The Single Best Thing about the Capital One/Discover Merger

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Capital One recently announced that it’s buying Discover® for $35.3 billion. This deal would make Capital One the largest credit card company by loan volume.

But the deal is not done yet; it still has to be approved by federal regulators. Some Democrats in the Senate, including Senator Elizabeth Warren, are critical of the deal, warning that the creation of such a large credit card company would be bad for consumers.

The Federal Trade Commission (FTC) could sue to stop this deal. Sometimes the FTC intervenes and prevents corporate mergers from happening because it doesn’t want any company getting too big. The FTC is supposed to maintain competition in America’s free market so no company gets the power to fix prices or hurt its competitors with unfair business practices.

But I believe this deal deserves to go through. Capital One buying Discover is ultimately going to be a good thing for average credit card customers because it will create new competition for Visa and Mastercard. And the best thing about Capital One buying Discover is that it might save credit card rewards from being killed by Congress.

Let’s look at the surprising implications of Capital One buying Discover — and why credit card customers should root for this deal to be approved by the FTC.

1. Capital One is trying to compete with Visa and Mastercard, not eliminate competition for credit cards

The biggest reason why Capital One is buying Discover is because it wants to own Discover’s payment network. Discover currently has the fourth-largest payment network — Visa and Mastercard are the two biggest by far, and American Express is third largest.

Even though Capital One would become the biggest credit card company in some ways as a result of this deal, it’s not trying to wipe out smaller credit card companies. It’s trying to boost the performance of the smallest payment network.

I’m not an antitrust lawyer, but it seems that Capital One buying Discover is more likely to increase competition with the two biggest payment networks (Visa and Mastercard) than it is to reduce competition among credit card companies. There are still going to be plenty of other credit cards on the market for consumers to choose from.

But by becoming a bigger player in the payments network space, Capital One could motivate Visa and Mastercard to offer better deals to other credit card companies — and to merchants, restaurants, and retailers. Even if you’re not a Capital One or Discover card customer, your credit card experience might get better as a result of this deal.

2. Capital One buying Discover supports the goals of the Credit Card Competition Act

Before the Capital One/Discover merger was announced, Congress was considering a bill called the Credit Card Competition Act (CCCA). The goals of this bill are to change the way credit card companies work with payment networks to create more competition for Visa and Mastercard.

Supporters of the CCCA believe that more competition for payment networks would (hopefully) create lower-cost credit card swipe fees. And this would (ideally) drive down costs for consumers and small businesses. For example, what if swipe fees went down by 1%, and your restaurant tab or grocery store bill ended up being 1% cheaper, too?

However, opponents of the CCCA have warned that the bill — if it becomes law — could kill credit card rewards programs. That’s because credit card companies might have less financial flexibility to turn credit card processing fees into reward points.

I believe that anyone in Congress who supports the CCCA should also support Capital One buying Discover because the Capital One/Discover merger would help accomplish the biggest goal of the CCCA: creating more competition for Visa and Mastercard.

Dave Grossman is a credit card loyalty program expert and CEO of MilesTalk. He agrees that there’s a strong argument to be made that Capital One buying Discover is ultimately good for competition in the credit card industry.

“The theory behind the Credit Card Competition Act (CCCA) is that Mastercard and Visa have a duopoly, although I believe that this theory discounts the power of American Express, which is right on the heels of Visa and Mastercard in acceptance within the U.S. market,” Dave Grossman said. “Capital One will make Discover, over time, a formidable fourth player — increasing competition all on its own without the government intervention envisioned by the CCCA. And I believe that the CCCA would ultimately be bad for consumers.”

If the Capital One/Discover merger is allowed to go through and the CCCA doesn’t pass, that means your credit card rewards are likely to continue. And because of the new competition and innovative products that Capital One can offer by owning Discover’s payment network, the best rewards credit cards might get even better.

“This Capital One/Discover deal accomplishes what the CCCA set out to do, and on that merit the merger should be approved,” Dave Grossman said. “Whether or not it survives the politics of such a large merger is, of course, another matter entirely!”

Bottom line

No one knows for sure if the Capital One/Discover merger will survive FTC scrutiny. The FTC recently sued to block a proposed $24.6 billion merger of the Kroger and Albertsons regional supermarket chains. But if Capital One is allowed to buy Discover, there could be upsides for consumers. More competition for Visa and Mastercard could bring interesting innovations and better deals to the world of credit cards.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.American Express is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services and Kroger and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

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