In this episode, we fan the flames to get Glenbrook’s hot takes on the proposed Capital One acquisition of Discover. Now that the dust has settled a bit on the February announcement, and while we wait with bated breath to see if the regulators will sign off on this deal, we wanted to debate the potential winners and losers – and possible outcomes – of an acquisition.

We spend some time discussing how this combination would impact some key stakeholder groups – networks, banks, processors, payment service providers, businesses, and merchants. Now that our thoughts are on the record, we’re eagerly anticipating what we got right and what we missed if this intriguing acquisition comes to fruition.

 

Yvette Bohanan:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends and its evolution.

Hello, I’m Yvette Bohanan, a partner at Glenbrook and your host for Payments on Fire. Welcome to another Fanning the Flames, where we convene some of the folks at Glenbrook to discuss a hot topic in payments. For this episode, we’re giving you our perspective on the potential winners and losers in Cap One’s proposed acquisition of Discover. Joining me on this episode are Bryan Derman, Chris Uriarte, Russ Jones, and Drew Edmond.

Hi, everyone. I am looking forward to hearing your thoughts on this one, and I guess I have to warn the listeners too, that we have four folks from Glenbrook giving their perspective. So we have at least 10 opinions expressed on each question. This could be a three-hour Fanning the Flames. We’re not careful. You all have had some time to reflect on the February announcement, so I’d like to walk us through each of the stakeholders and hear your thoughts on how they’re going to fare if this deal materializes. Does that sound okay to everybody?

Bryan Derman:

Yeah. Let’s go for it.

Yvette Bohanan:

All right. Okay. Let’s start with the entities in the proposed acquisition. How is this going to benefit Capital One?

Bryan Derman:

I’ll jump in there, Yvette. I think there’s a lot of ways. I am a big fan of this deal from the perspective of Capital One. Obviously, it makes them a big time player in the credit issuing business. They were already among the leaders, but depending on how you want to measure it, purchase volume on a pro forma basis, I think they become now the third-largest issuer on a combined basis. In terms of credit card lending, when you put the two together, you get the number one lender by a good margin. Considerably bigger than JPM in terms of credit card outstanding. So they become a true scale player in the credit card issuing business.

You go over to the debit side, they’re not as big on that side, neither Capital One nor Discover, but together the volume gets them toward the top 10. But the really interesting thing is Capital One’s stated intention to migrate all of its debit cards relatively quickly onto the Discover network, where they will operate as a closed loop player, and therefore be exempt from the Durbin Amendment caps on debit interchange.

That’s worth a lot. We don’t know exactly where that interchange will settle out, but Discover does that today with its own debit portfolio and earns a representative non-exempt rate on its interchange. So you have Cap One joining onto that as well, maybe negotiated down. But it gets particularly interesting when you compare it to else is going on with Durbin, particularly the proposal out there from the Fed to reduce the Durbin cap on the order of 28%, as we calculated it. That hasn’t gone through yet, but we’ve gotten accustomed to thinking of 21 cents and five basis points. The proposal on the table is 14.4 cents and four basis points.

Yvette Bohanan:

Yeah, pretty significant haircut.

Bryan Derman:

So other big issuers facing a big reduction, Capital One may have put itself in the way of a pretty big increase. I guess the last component from their point of view is just the ownership of a closed loop network. You end up with an entity that maybe a bit more resembles American Express in terms of being able to guide its own fate from both the standpoint of issuing and network functionality.

Russ Jones:

Let’s don’t forget the ownership of three card networks, Discover Pulse and Diners Club.

Bryan Derman:

Yeah, exactly. And I’m sure we’ll talk more about those closed loop features while at the same time theoretically retaining the ability to issue on Visa and MasterCard, wherever that seems more advantageous. I don’t think we’ve ever seen an entity that had that range of options available to it. It’d be fascinating to see where they use each of those network assets across their portfolio.

Yvette Bohanan:

A lot of arrows in the quiver, if you will. Big arrows there. What about Discover? If you turned this around and looked at this from Discover’s perspective, what’s in it for Discover? What do they gain here? What might they lose?

Bryan Derman:

Well, some of the same issues at play there, they will be part of a big scale credit card issuer. People have looked at their combined marketing budgets, under that Discover was already a heavy spender, but now perhaps even more so. You have the debit side. Both of these companies have had separate efforts around deposit raising and debit, and you can combine those efforts now, so theoretically helpful to Discover. A Discover network, arguably a bit subscale now gets a big boost, although we’ll see how much it will get some Cap One volume. I don’t think we know what will happen on the third party side, but certainly a big lift from the Capital One volume.

