Will the Capital One, Discover merger impact the Credit Card Competition Act?

The announcement of Capital One Financial’s proposed $35.3 billion acquisition of Discover Financial Services has left some wondering if there is still a need for the pending Credit Card Competition Act (CCCA). The CCCA aims to introduce more competition in the credit card payment network space — a goal that the proposed merger may accomplish, too — which could, in turn, benefit consumers.

Currently, Visa and Mastercard hold dominant positions in the card payment network market, having captured more than 80 percent of market share. American Express and Discover are smaller players, each with their own card payment network to process the cards they issue. If the merger goes through, Capital One could gain access to Discover’s payment network, potentially changing the competitive dynamics of the market.

According to a Capital One press statement, “Discover has built a rare and valuable global payment network with 70 million merchant acceptance points in more than 200 countries and territories. Even so, it is the smallest of the four US-based global payments networks. This acquisition adds scale and investment, enabling the Discover network to be more competitive with the largest payments networks and payments companies.”

Is there still a need for the Credit Card Competition Act?

Visa and Mastercard establish the interchange fees for the cards that bear their logos and are processed on their respective networks.

The CCCA aims to introduce payment network competition by asking lenders that issue Mastercard and Visa credit cards to give retailers a choice of two different networks (including one that would not be Visa or Mastercard) on which to process credit card transactions. Merchants could then choose the network that offers them more favorable terms so that they could pay lower interchange fees. These savings could then potentially be passed on to consumers.

According to Doug Kantor, a member of the Merchants Payments Coalition executive committee, “If the CCCA is passed, the competitive nature of the retail industry guarantees that merchants will share billions of dollars in savings with their customers. With Visa and Mastercard still blocking transactions from being processed over competing networks, nothing about this merger on its own changes anything on competition over swipe fees. Only competition like that offered by the CCCA can change that dynamic.”

However, Gary Leff, a travel rewards blogger at View From The Wing believes that the proposed merger potentially does away with the need for the CCCA, stating that, “Durbin-Marshall [referring to the initial sponsors of the legislation] is designed to elevate another payment network to compete with Visa and Mastercard. This [merger] does that by bolstering Discover. And it does that without being a huge transfer from consumers to merchants or risking the payments processing system or availability of consumer lending.”

Preparing for the Credit Card Competition Act?

There is some speculation about whether Capital One’s merger proposal is aimed at positioning itself better as a competitor to Visa and Mastercard in anticipation of the CCCA legislation. The CCCA, which already has bipartisan support, is gaining some momentum with two more sponsors, Sen. Jack Reed (D) and Sen. Josh Hawley (R), recently signing on.

Ed Mierzwinski, senior director with the consumer advocacy Public Interest Research Group, says, “The CCCA is coming. Cap One sees what the other cards don’t. Visa and Mastercard ban competition; the CCCA allows it.”

He added, “Discover is small but could be the straw that breaks the monopoly.”

Lulu Wang, an assistant professor of finance at Northwestern University sees the merger as “insurance” against the CCCA, considering that the proposed law requires each credit card to be on two networks and that Capital One would now own “a natural second network.”

Posting on the microblogging site ‘X’ (formerly Twitter), Wang noted that Capital one is “widely recognized” for working with merchants and that the merger would let Capital one expand its current work in the e-commerce fraud space. That’s because the reach of Discover’s network and additional customers would make it worthwhile for merchants to invest in Capital One’s fraud technology, he expects.

Merger has to get through regulatory hurdles

Of course, it remains to be seen if the Capital One and Discover merger actually goes through, since it still has to pass government scrutiny to be allowed. Leff expects that it would be “bizarre for the Biden administration to go after this deal on anti-trust grounds at the same time that Congress is pushing for stronger competition across payment networks, since this bolsters precisely that competition.”

However, there has already been some open opposition to the merger from two Senators. For one, Hawley, the Congressman who recently signed on to the CCCA, has sent a letter to the Department of Justice asking it to block the merger. His position is that the proposed merger would cut down on competition in the credit card space by adding Discover’s 300 million cardholders to Capital One’s existing 100 million card users, thereby creating the third-largest credit card-issuer based on purchase volume.

Hawley expects that this sort of consolidation will only benefit Capital One’s shareholders, and not flow down to consumers. Hawley did not comment about the merger’s potential impact in the credit card network space.

And in a post on X, Sen. Elizabeth Warren (D) said that the deal should be blocked, considering that it “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families.”

More payment network competition could benefit consumers

Others expect that the additional competition would benefit consumers. The merger would “almost certainly” increase competition amongst payment networks, according to Wang.  He speculated that this would not be good for merchants, considering that higher competition has, based on historical experience, meant higher interchange fees as networks compete to retain card issuers.

If networks compete for card issuers by offering them a higher share of card processing fees, merchants could lose if interchange fees rise. Consumers, on the other hand, could benefit if issuers pass on additional rewards to them. The merger would also give Capital One a negotiating tool in dealing with the bigger Visa and Mastercard networks, potentially leading to better terms on any cards it issues through these networks.

Travel blogger Leff, also expects that the additional payment network competition would be good for consumers and rewards. In his opinion, that’s because Capital One would save money by processing cards through its own network, also giving it access to a greater volume of consumer data that could make the lender more efficient.

However, Jonathan Hoddenbagh, an assistant professor of economics at Johns Hopkins University, sees the potential for mixed impacts to consumers. “There are good arguments on the credit card lending side that the merger will reduce competition,” he states. “However, it’s possible that Capital One’s acquisition of Discover may promote more competition in credit card payments by creating a larger alternative network to challenge Visa and Mastercard. So the overall impact on the public and consumers is difficult to forecast.”

The bottom line

At the end of the day, it seems with or without the CCCA, consumers could benefit from any additional competition in the card payment network space.

Capital One Financial’s proposed acquisition of Discover Financial Services would introduce additional competition into the credit cards payment network space, which is what the pending CCCA legislation aims to do. That’s why some are questioning whether there remains a need for this law. However, merchants still see the need for the CCCA legislation in order to gain access to greater network choice, as — without the mandate to give retailers this choice — Visa and Mastercard will still be dominant.

With the bipartisan CCCA gaining recent momentum, there is also some speculation that the Capital One merger plan aims at positioning the financial institution to take advantage of the competition the legislation aims to bring about. However, as of now, the merger faces regulatory scrutiny, and it is not clear if it will go through.