Capital One and Discover expect to close on their merger early next year. The merger, first announced in February, would bring together two financial institutions that have distinguished themselves in part by targeting consumers whose credit falls below prime levels. Credit scores from 660 to 719 are considered prime.
The merger is still awaiting approval from government regulators, but the odds that it goes through seem higher following the November election of former President Donald Trump. After the election, Discover and Capital One shares rose dramatically. That rise reflects increased confidence in merger approval, Barron’s reported.
Some Democrats and consumer advocates have opposed the merger, arguing that it will reduce competition and harm consumers. Other experts see more promise in the combination, which could lead Capital One to offer rewards debit cards and enhance fraud protection.
If you’re a customer of either financial institution (or you’re considering becoming one), you should keep an eye on credit card costs, debit card rewards and possible payment network changes in the wake of the merger.
[Read: Best Credit Cards.]
The Discover-Capital One Merger: Three Things for Consumers to Consider
Here are some parts of the merger discussion with tangible implications for consumers.
Credit Card Costs
After the merger, Capital One would account for a larger portion of the credit card market. That boost in power, particularly among consumers with lower credit scores, has led some to ask whether the new entity would be able to unfairly raise interest rates.
Consumers should always be aware of the rates and fees on their credit card accounts. But increasing costs may not be in Capital One’s best interests. By doing so, it would risk its current edge with nonprime customers.
“If Discover and Capital One then kind of ruin (their) position in that market by raising prices, then you can expect other kinds of banks to try to enter in that market,” says Lulu Wang, an assistant professor in finance at Northwestern University’s Kellogg School of Management.
Raising rates could also be unattractive to Capital One because it could lead to a riskier customer profile.
“The risk is then you raise interest rates, then only the people who are really desperate and likely to default are going to stick with you,” Wang says. “The good borrowers who could do otherwise might go somewhere else.”
[Read: Best Credit Cards for Good Credit.]
Debit Card Rewards
As it stands, rewards debit cards are uncommon. Many issuers stopped offering them following the Durbin Amendment, a part of the 2010 Dodd-Frank Act that caps debit card interchange fees (also known as swipe fees).
Discover is excluded from this legal mandate when it acts as both a card issuer and a card network — meaning that it issues cards, manages accounts and provides the technology to process transactions. In short, unlike Capital One, Discover doesn’t use Visa or Mastercard to make transactions possible.
Unlike other issuers, Discover does offer a rewards debit card. Capital One intends to run its debit cards over the Discover network following the merger. This could come with an expansion in rewards offerings.
Payment Network Changes
As mentioned, Capital One plans to transition its debit cards to the Discover network after the merger. It also plans on moving some of its “credit portfolios” to Discover’s network, according to a February investor presentation.
If you’re a Capital One cardholder, this may not be welcome news. Capital One stands out for charging no foreign transaction fees on any of its cards and offering cards that run on either the Mastercard or Visa network, each of which is widely accepted internationally.
Discover doesn’t charge foreign transaction fees either, but the Discover network isn’t as widely accepted outside the United States. If you typically use your Capital One card abroad, you’ll want to keep an eye on this in case you need to have a backup payment method available.
[Read: Best Credit Cards for Fair Credit.]
What Else Should Consumers Know About the Potential Merger?
Even if regulators approve the merger, changes won’t happen overnight. If you’re considering opening an account with either Capital One or Discover now, before the merger proceeds, you can feel comfortable doing so.
“I’m sure that through the merger process, they’ll integrate the customers of both organizations in an effective manner,” says Julian Morris, senior scholar at the International Center for Law & Economics, or ICLE, which published a white paper on the merger in July.
When and if the merger goes through, other things consumers can look out for include:
— Improved fraud protection. This is especially relevant when it comes to e-commerce, Wang says. “Capital One has invested a lot in these merchant data exchanges,” he says. “They could try to build that deeper into the Discover network.”
— Increased promotion of no-fee checking. Capital One offers a checking account with no monthly fee or minimum balance requirement, as does Discover. This is also a product that is less commonly available. The merger could boost that product. “The company should be better able to market no-fee, no-minimum-balance bank accounts to underserved low- and middle-income consumers,” Morris and other ICLE contributors wrote in the July white paper.
— Continuation of Discover branding. Credit cards that currently have Discover branding will retain it after the merger, according to the issuers.
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Capital One-Discover Merger Seems Likely Under Trump Administration: What Should Cardholders Expect? originally appeared on usnews.com