Yvette Bohanan:

So you talked a little bit about scale. Given the volume and the latitude that they have in exercising some of these different networks, what do you think the impact is on Visa and MasterCard dynamics, and Star and Nice when you think about this broadly? Do you think they feel even more of a threat when these come together on the Discover/Cap One side? We’ve talked about this both ways, the importance of scale and then we’ve talked about Visa and MasterCard becoming a network of networks. And so, what’s the real net net here on these folks?

Chris Uriarte:

I’ll jump in on that, Yvette. I want to go back to something that Bryan brought up earlier around Capital One strategy, at least to what they’ve announced thus far in regard to migrating some of their portfolios from the Visa/MasterCard brands over to Discover. Back to what Bryan noted, which is a really, really important part of the strategy here, is Capital One’s intention to migrate their debit portfolio immediately over from the Visa/MasterCard brands to the Discover brand. That obviously has a big implication on Visa/MasterCard from the standpoint that here you have an organization that’s already considered to be a mega issuer saying that they’re going to be moving large chunks of cards over to another network. And again, to double click on what Bryan said, we have been used to the discrepancy in pricing for both Durbin regulated and Durbin unregulated issued cards.

Capital One being a Durbin regulated institution, Discover being a Durbin unregulated institution for debit cards. And what does that really mean to merchants? Well, merchants might have to expect to pay more from an interchange perspective for those cards that have migrated from Capital One’s Durbin regulated portfolio to Discover’s Durbin unregulated portfolio. What does that really mean at the end of the day when we talk about numbers? When we look at numbers, the Federal Reserve says that the average interchange rate across the board for Durbin regulated transactions, merchants pay about 45 basis points when you take into consideration the flat fee and AUM fee associated with the Durbin regulated rate. And for Durbin unregulated debit cards, merchants pay on average about 1.41%. So that is a significant uptick of almost 1% from an acceptance perspective of Durbin unregulated to Durbin regulated. Or the other way around, I should say.

That obviously will have an impact on merchants with a large chunk of these cards associated with that issuer. The other thing to keep in mind is on the credit side as well, as Bryan had said, there is a strategy there that Capital One is exploring and moving some of the credit portfolio over to Discover. That will mostly be focused on cards that will consider to be domestic spend credit cards. I think we’re all familiar with Capital One’s travel cards. If you’ve ever turned on a radio or television, you’re very aware of the Capital One Venture card and some of the other cards that they have in their portfolio which are focused on travelers.

And they have those features that travelers like, they have the no international transaction fees. And most importantly, they have a Visa and MasterCard brand on them, which is almost ubiquitously accepted across the globe. They’ll most likely keep those cards on the Visa/MasterCard brands. But any of those cards that are purely domestic in nature, you can see where it makes sense for Capital One to move those over to the Discover brand. What does that mean from an interchange perspective? We’re not sure yet. We’re not sure where interchange is going to settle all around from a credit perspective where Discover’s ultimate interchange rates will land now in this new world of competition, but it’s something sure to keep an eye out for.

Russ Jones:

And Chris, I’ll note the cynics inside of Glenbrook would say, when interchange goes down, what do merchants do? Do they pass on those savings to their customers or do they pocket it?

Chris Uriarte:

Well, I think you know my view on this, Russ.

Russ Jones:

And what happens when an interchange goes up, do they suck it up and just pay it, or do they pass it on to their customers?

Chris Uriarte:

Well, my view is I like to look at data and-

Yvette Bohanan:

Wait a minute, wait a minute. Chris, I think he just called you a cynic. Don’t you want to address that point first?

Chris Uriarte:

I wouldn’t necessarily disagree with that. I like to look at data and make my decisions based on data. And we have lots of really good academic studies that are out there from the University of Pennsylvania and University of Chicago and others that have shown that when interchange goes down, that savings indeed does not get passed on to consumers at the end of the day.

Yvette Bohanan:

So we’ve established you’re a data driven cynic.

But citing incredible sources here. Yeah.

Russ Jones:

There’s no data like dark and ominous data, right?

Yvette Bohanan:

I’m going to put a pin in your comment about the Cap One and the Venture card and the network and the likelihood that those will retain Visa/MasterCard logos and that, because we’re going to come back around to one of the assets that Discover’s been building out for 40 years in a few minutes. And I want to debate that point a little bit with my friend Russ, who likes to bring up thorny topics. Let’s move on to banks first though. Do you see Discover potentially moving into an open loop model at any point, or opening up the network to direct bank participants? Would that be, given all the comments here about the economics and the potential win on the… How could they slice this? Is there any opportunity here for an open loop model?

