Why the Capital One/Discover Merger Could Be Expensive for Consumers

Capital One recently shocked the financial industry by announcing it has agreed to acquire Discover, combining two of the largest credit card–issuing banks into one company. The combined business would have more than 400 million credit card customers in addition to the other banking products offered by each company, and it would also have Discover's own payment network.

While there are some clear (and legitimate) reasons why the Discover and Capital One merger makes sense for both businesses, there are also concerns that it could raise costs for consumers.

Why is Capital One acquiring Discover?

There are a few reasons why this deal could be attractive for Capital One. First, and perhaps most obvious, with all other factors being equal, larger businesses are typically more efficient than smaller ones.

As an example, Capital One and Discover currently have two full leadership teams they're paying. After the merger, they'll only have one. They can also combine marketing efforts, leverage each other's strengths (like Capital One's local branches) to their advantage, and more.

What's more, there are four major payment networks in the United States, of which Discover's is by far the smallest. By owning a payment network, Capital One could ultimately create a closed-loop payment network (where it serves as the bank and processes transactions) and use its resources to scale it. Owning a payment network could be a major competitive advantage -- as it has been for American Express through the years.

Concerns about what it could mean to consumers

Shortly after the merger announcement, several consumer advocacy groups voiced their strong opposition to the deal.

First, they say that combining two already-massive credit card issuers will hurt competition and concentrate risk in the U.S. financial system. Think of it as if Walmart were to acquire Target. Sure, there are other large retailers out there like Costco, but this would be a competition-reducing deal (which would almost certainly be rejected by regulators).

This concentration and scale would allow Capital One to increase fees on consumers and businesses, argue the deal's opponents. The credit card industry is already dominated by a group of large players, and if you look at our best credit cards pages, you'll notice that most are issued by just a few major banks.

Here's why this is a concern: Larger credit card issuers generally charge higher interest rates and have higher fees than smaller ones. In fact, a report by the Consumer Financial Protection Bureau found that the 25 largest credit card issuers charge interest rates that are 8% to 10% higher, on average, than those charged by smaller banks and credit unions.

On the other hand, there's a solid argument to be made that the deal will increase competition on the payment processing side. Visa and Mastercard are so large that they have an effective duopoly on the payment processing industry. With Discover under Capital One's umbrella, it could be better positioned to become a serious competitive threat to the two giants.

Should consumers be worried?

Not yet. For one thing, there's a lot that needs to happen before the deal can be finalized. And the deal is subject to regulatory approval before it can go through. There's also the burden of showing that the merger benefits the public, not just the businesses and their investors, so there is likely to be somewhat of a battle. The deal isn't expected to close until late 2024 or early 2025, and even this could prove to be an aggressive timeline.

The bottom line is that nothing is changing immediately, and there's no way to know right now whether the deal will ultimately be approved. But if you're a credit card user, it's definitely worth keeping an eye on.