In late February, credit card behemoth Capital One revealed its plans to acquire Discover Financial Services for $35 billion.
Through an all-stock transaction, Discover Financial shareholders would get the chance to receive Capital One shares priced at only $140. Capital One shareholders would own 60% of the newly merged entity, while Discover shareholders would own 40%.
With the payments industry largely dominated by Visa and Mastercard, the merger could have serious implications for retailers and cardholders in general, according to the Associated Press.
Should the acquisition go through, Capital One would gain access to Discover’s payment processing network, and Discover would be given a major partner. Some say that would result in 40-year-old Discover — which has less than 5% of the credit card market — having a legitimate shot at competing with Visa-Mastercard, which control more than 80%.
According to Reuters, the merger of Discover and Capital One — two of the nation’s largest credit card companies — would lead to the newly merged company controlling a market share of 22%.
Will It Be Approved?
It is still up in the air as to whether the acquisition will get through regulatory processes. As it stands, 13 Democratic senators have spoken out, urging the Biden administration to block the deal.
According to The Hill, concerns about the deal surround the topic of competition, as the merger of the two brands would move Capital One from its place as the ninth-largest bank in the country to the sixth largest. Additionally, Capital One would become the largest credit card issuer in the U.S.
“I think as it stands right now, it’ll get blocked. I think you’ve got some pretty strong senators opposed to it immediately out of the gate,” said Perry Kramer, managing partner at Retail Consulting Partners. “However, I think they can put enough caveats and assurances in there that they’ll get it through.”
For the deal to be approved, it would need to go through federal bank regulators, while the Justice Department’s Antitrust Division would also have the ability to file a lawsuit against the deal.
What It Would Mean For Retailers
In terms of implications for retailers, merchants say the merger itself will not bring the competition over credit card swipe fees they have sought for years.
Averaging 2.24%, swipe fees are the percentage of money that is taken out of each purchase by credit card networks and banks. And with questions about whether the new entity would be covered by the Durbin Amendment cap on debit card swipe fees, it could lead to higher fees for debit cards.
“(The deal) probably doesn’t make much difference at all. It may mean higher debit card fees, but it doesn’t change any of the dynamics on the credit card side with respect to merchants,” said Doug Kantor, general counsel at NACS and a member of the executive committee of the Merchants Payments Coalition. “So, it looks like it’s mostly some downside on debit, but otherwise a relatively unchanged picture.”
For the merger to bring swipe fee competition, Kantor said Congress needs to pass the pending Credit Card Competition Act (CCCA), which would give merchants bargaining power with networks.
Currently, Visa and Mastercard each centrally set the swipe fees charged by all banks that issue cards under their brands, and also block transactions from being processed over competing networks.
The CCCA, which was introduced by Senators Richard Durbin, D-Ill., and Roger Marshall, R-Kan., would require the nation’s largest banks to enable at least one competing processing network in addition to Visa and Mastercard on the cards they issue.
If the bill is passed, merchants would be able to bargain different networks against each other to get the best deal on fees, security and service, according to Kantor. The move is expected to save merchants and their customers over $15 billion a year.
Discover has been discussed as the second processing network, along with networks like NYCE, Star and Shazam that currently process debit card transactions. But with Visa and Mastercard blocking transactions from going over competing networks, none of the networks — including Discover — could become the second network without passage of the CCCA, regardless of the merger, Kantor said.
“No merger can change that bar to competition – only legislation can,” Kantor said. “If the CCCA is passed, Main Street businesses and their customers get competition regardless of whether the merger goes through. But the merger alone doesn’t get us to that goal.”
Concerns Surrounding The Deal
The credit card industry competes intensely to convince consumers to take one card over another. But, Kantor said, the banks refuse to compete over swipe fees.
“The biggest concern in all of the merchants’ advocacy on this is that the issuing banks don’t compete with each other on price at all,” stated Kantor. “With respect to merchants, the centralized price fixing and that type of system just is not consistent with the private market that the U.S. has across the economy and is really then injurious to businesses.”
“A collective of the issuers is working together to make them pay more,” he added. “That leaves retailers pretty helpless in that system.”
Without competition, credit card swipe fees have risen 50% since the pandemic and hit a record $126.3 billion in 2022, according to the Nilson Report.
“These are huge, huge worries right now. Our members have told us very clearly this is their No. 1 public policy issue,” Kantor said. “There doesn’t seem to be any obvious change to that problem based on the merger because Capital One, while they are saying they may move their debit cards to Discover, they’re not going to do that with their credit cards, in part because the Visa MasterCard pricing system is so incredibly lucrative for them. And it doesn’t change Visa, MasterCard rules prohibiting any type of competition among the networks.”
Kantor believes that at some point, the system is going to have to change, and the government will need to intervene.
“It could be legislation, it could be work from the enforcement bodies like the Department of Justice or the Federal Trade Commission, but yes, we need policy change here somewhere,” he said.
Kramer, on the other hand, is not too concerned, noting that he believes there will still be enough variety to keep the market competitive.
How Retailers Should Plan
Kramer said there are many different strategies that retailers can take to make the most of the deal, but for the most part, it is just preparing for the possibility of the deal — which could take some time.
Kantor, however, mentioned that the best thing retailers could do right now is to advocate for passage of the CCCA.
Operationally, there is little that can be done to offset swipe fees in the meantime, he said. Merchants can work with their processors and look closely at chargebacks or fraud costs that are pushed onto them. But Kantor said all of those moves are only “on the margins” because the swipe fees set by Visa and Mastercard make up 90% of the cost of processing credit cards.
It is expected that the Capital One/Discover deal could take a year or more to take effect. In the meantime, Durbin, who chairs the Senate Judiciary Committee, plans to hold a hearing on the lack of swipe fee competition in April. He and other supporters hope to see a vote on the CCCA sometime this year.
