Two major credit card companies, Capital One and Discover Financial, may join forces

AILSA CHANG, HOST:

Two of the nation's biggest credit card companies want to join forces. Capital One has offered to buy the company behind Discover cards for more than $35 billion. And while the proposed deal might not change what's in your wallet, it could affect the way credit card payments are processed behind the scenes. NPR's Scott Horsley joins us now to explain. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: OK. So $35 billion is a chunk of change. What does Capital One hope to get out of this very expensive deal?

HORSLEY: Yeah. Capital One's already the third biggest credit card company in terms of loan volume, and adding all those Discover cardholders to its table would vault it up into first place. Discover, as some of our listeners will remember, was launched way back in the 1980s by...

CHANG: Oh, yeah.

HORSLEY: ...Sears. And it was really a pioneer in offering cash back rewards to cardholders.

CHANG: That's why my mom made me sign up for a card.

(LAUGHTER)

HORSLEY: Nowadays, of course, flashy rewards are a big part of the credit card universe, but what Capital One is really interested in, though, is less visible. It's that behind-the-scenes payment network that Discover has built for processing both credit and debit card payments. Here's the way Capital One CEO Rich Fairbank describes it.

RICH FAIRBANK: Over four decades, they have built a global payments network that connects merchants, small businesses and consumers in the United States and around the world. This is a valuable and rare asset.

HORSLEY: When you swipe your credit card at the store, it's that network that tells your bank and moves the money back and forth, all in exchange for a fee. Now, the Discover payment network is tiny compared to the behemoths Visa and Mastercard, which dominate the business. But Fairbank sees a lot of room to grow, and that would give Capital One a more direct line to businesses that take its credit cards and perhaps more leverage in negotiating those processing fees.

CHANG: Well, this proposed merger - I mean, it's coming at a time when more and more people are paying with credit cards, right? Like, tell us why that's happening right now.

HORSLEY: Yeah. Credit card payments have been climbing as a share of overall payments. That was true before the pandemic, and it accelerated in the COVID era. Card companies make money off that two ways, first from those swipe fees that merchants pay and then also from the interest that banks charge to the credit card users who don't pay their balance every month. Last year those outstanding card balances hit a record of more than a trillion dollars. And Greg McBride, who's with Bankrate, says the average interest rate on that credit card debt is more than 20%.

GREG MCBRIDE: Nobody's financing purchases at 20% because everything's hunky-dory. That's a clear sign of the strain that millions of households are feeling just in terms of making ends meet.

HORSLEY: About half of all credit card users do carry a balance from month to month, and McBride says those high interest rates aren't going to change no matter what happens to this proposed merger.

CHANG: Well, how likely is it that this merger deal will go through, you think?

HORSLEY: This is going to get a close look. It's already gotten some opposition from community groups who worry about the effect it would have on bank customers. The Biden administration has also taken a dim view of corporate mergers that look like they might cut down on competition. Greg McBride, however, argues this deal might have the opposite effect, at least behind the scenes.

MCBRIDE: I expect this to get a lot of scrutiny. The advantages that it does provide more competition for Visa and MasterCard on the payment network side - that could be a crucial point in getting the deal done.

HORSLEY: Analysts who follow the banking industry at KBW wrote, this is not a slam-dunk, but they do see a path for this deal to win approval. Capital One says it hopes to complete the transaction by the end of this year or early next.

CHANG: That is NPR's Scott Horsley. Thank you so much, Scott.

HORSLEY: You're welcome.

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