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A Northeastern economist says the merger points to a related development in the banking sector — namely, the market power Visa and Mastercard share in setting payment processing fees.
Capital One’s proposal to acquire Discover for $35 billion would be the largest banking deal in nearly two decades if it goes through, a Northeastern expert says. It would consolidate two industry titans into one colossal credit card company, and give Capitol One a leg up in the lucrative world of payment networks.
But the tie-up faces a tough road to approval in the present regulatory environment as antitrust watchdogs have challenged a slew of deals in recent years — from the JetBlue and Spirit Airlines deal to Microsoft’s bid to take over Activision Blizzard. Additionally, lawmakers such as Sen. Elizabeth Warren, D-Mass., have already voiced their opposition to the deal.
John Kwoka, the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University, says the merger points, and is perhaps responding, to an adjacent concern in the banking sector — namely, the market power Visa and Mastercard share in setting payment processing fees.
“One aspect of this that hasn’t been much discussed … is the payment processing duopoly that Visa and Mastercard have at present,” he says.
While Capital One and Discover are on stable financial footing, Kwoka contends that Discover’s payment processing system might present Capital One with an opportunity for cost savings.
“If there are cost savings that Capital One and Discover think they’re going to achieve here, it’s really because the Visa and Mastercard duopoly is setting very high merchant fees,” Kwoka says. “Capital One may be trying to bypass that by owning a piece — or all — of an alternative payment processing system that Discover has.”
The proposed merger comes at a moment when federal regulators are cracking down on consolidation; the FTC and the Department of Justice are “becoming more assertive in examining mergers like this,” Kwoka says. The Justice Department, which oversees banking mergers, has signaled that it intends to bring greater scrutiny to bear on such deals.
The Biden administration has also said that it intends to vet financial mergers more closely, citing concerns that they lead to branch closures and higher interest rates for commercial and personal loans, Kwoka says.
“All of this is taking place in a highly unfavorable environment for mergers like this, and so the question becomes: Why do they think they will stand the chance of obtaining an approval for this?” he says.
Kwoka says the deal is sure to face an uphill battle in Washington.
“These are two quite healthy companies, and as a result, it is going to raise serious antitrust questions,” he says.
“The argument that no doubt Capital One’s going to make is that this allows them to rely on Discover’s payment processing system and avoid Visa and Mastercard’s high charges, whether that constitutes the kind of efficiency that can’t otherwise be achieved and whether such savings are likely to be passed through the consumers — and will be verifiable” remains to be seen, Kwoka says.
What kind of an impact would the deal — if approved — have on consumers, depositors, businesses and others?
With so much yet to play out, it’s hard to know, Kwoka says.
“The parties, of course, will make the case that they may be able to lower the processing fees and, as a result, give customers — you, me — credit card users and merchants something of a break,” he says.
On the other hand, a Capital One and Discover marriage would result in even greater bargaining power for the pair that could be leveraged against merchants as well, Kwoka says. Many industry experts have warned against further shrinking of competition in an already highly consolidated credit card market.
“Down that path lies the opposite concern — that the merger will preserve the high fees and simply result in Capital One-Discover pocketing those fees more fully than at present, where Capital One has to pay Visa and Mastercard,” he says.