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Discover could have a moment thanks to $35 billion merger with Capital One. What the deal means for cardholders

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A marriage between Capital One and Discover Financial Services is on the table for $35.3 billion. If finalized, it could create one of the nation’s largest consumer financial institutions—and potentially be a boon to some consumers and small businesses.

A merger could be attractive to both companies for several reasons. Discover, along with issuing credit cards, is also a payment network: It creates the infrastructure to facilitate payments between merchants and card issuers when customers make a purchase, charging fees along the way.

Acquiring it would give Capital One, one of the nation’s largest banks and credit card issuers, access to its own network the ability to collect those fees. Other major credit card issuers, like JPMorgan Chase and Bank of America, do not process payments on their own. Combining with Discover would make Capital One the largest card issuer in the country, pushing ahead of JPMorgan, according to a presentation Capital One put together for investors on the deal.

“Our acquisition of Discover is a singular opportunity…to build a payments network that can compete with the largest payments networks and payments companies,” Richard Fairbank, the founder, chairman, and CEO of Capital One, said in a press release about the deal.

Other payment networks in the U.S. include American Express, MasterCard, and Visa. Discover is the smallest of the four, but is still accepted by many merchants and in more than 200 countries and territories, according to a press release. In an investor call Tuesday, Capital One executives said one of their goals is to change the perception among consumers that Discover isn’t widely accepted by merchants.

Capital One is likely to move more of its cards to the Discover network, potentially cutting out MasterCard and Visa along the way. Capital One did not respond to Fortune‘s request for more information on this topic.

Michael Seamen, CEO and founder of the payments consultancy Swipesum, says the deal could make Capital One and Discover an entity similar to American Express—not only doing the issuing, controlling the loans and credit, but also fully managing transactions, cutting other payment processors out of the ecosystem. That would allow them to make better deals with merchants, small businesses, and consumers alike.

“This will increase business, but it’s more than just those revenues. It’s also, they get a key to the backdoor of the payments industry,” says Seamen. “If you pair Discover with Capital One and increase the issuing side and you own the card network, you can really create offerings and innovation and expand through partnerships in a way only American Express has in the past.”

‘Addicted to points’

The companies said in the press release that the deal won’t close until late 2024 or in 2025—and that’s if government regulators approve it.

From there, it’s not 100% clear what will happen to consumers’ current cards, but it’s likely they’ll be accepted more widely—and potentially offer more competitive rewards programs—which is good, Seamen says, since “Americans are addicted to points.”

“If you control the issuing side and all of the processing fees on the acquiring side, they will have more leverage on the rewards side because there are less parties to pay out,” he says.

Additionally, current Discover consumers might benefit from improved customer service and access to new technologies (both Discover and Capital One already rank highly, especially among middle-class consumers.) It could also increase competition with the likes of Visa and MasterCard.

That said, consumer groups are likely to keep a close eye on the deal, as is the Biden administration. Capital One has a larger portfolio of sub-prime borrowers than other credit card issuers, and Discover’s portfolio is composed of many people early in their credit journey.

If the deal is approved and the company changes up its credit card offerings, it will need to alert consumers 45 days before any changes are made to the terms of their cards, Greg McBride, chief financial analyst at Bankrate, said in a statement.

“Assuming the transaction receives regulatory blessing and ultimately closes, the card lineups will eventually be optimized, which could mean some offers going away and new offers coming to market,” says McBride. “Any of that is likely a year or more away, however.”

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