Higher APRs? More rewards? How the Capital One-Discover deal impacts card users

Others say the most notable potential change could happen on the back end of the credit-card equation if Discover
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gets a much larger stage for its payment network. Discover is one of the few credit-card issuers to use its own network to process payments.

At a time when lawmakers want to break up Visa
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and Mastercard’s
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-3.50%
dominance in the payments market, the question is whether increased competition from another network would increase the “swipe fees” that merchants pay — and if customers would bear the cost.   

If the deal gets regulatory approval, it would create the largest card issuer as measured by card loans outstanding, according to some counts.  

Capital One and Discover did not immediately respond to requests for comment. 

Could the Capital One-Discover deal lead to higher APRs on credit cards?

The massive size of the deal is not sitting well with Sen. Elizabeth Warren, a progressive Democrat from Massachusetts. 

The merger “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families,” she tweeted Tuesday. “The Wall street deal is dangerous and will harm working people. Regulators must block it immediately.”

It’s too early to tell exactly how combining the two credit-card issuers could impact the companies’ customers, experts told MarketWatch.

Changing terms and conditions would have to be communicated 45 days in advance to cardholders and would only apply to future purchases, Greg McBride, chief financial analyst at Bankrate, said in a statement.

Bigger credit-card issuers tend to charge customers higher interest on their credit cards than smaller institutions do — as much as $400 to $500 more each year for a cardholder with a balance of $5,000, according to an analysis last week from the Consumer Financial Protection Bureau. 

“It’s really hard to say if this will definitely lead to higher interest rates,” Adam Rust, director of financial services at the Consumer Federation of America, told MarketWatch. “What research is suggesting is that it could.”

Even if larger card issuers have more pricing power, there are forces outside their control that affect APR levels — starting with the Federal Reserve, which has kept its benchmark interest rate at a two-decade high in order to fight inflation. 

And higher APRs haven’t kept many households from swiping their cards. Business has flourished for card issuers as consumers have turned to credit to fuel their spending. Americans’ total amount of credit-card debt has reached a record of $1.13 trillion, and delinquencies are up, too. 

”Consumers have over $1 trillion in credit-card debt. These are two of the largest credit-card issuers,” Rust said. “Is this one more thing that tips the balance between credit-card companies and regular households? I fear it does.”

Competing with Visa and Mastercard?

Aside from what Capital One’s acquisition of Discover could mean for credit-card APRs, some say the emergence of a payment network that could compete with Mastercard and Visa is the bigger story.

By acquiring Discover, Capital One would also own the card issuer’s payment network.

The combined company would be able to “compete with the largest payments companies and deliver enhanced value to a franchise of over 100 million customers,” Capital One said when announcing the acquisition. 

Visa and Mastercard are the two dominant payment networks. Compared to those companies, Discover’s network is much smaller.

Payment networks charge interchange fees, or “swipe fees,” to merchants that accept credit-card payments. The fees are typically 2% to 3% of the transaction amount, and most merchants build them into the cost of doing business, meaning that consumers don’t cover those costs directly.

Card issuers like Capital One also take a piece of the swipe fee, and higher fees boost their revenues — an arrangement that some say can disadvantage businesses that take credit-card payments.

“The most likely effect of this is potentially higher fees on merchants,” said Lulu Wang, a finance professor at Northwestern University’s Kellogg School of Management. “This makes it such that Visa and Mastercard are going to face pressure to raise fees on merchants to keep banks like Capital One onboard their network.”

But a swipe fee only kicks in if a consumer wants to swipe their credit card. There’s a link between higher swipe fees for merchants and more rewards for credit-card users, Wang has found.

So if swipe fees rise, Wang said it’s reasonable to think credit-card reward programs could improve for consumers. If businesses absorb any increased swipe fees, that’s a win for consumers, he noted. If businesses pass along the costs, credit-card users win by accessing the higher rewards, but cash users have nothing but higher prices to pay. 

Credit-card companies have said the revenue from swipe fees helps them provide the airline miles, dining points and other reward perks that so many cardholders enjoy. 

Doug Kantor, an executive committee member at the Merchant Payment Coalition, thinks the Capital One-Discover deal would have a minimal impact on the current landscape. He sees the acquisition as a way for Capital One to prepare for new credit-card regulation taking shape in Congress that takes aim at those swipe fees.

“It seems more geared toward Capital One getting ready for the Credit Card Competition Act,” he said, referring to the legislation proposed by Sen. Dick Durbin, a Democrat from Illinois, last summer.

The proposed law targets Visa and Mastercard and would require credit-card issuers to offer merchants at least two networks over which they could opt to process payments — one of which couldn’t be the two largest.

Airlines, travel firms and financial institutions have argued that the bill would place unnecessary restrictions on processing and would inadvertently get rid of many credit-card rewards by dinging issuers’ profits.

The bill won two new bipartisan cosponsors last week and is gaining some “big momentum,” Kantor said. 

Ed Mierzwinski, senior director of U.S. PIRG’s federal consumer program, expects Capital One’s acquisition to face “incredible scrutiny” from lawmakers and regulators.

“In the short run, the biggest question is: What will Senator Durbin do?” he said. 

If the bill does pass, having its own payment network over which to process some cards could offer Capital One a key advantage, Wang said. 

“This merger is great insurance against that law,” he said.