Bryan Derman:

In theory, Yvette, that’s where Discover has been. They have been open to third party issuance, obviously earned a lot of it on the Pulse side of their network. Lots and lots of issuers participating in that network. I think on the Discover side, it hasn’t proven particularly successful as a credit brand for third party issuers. And the sense I get listening to Capital One management talk about the deal is that they are probably more enamored of the closed loop model there and the flexibility that gives them, the data rich transaction processing environment that it provides. I would come down more on the side of saying that they would be closed loop, at least on the credit side.

Yvette Bohanan:

Let’s talk about what they’ve done on the credit side though that’s unique. They have had this approach of creating a global network, we often call it a reciprocity network at Discover, to support cross-border processing. What is that in terms of an asset or a resource in this deal? Because they’ve been building this out for 40 years, this is a pretty significant arrangement that they’ve created with networks all over the world. How should we be thinking about that asset?

Russ Jones:

I’ll speak to that, Yvette. The thing that’s actually a bigger story than I think the reciprocity agreements they have with other networks is their whole philosophy about networks that stands unique in the global card system that they think this way. And I think the easiest way to think about it is compare and contrast here to Visa and MasterCard. Visa’s network is for Visa’s use. MasterCard’s network is for MasterCard’s use. These are big assets that they have. You could even call them proprietary assets. They don’t try to sell them to anybody else, they don’t lease them out to third parties generally. Discover, on the other hand, has this approach that they’ve built this very large, in many ways domestic network, and they’re willing to open it up to third parties. There’s a lot of FinTech innovations, a lot of third parties who take advantage of what in the industry people would call the Discover Rails. So it’s very much an asset that they have.

They have also taken an approach different, again, from Visa and MasterCard of building out their global footprint in partnership. So they have strategic partnerships that offer them and their partners’ reciprocity. So that when a Discover card goes into another domestic market, if they have a partnership with the domestic card network in that country, their card is accepted as a domestic card in those markets. And vice versa, when someone comes in from Brazil or China or India comes into the United States, their cards are treated as Discover cards. And from a merchant’s perspective, they look like Discover Cards, they have Discover economics, they process on Discover rules. And the same thing happens when a Discover card holder in the US goes to another country, their card becomes a domestic card for all intents and purposes.

So this has had a super interesting effect. When you add up all of the so-called merchant footprint of all these domestic networks around the world, Discover cards are usable in more locations than Visa cards and MasterCard branded cards, but they’re not directly usable. They’re not usable under Visa rules or MasterCard rules, like a Visa card would be on the Visa network or a MasterCard branded card to be on the MasterCard network. One of the things Capital One is talking about, one of the areas they would invest in is direct Discover acceptance outside the US, they see that as something that needs to be beefed up. It’s not that they don’t have a lot of acceptance, it’s that it’s not direct. It’s indirect acceptance, if you will.

Bryan Derman:

Do you think they will go to market under that brand? We’ll start to see Discover decals all over the world as we travel?

Russ Jones:

I think most likely so. I don’t read anything in this as their Capital One is interested in acquiring the Discover brand so they can change it. Discover is a pretty accepted brand with a lot of market visibility.

Bryan Derman:

I think they have said that the brand will need some nourishment, particularly outside the US, I think.

Russ Jones:

It’s because the way these agreements are structured, when a US cardholder takes their Discover branded card and goes into Brazil, it’s usable everywhere. But the only reason it would be that way, because the cardholder has been educated by Discover that they can use their card anywhere. Brazil, a merchant doesn’t say that they accept Discover in Brazil, but they dip it or they tap it. Hey, it works.

Yvette Bohanan:

It works quite well. And it’s actually a very interestingly elegant solution. Because you’re respecting all of the network rules and regulations and pricing within a specific country, but you’re giving the cardholder freedom to go anywhere, right?

Bryan Derman:

No, I’d argue with that, Yvette, not anywhere.

Russ Jones:

Right. Only in the markets where they have partnerships.

Bryan Derman:

The cost of the partnership is you end up with a network that’s a little bit patchy, I guess.

Russ Jones:

Yeah. Right.

Bryan Derman:

Works like a charm in Brazil, but if I cross the border into Argentina or if Peru is on my itinerary, I better bring another card.

