Credit Cards Are About to See a Huge Merger. It’s a Disaster.

If you’re following the merger between Capital One and Discover, you’ve probably heard some variation of the claim that the companies are making to justify the deal: “This merger is good because it will create a real competitor to Visa and Mastercard.”

All sorts of journalists and media outlets are parroting the point. The implication is that we ought to disrupt the Visa/Mastercard payment processing duopoly, even if it means reducing how many options Americans have when they’re looking for a credit card.

But is there any upside when it comes to creating competition with Visa and Mastercard?

No, there isn’t.

First, a bit of context: Visa and Mastercard are payment processors, or in industry lingo, “networks.” That means that Visa and Mastercard aren’t banks like other entities that offer credit cards—such as JPMorgan Chase, Citibank, or Capital One (or Discover, which is both a bank and a network). Visa and Mastercard can’t lend you money; all the others can.

And post-merger, Capital One would be a massive lender—with roughly 20 percent market share, it’d become the biggest credit card lender in America. Still, the argument the companies want you to focus on isn’t how big of a lender it would create. It’s the competition the Capital One–Discover merger would bring to Visa- and Mastercard-dominated payment processing.

There are two basic problems with that argument.

The first problem is that it is irrelevant.

If a merger harms competition in one market (for example, the market that normal people face when they need to borrow money), it doesn’t matter if it helps competition in a different market (the market of payment processors). A merger is illegal if it could substantially reduce the amount of competition in any market, full stop. In blocking Spirit’s Jet Blue acquisition in 2023, the courts made it quite clear that antitrust isn’t about balancing benefits and harms to consumers—it’s about stopping illegal activity.

The second problem with the argument is that it is inaccurate.

Stop to consider who the customers of Visa and Mastercard are. You, dear reader, are not Visa’s or Mastercard’s customer, even if you have a Visa or Mastercard credit or debit card. The customers of these payment processors aren’t even the businesses that accept Visa or Mastercard cards at the register. The customers of Visa and Mastercard are Chase, Citi, Bank of America, Capital One, and other banks and lenders. The banks undergo (highly secretive) contract negotiations with Visa, Mastercard, Discover, and American Express to decide which payment network they want to use for each of their credit card products. Visa’s and Mastercard’s market share are determined by how much they appeal to banks, not how much they appeal to merchants or consumers.

And the basic issue here is that Chase and Citi want something very different from what Walmart or your neighborhood bodega want.

Walmart and the bodega want credit card processing fees to go down, or at least to stop their relentless climb.

Meanwhile, Visa and Mastercard are playing chicken with the rest of the business community to see just how far they can raise prices without businesses deciding they’ll stop accepting credit cards, or how far they can push things without the government intervening. And in this game of chicken, the big banks are riding in Visa’s and Mastercard’s passenger seats, egging them on. Because these banks are negotiating with Visa and Mastercard to see what percentage of the processing fees they’re each going to keep.

So what happens when Capital One shifts its cards from Visa and Mastercard to the Discover network? Nothing good!

The new Capital One–Discover has zero incentive to solve the problem of high credit card processing fees, and in fact would probably prefer to raise the processing fees.

Media outlets including Bloomberg, Inc., and the Wall Street Journal are asserting that a Capital One–Discover merger would bolster competition between Visa and Mastercard by triggering more merchants to accept Discover. They seem to have completely missed the fact that 99 percent of U.S. merchants that accept Visa and Mastercard also already accept Discover (up from 96 percent a few years ago). Common sense would tell you Capital One is not going to lower processing fees across the board just to woo over that 1 percent of holdouts. (I’ll add a caveat that these dynamics are a bit different outside the United States, where Discover’s acceptance is indeed spotty, but where the law also caps credit card processing fees at a very low rate.)

To think about the impact of a merger between Capital One and Discover, consider the current biggest competitor to Visa and Mastercard—American Express. American Express charges higher processing fees than Visa and Mastercard, by a significant margin.

Ask any small-business owner whether they’d like a bunch of their customers to cancel their Visa cards and open up an Amex card instead. The answer will be a resounding no. A combined Capital One–Discover would be like another American Express, but much larger, and therefore even better positioned to hike up processing fees should they choose.

And higher processing fees result in higher prices for everyone. Yes, everyone who buys anything, whether they pay on a credit card, on a debit card, in cash, or with government food aid like EBT or WIC.

Don’t just take it from me: The Merchants Payments Coalition, a trade association of retailers, i.e., the people who have been complaining nonstop about Visa and Mastercard, has flat-out said they don’t expect Capital One’s proposed acquisition to solve any of their problems.

I can’t say for certain whether the “this merger is good for competition” talking point has come primarily from the Capital One PR machine or from journalists who are mindlessly riffing. Probably a bit of both, and either way, it should make you mad. I used to work at Capital One, and in that time, and in the years since, I realized how extraordinarily effective banks have been in influencing mainstream sentiment.

We can’t afford to let the banks misdirect us again. It’ll cost all of us.