon to say for sure what Capital One's purchase of Discover might mean for credit card customers, but industry experts have some good ideas. We talked with Phil Alberstat, Managing Director of Embarc Advisors and a corporate merger expert, to see what could be the biggest changes to come from Capital One buying Discover.

Let's look at a few possible future effects of the Capital One-Discover merger -- for the credit card industry and your wallet.

1. Better rewards credit cards from Capital One (and Discover)

Capital One and Discover both already rank highly on The Ascent's list of best rewards credit cards. But this new merger is likely to help Capital One offer an even more impressive range of credit card rewards, by building upon both brands' strengths.

"Since both companies have a strong market presence it could lead to the development of new, more attractive rewards programs," Phil Alberstat said. "Capital One could leverage Discover's payment network to offer enhanced cashback rewards, travel perks, or exclusive deals that span a broader array of merchants. This could make their offerings more appealing to a wide range of consumers, from those seeking simple cash back rewards to those looking for premium travel benefits such as airline partnerships, hotels and car rentals. By processing cards through its own network, Capital One would save money and potentially be able to offer these improved perks and rewards."

2. Could Capital One become more like American Express?

When you look at the big picture of what different brands represent in the credit card industry, different banks and credit card companies tend to serve different groups of customers. Some credit card companies are more popular with higher-income customers with better credit scores, while other companies design credit cards that fit the needs of lower-income customers or people with lower credit scores.

Capital One is often described as a mass-market brand with good cards for people with less-than-good credit. American Express is more of a high-end brand for people who want premium rewards and can afford to pay for annual fees -- and American Express can afford to offer better perks. That's because (like Discover, and soon like Capital One) American Express owns its payment network and doesn't have to pay credit card processing fees to Visa and Mastercard.

Capital One could soon benefit from the same kind of situation that American Express enjoys. Phil Alberstat believes that by buying Discover and its payment network, Capital One could start to look more like American Express.

"They would probably borrow some of the American Express playbook by offering special perks at different levels of card membership," Phil Alberstat said. "For example, 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."

Phil Alberstat believes that Capital One -- if the deal goes through -- could create a new type of luxury credit card, that he describes as like The Platinum Card® from American Express, but "for the masses." The same kinds of customers that admire the Amex Platinum Card's premium travel rewards and other benefits -- but hesitate to pay a $695 annual fee (see rates and fees) -- could eventually see lower-cost offers from Capital One.

"American Express is a small player with premium customers," Phil Alberstat said. "So the combination of these two companies (Capital One and Discover) may create an opportunity for the mid to upper mid-market to have similar premium credit card benefits at a lower cost entry point."

3. Possible upside for other credit card customers

There's been a lot of discussion in the credit card industry recently about the Credit Card Competition Act (CCCA), a proposed bill in Congress that would require credit card companies to offer merchants a choice of payment networks -- not just the biggest networks, Visa and Mastercard. The idea of the CCCA is that by reducing credit card processing fees, retailers would be able to charge lower prices to consumers.

The CCCA is facing big opposition from financial institutions and credit card companies, and there's no guarantee that the legislation will pass. But whether the CCCA passes or not, the Capital One-Discover merger could help accomplish some of its goals -- by creating more competition for Visa and Mastercard.

This behind-the-scenes competition for credit card processing fees might seem obscure and technical to most credit card customers. But it matters to your personal finances -- and could lead to better deals for you in the future.

"The credit card industry is currently under heavy scrutiny from antitrust regulators and is ripe for genuine reform," said Phil Alberstat. "If consumers do not see changes to fees and rates, the government will enact more rules mandating competition in payments. I believe more credit card issuers will move some or all of their payment volume to Capital One's payment network post-merger. 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 could be some exciting new changes coming to the credit card industry as a result of the Capital One-Discover merger. By owning Discover's payment network, Capital One could bring new competition to Visa and Mastercard, driving down fees for other credit card customers. Capital One could also launch innovative new products and premium rewards credit cards.