Yvette Bohanan:

Right.

Russ Jones:

Yeah. I think Discover has something on the order of around two dozen of these partnerships around the world, and there’s a lot more countries than that.

Chris Uriarte:

But some of them are quite powerful and have great reach. And I think some of you have heard me told the story before, I worked the better part of three years in China. And my whole driver for getting a Discover card is the agreement that they have with the China Union Pay network.

Yvette Bohanan:

Exactly.

Chris Uriarte:

And went to China, the first day that I swiped the Discover card it worked flawlessly, and worked flawlessly for several years from that point forward. And when I did get home from that first trip from China, I had a nice little envelope waiting for me from Discover that had a little business card in it that said, “Here, feel free to present this to any merchants in China.” And it was a little card that said, “Hey, this card’s going to work just like a China Union Pay card. It doesn’t require a pin, but feel free to swipe it and you’re still going to get paid just like you do every single day.” And that came in handy a few times. But I will say generally the experience over the course of three years, I don’t think I was declined once, to be honest with you, by Discover when processing a transaction over there. When it works, it works. It’s a pretty powerful arrangement they have.

Yvette Bohanan:

That’s what I was getting at for anywhere. Yes, in the countries where they have reciprocity. But once you’re in that country, because you’re considered you’re on the local rails, it’s a very powerful underlying proposition in terms of approval rates.

Russ Jones:

So Chris-

Yvette Bohanan:

I think that’s interesting.

Russ Jones:

Let me see if I got this right. You can take a card that a merchant’s never seen before and you can hand it to them. And if you just give them a little piece of paper, everything is golden.

Chris Uriarte:

Yes. All the merchant knows is whether that terminal comes back and says it’s accepted or not, that’s all they care about. Based on my experience, yeah.

Yvette Bohanan:

I’m going on record to say this is a massive asset, and they’ve got to figure out how to make this scale to other countries. But they’ve got something pretty interestingly unique here in terms of how they can scale within a country and have a great customer experience. If I was taking another card over there, I don’t know if it would be the same experience.

We’ve talked a little bit about interchange, we’ve talked about the footprint here. We’ve talked about the latitude they have or the quivers. The arrows in the quiver, whatever that metaphor is, for the different networks. And some of their assets. Where are the regulators’ minds here, do you think? Are they happy? Are they shocked? Are they raising an eyebrow on this possibility?

Drew Edmond:

Yeah, I think I’ve been sitting here listening to you all talk about making great points. I think about the different assets that each entity brings to this deal. And through this lens of this thing is happening, but we don’t know if it’s happening yet. I think there’s still a lot of questions about what different governmental institutions are going to think about this with the size of what we’re talking about here. We’re talking about creating a combination that is extremely powerful in the ecosystem when it comes to financial services and the impact that might have on consumers, and pricing power in the market, and things like that. It is not a foregone conclusion that this will go through.

One of Capital One’s arguments coming in on the face of it is, look, you’ve been talking about the Visa and MasterCard duopoly since the dawn of time. You finally have an opportunity here to have a big player. Yes, it’s going to be a big player, but this is a benefit. This is a benefit is that we get to come into the market and help introduce competition into this world of card issuance and networks, and things like that. With additional subtexts going on with things like the Visa and MasterCard settlement recently on merchant fees that folks are paying that they’ve been upset about for a long time. But I think the question is, what’s the reality here in terms of the impact of a merger like this on the ecosystem? Is it actually going to introduce true competition to Visa and MasterCard? And I don’t know if that’s necessarily true, just given what we’ve been talking about.

Part of this is, well, they’re not going to be an open loop network. So initially right off the bat we’re saying, well, you’re not operating in the same way that Visa and MasterCard are operating. So are you ultimately going to bring competition in that same way? If you think about it through the lens of a bank that’s thinking about where to issue their cards, nothing changes. If they can’t issue on Discover, their options are still Visa and MasterCard. Now, yeah, we’re going to probably peel the debit volume away from Capital One, and that’s going to move over to Discover. So that’s going to have some impact just over overall on the economics of Visa and MasterCard, or at least their revenue that they’ve been used to seeing there. So they’ll see that go away. Well, that has one impact and that’s the interchange rates will go up for the market. Now we’re talking about trying to introduce competition to reduce fees from merchants, and ideally for consumers, but we know how that goes.

