Capital One’s acquisition of rival Discover spells trouble for Americans using their credit cards overseas, experts warn.
Regulators quietly approved the $35.3 billion takeover – which will create the US’s biggest card issuer – just before Christmas.
Other than boosting customer numbers, Capital One wanted to gain control of Discover’s payment processing network – a rival to services offered by Visa, Mastercard and American Express.
Payment processors serve as intermediaries between merchants and card issuers – and take a small cut of every purchase.
Until now, Capital One has relied on Visa and MasterCard networks, which are widely accepted worldwide. Owning Discover’s payment network once the deal is closed early this year, it no longer needs to rely on them.
But once its cards shift to Discover’s network – less common outside the US – travelers could face limited payment options, experts warn.
‘In most cases in the US, Discover is more or less accepted everywhere that Visa, MasterCard, and American Express are,’ Matt Schulz, chief credit analyst at LendingTree, told Fortune.
‘Where you may run into more issues is with international travel because Discover may not be as widely accepted.’
By acquiring Discover, Capital One will then own one of the largest payment-processing networks in the country, alongside the Visa, MasterCard and American Express
Travelers are advised to stay alert to these potential changes and consider backup options for international spending.
Capital One said it plans to move all of its debit cards and some of its credit cards onto Discover’s network starting in the second quarter of this year.
‘Over time, we will move a growing portion of the credit card business to the Discover network,’ said Capital One CEO Richard Fairbank during an investor presentation in February last year.
‘In total, across debit and credit, we expect to add over 25 million Capital One cardholders and over $175 billion in Capital One purchase volume by 2027.
‘This injection and volume in the network will help Discover be competitive with the leading network.’
Capital One is the nation’s ninth-largest bank by total assets, with 259 physical branch locations, 55 ‘Capital One Cafes’ across the country and a major online banking operation.
Discover Financial, meanwhile, is a mostly online bank with a single physical branch in Delaware.
Capital One’s takeover of credit card issuer Discover could cause problems for Americans using cards abroad, experts have warned
If the merger goes through, Capital One would be the largest card issuer in the country based on outstanding credit card loans, becoming even larger than JPMorgan Chase
Another key element of the merger is how it could affect competition within the payments network space.
There is a possibility the merger reduces competition among issuers, and progressive Democratic lawmakers have long fought against bank consolidation, arguing it increases systemic risk and hurts consumers by reducing lending.
New research from the Consumer Financial Protection Bureau (CFPB) found that larger credit card issuers charged higher interest rates and annual fees than smaller banks, due to a lack of competition.
If the merger goes through, Capital One would be the largest card issuer in the country based on outstanding credit card loans, becoming even larger than JPMorgan Chase.
‘Anytime there’s more consolidation and less competition, there’s always the possibility for rates and fees to increase, but I don’t see it being a huge issue,’ Schulz said.
He argues, however, that the deal could in fact make the payment processing space more competitive, challenging the dominance of MasterCard and Visa.
This could lead to better rewards on credit cards for consumers as issuers compete for customers.
‘One thing that will be interesting to watch is how the credit card rewards programs are blended together,’ Schulz added.
‘Capital One will have to decide how they handle Discover miles and if they keep those two rewards programs separate or if they bring them together, and that decision will impact consumers.’
Inflation starts to bite into the value of points if users redeem them directly through a bank’s portal or online app
Meanwhile, a recent report showed how the value of credit card reward points has been gradually falling – as inflation has taken hold.
A reward point has long been worth around one cent when used to cover other purchases.
But one cent has lost around 20 percent of its purchasing power since 2018, according to the Bureau of Labor Statistics.
This means a point has also fallen in value by about the same amount. If you built up 50,000 points with a major credit card issuer in 2020 and still have not spent them, they are now worth about 41,300.
