Americans' Credit Card Addiction Fuels $35 Billion Merger

Since the pandemic, Americans have relied more and more on their credit cards. So much so that they are ready to risk over $30 billion on Capital One's wager that they won't give up the habit.

On Monday, Capital One Financial said that it will pay $35 billion to acquire Discover Financial Services. The merger may cause a stir in the payments sector, which is mostly controlled by Visa and Mastercard.

Customers of the businesses may eventually benefit from more benefits and increased merchant acceptance of Discover cards, which might increase competition in the payments sector. However, the corporations themselves and the retailers that take these cards will reap the most of the rewards.

Banks like Citigroup and JPMorgan Chase are among the largest credit card providers. But like American Express, but with a distinct customer base, Capital One and Discover are first and primarily credit card corporations. With tens of millions of subscribers, they cater to Americans who want to get more value out of their regular expenditures like groceries, petrol, and domestic travel but do not go abroad frequently. Stated differently, those who don't usually hold expensive credit cards.

The merged entity will surpass both JPMorgan and Citigroup in terms of loans extended to customers via credit cards. Additionally, the merger empowers the Discover network to compete more effectively with industry giants like Mastercard and American Express, a feat it hasn't achieved in its four-decade existence.

Capital One's Expansion Plans and the Growing Credit Card Debt Landscape

Executives from Capital One said on Tuesday that they will begin enabling users to use the Discover payment network as soon as the merger complete, potentially before the end of the year. In addition, Capital One intends to maintain the Discover name alongside its cards-though it's possible for the two brands to co-exist.

Fundamentally, this agreement is a large wager that Americans will continue to accumulate credit card debt.

Due to two years of extremely high inflation, Americans have been rapidly raising their credit card debt. According to the most recent figures from the New York Federal Reserve, as of the fourth quarter of 2023, Americans owed $1.13 trillion on credit cards, while total household debt levels rose by $212 billion, or 1.2%.

Additionally, the interest rates that consumers pay on such amounts are rising. Approximately 21.5% is the highest interest rate on a bank credit card since the Federal Reserve began keeping track of the data in 1994.

For a long time, Capital One's detractors have said that the corporation primarily depends on those who are least able to pay exorbitant interest rates on their credit card debt. Historically, compared to JPMorgan, Citi, Discover, and American Express, Capital One has had greater default and 30-day delinquent rates.

Regulatory Uncertainty Surrounding the Merger

Whether the deal will pass regulatory scrutiny is unknown. Customers may get credit cards from almost any bank, but not all businesses are banks first and credit card firms second. Both Capital One and Discover, which was once known as the Sears Card, began as credit card firms before branching out into other financial services including checking and savings accounts.

Bank authorities have long expressed a desire to examine major mergers in the financial services industry more closely. With more than $600 billion in assets, the combined Discover-Capital One business will be larger than the majority of the nation's major regional banks.

It is anticipated that consumer advocacy organizations would exert significant pressure on the Biden Administration to ensure that the agreement benefits both shareholders and consumers. Politicians on the left, such as Sen. Sherrod Brown, the influential Democratic chair of the Senate Banking Committee, are already advocating for a thorough examination of the agreement.