The recent approval of Capital One’s acquisition of Discover Financial Services is the first of its kind.
With federal regulators giving the green light and the deal expected to close on May 18, 2025, merchants across the country are wondering how this merger will affect their businesses.
As someone with expertise in payment processing, I see this as a moment that will reshape merchant-card network relationships in two distinctly different ways.
The Merger at a Glance
Capital One’s $35.3 billion acquisition of Discover creates a new player in the payments ecosystem. The combined entity will become the largest credit card issuer in the United States with a 19% market share, surpassing JPMorgan Chase’s 16%.
More importantly, it’s a unique vertical integration where a major retail bank gains control of a payment network – something we haven’t seen before in this configuration.
The deal brings together Capital One’s 100 million cardholders with Discover’s 300 million cardholders (including Discover, Diners Club, and depositor debit cards).
Capital One plans to move all of its debit cards and some of its credit card offerings onto the Discover network after the merger closes.
Scenario 1: Higher Fees and Tougher Disputes
The first scenario that could happen due to the merger is an AMEX situation.
Higher Interchange Rates Ahead?
One potential path for the merged entity is to follow American Express’s model of charging higher fees to merchants.
Some critics worry that Capital One might raise Discover’s transaction fees, which currently average around 1% compared to the industry average of 2.5%
The three-party structure of Discover’s network could create both the incentive and ability for the merged entity to force merchants to pay higher discount rates.
Merchant Dispute Resolution Could Become More Challenging
In this scenario, merchants might face a more issuer-friendly dispute resolution process. With Capital One’s historical focus on subprime borrowers (those with credit scores in the lower 600s), the company might prioritize cardholder protection over merchant concerns.
This could lead to higher chargeback rates and more difficult resolution processes for merchants, similar to what many experience with American Express.
Reduced Negotiating Power for Small Businesses
The vertical integration of a major bank with a payment network could create an imbalance of power.
Smaller merchants might find themselves with less leverage when negotiating fees or disputing charges, especially if the merged entity prioritizes its own profitability over merchant relationships.
Scenario 2: A Merchant-Friendly Approach to Gain Acceptance
The second scenario is one where the aim of the merged entity is to improve acceptance.
Lower Fees to Drive Merchant Adoption
Alternatively, Capital One-Discover could take a disruptive approach by charging merchants significantly lower fees than Visa and Mastercard.
This strategy would aim to increase Discover’s merchant acceptance, which currently lags behind Visa and Mastercard internationally. While Discover is accepted at about 70 million merchants globally, Mastercard reaches around 100 million and Visa 130 million.
Improved Merchant Relationships and Services
Capital One has explicitly stated its intention to build closer ties with businesses through this merger. This could translate into more merchant-friendly policies, including:
- More transparent dispute resolution processes
- Enhanced fraud protection services
- Reduced chargeback rates and related disputes
- Better data analytics and customer insights for merchants
Competitive Pressure on the Entire Industry
By positioning itself as a merchant-friendly alternative to Visa and Mastercard, Capital One-Discover could force the entire industry to improve its merchant services and potentially lower fees.
This increased competition could benefit all merchants, not just those accepting Discover cards.
Which Path Will They Choose?
Both scenarios are feasible, but Capital One can only choose one route.
Factors Suggesting the AmEx Model
- Capital One’s historical focus on higher-risk borrowers who pay higher interest rates
- The potential to extract more revenue from merchant fees to offset acquisition costs
- The three-party network structure that gives more control over fees
Factors Suggesting the Disruptor Model
- The need to increase Discover’s merchant acceptance, especially internationally
- Capital One CEO Richard Fairbank’s statement about creating “a payments network that can compete with the largest payments networks“
- The opportunity to disrupt the near-duopoly of Visa and Mastercard, which control over 80% of the credit card network market
Short-Term Indicators
- Any immediate changes to Discover’s fee structure after the May 18 closing date
- Updates to merchant agreements and dispute resolution policies
- Public statements from Capital One about its merchant strategy
Long-Term Considerations
- How Capital One balances potential effects on merchants against cardholder benefits
- Whether the merged entity shifts more transaction volume to the Discover network
- Regulatory responses, particularly regarding interchange fees
OFFER PAYMENT METHODS YOUR CUSTOMERS PREFER
Preparing Your Business for Either Scenario
Whichever path the merger takes, you need to prepare your business. It’s likely you should accept Discover or Capital One cards at checkout, but you can balance it to minimize fees.
If Higher Fees and Tougher Disputes Materialize
- Review and potentially renegotiate your merchant service agreements
- Strengthen your chargeback prevention and management processes
- Consider diversifying payment options to reduce dependence on any single network
If the Merchant-Friendly Approach Prevails
- Explore potential partnerships with Capital One-Discover for enhanced services
- Leverage any new data analytics offerings to improve customer experiences
- Monitor fee structures across all networks to ensure you’re getting competitive rates
Action to Take Today
The Capital One-Discover merger represents both an opportunity and a challenge for merchants.
While the AmEx model might lead to higher costs and more difficult disputes, the disruptor model could create a more competitive landscape that benefits merchants through lower fees and better services.
What’s certain is that this merger will change the payment processing industry. Merchants who stay informed and adaptable will be best positioned to navigate these changes successfully.
As the May 18 closing date approaches, all eyes will be on Capital One to see which path they choose.
Right now, you can find out how to load balance, negotiate rates, and minimize fees. Get in touch with us for more info.
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