America is on the cusp of a new biggest credit card company. Here’s what it could mean for you

NEW YORK CITY, New York (CNN) — What’s in your wallet? Capital One is making a $35 billion bet that the answer will soon be: more of its credit cards.

The bank announced Monday evening it is acquiring Discover Financial Services (DFS) in a $35.3 billion all-stock deal. If approved by regulators and shareholders, Capital One’s (COF) acquisition will create the biggest US credit card company by loan volume.

So what does that mean for you?

For now, not a lot. Given that the deal isn’t expected to be finalized until late 2024 or early 2025, Discover and Capital One customers shouldn’t anticipate any immediate changes.

And antitrust regulators could push that deadline even further out: The Biden administration has established a strong anti-merger stance by attempting to block consolidation of corporate giants, from tech companies to airlines.

But, down the road, there could be significant transformations.

More businesses could start accepting Discover

For starters, all Capital One debit cards will be switched from Mastercard to the Discover network “within the first few years” from when the deal is finalized, Richard Fairbank, founder and CEO of Capital One, said in a Tuesday morning investor call.

Discover cards are already accepted at 99% of all US merchants that allow customers to make credit card purchases, according to the company. But Fairbank said people mistakenly believe that share is a lot lower.

On the international side, he acknowledged that Discover’s acceptance rates are much lower compared to Visa and Mastercard. That’s one of the reasons he said Capital One will continue to do business with them, even as it builds up the Discover network.

The end goal, though, is to get more merchants to take Discover, he said. To do so, Capital One would likely have to lower the processing fees Discover currently charges to make it more competitive with Visa and Mastercard’s lower fees. That’s good for consumers because it means they can use their Discover cards in more places and also likely earn more rewards from those purchases.

With a market valuation of almost $28 billion, Discover is considerably smaller than the other three major credit card networks in the US — Visa (V), Mastercard (MA) and American Express (AXP). Credit card networks are the liaison between card issuers and merchants, for whom they set fees.

Getting Discover, which also issues its own credit cards, unlike Visa and Mastercard, under the same roof as Capital One would give the bank a major leg up against competing credit card-issuing banks such as JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), which don’t process transactions themselves.

Consumers could pay higher interest rates

As of 2022, around 42% of Capital One’s credit cards ran over Visa’s network and 58% ran over Mastercard’s, Bank of America analysts said in a Tuesday note.

Of the $606 billion in transactions that Capital One credit card users made last year, the analysts estimated that $255 billion came from its Visa cards, while $351 billion was from Mastercard.

If Capital One flips all its credit cards to Discover, Mastercard would stand to lose a quarter of its US credit card volume. Visa, on the other hand, would lose a smaller share — around 9% of its US credit card volume.

This could harm consumers if it results in higher fees for the balance they owe. Already, Capital One is among 15 credit card issuers that have at least one card with a maximum interest rate above 30%, according to a recent report published by the Consumer Financial Protection Bureau.

Compared to other major credit card issuers, Capital One has historically catered to customers with credit scores in the 600s range, which is considered subprime. Given these borrowers are considered riskier, they tend to get charged higher interest rates compared to higher-scoring individuals.

The CFPB found that “lack of competition likely contributes to higher rates at the largest credit card companies.” Cards issued by smaller banks and credit unions, by contrast, can come with much lower interest rates. (Capital One did not respond to CNN’s inquiry.)

Democratic Sen. Elizabeth Warren labeled the deal “dangerous,” adding that it will “harm working people,” in a Tuesday post on X. She urged regulators to block it.

From a regulatory perspective, increased competition could work in Visa’s and Mastercard’s favor if it helps delay or eliminate legislation aimed at reducing the fees they collect from merchants, Jaret Seiber, an analyst at TD Cowen, said in a Tuesday note.