But let’s just say for merchants, interchange is going up on the debit side. Then if you think about it on the credit side, well, all right, now we’re talking about we’re leaving these cards on Visa and MasterCard because of the international reach. And so, how much does that actually move over? And for the revenue that they do end up losing from Visa and MasterCard, maybe they just increase their other fees to make up for that lost revenue. So we could ultimately see these downstream implications, which happens a lot in the world of payments, where we think that competition is being introduced and the end result is that fees go up. It’s just a funny world that we live in, in payments where that can be an outcome of some of these changes that are somewhat unforeseeable sometimes, but maybe we’re foreseeing it. I think overall, when it comes to the competition question, there’s no guarantee that this merger results in lower cost for merchants or better competition there. I think there’s an opportunity that it might do the opposite in some cases.

Chris Uriarte:

I think both the regulators and legislators are an interesting conundrum here because it’s been all about competition, their messaging. We need more competition. Durbin initially being enacted to introduce more competition between different networks, depending CCCA, the Credit Card Competition Act. That third C there, competition. The idea being is that if you do introduce more competition, it should ultimately bring cost down. Now you have a scenario where you have a major player that is perhaps introducing some level of significant competition to Visa and MasterCard. But the result of that, as you’ve said, might not actually result in lower cost of acceptance to merchants.

And in fact, what’s interesting as you see the strategy, the migration from Capital One debit portfolio, branded debit portfolio on the Visa/MasterCard networks to Discover brand debit cards. This is essentially an exploit of the initial Durbin Amendment to help get better economics for Capital One, moving from a regulated to an unregulated cost structure. So it’s really interesting where we stand right now.

Russ Jones:

I think in terms of regulated versus unregulated, there’s going to be a ton of lobbyists leaning on Congress, leaning on the Federal Reserve about the closed loop exemption. When you go back to the original Durbin Amendment, the exclusion of closed loop networks, I can’t even remember, it was so long ago. I can’t remember. Bryan, maybe you remember whether or not that was in the original Durbin Amendment, or whether or not that came out of the Regulation II rulemaking.

Bryan Derman:

I think it’s in the amendment. It is so long ago. But the amendment was regulating interchange, and interchange only exists technically in open loop networks.

Russ Jones:

Yeah.

Bryan Derman:

And remember, what we’re trying to address is the theoretical concentration of power that happens in big multi-bank networks. And the thought here is, like Amex, this is just one issuer as a closed loop. And as a merchant, you can take them or leave them. You don’t have to walk away from 50% of the volume in the US banking system as you might if you said, “I’m not going to take Visa or I’m not going to take Discover.” That’s not a viable strategy for most merchants who aren’t named Costco.

Russ Jones:

I would tend to think that Visa and MasterCard and their major issuers are going to bang the drum on fair is fair. Why do we exclude these closed loop networks? Doesn’t this create an unfair advantage for banks that have the wherewithal to buy a closed loop network?

Bryan Derman:

I think they must be up in arms about it, particularly as they face this reduction in the Durbin cap. This is a real insult on top of that, alongside some of the other circumvention that’s happened through the small banks. I’m sure that’s upsetting.

Last thing I’d like to call out on the regulatory side is I think of this deal is going to get challenged. The biggest flashpoint has to be that credit card loan portfolio, because that’s where you’re going to see the biggest of powers is in the combining of that.

Russ Jones:

Biggest concentration of risk too.

Bryan Derman:

If you say a big part of both of those portfolios serves a middle income, revolving oriented consumer, and you’re going to put two of the leading players together there. And somebody could legitimately ask, what’s the impact going to be on APRs for that borrowing consumer? And on the face of it, it wouldn’t look positive. There’s a lot of higher math that they do and antitrust calculations, but that piece of it looks like the biggest concentration risk that comes out of this. I would expect that to be scrutinized, let’s say.

Yvette Bohanan:

One thing that we haven’t really touched on here yet, is there a possibility that this is approved with contingencies or-

Chris Uriarte:

I think it’s impossible for this to get approved without some level of contingency. The question is, how big and how impactful will those contingencies be? I have both seen and been part of large mergers that ultimately did get the red flag from regulators, but did not move forward because of the price of those contingencies to the parties.

Yvette Bohanan:

So it basically dilutes the whole thing to the point where it doesn’t make sense to do it anymore.

Chris Uriarte:

It is possible, yeah.

Yvette Bohanan:

So it’s a yes-

Chris Uriarte:

A yes, but.

Yvette Bohanan:

Oui, mais no, as the French would say. We haven’t finished all the stakeholders here yet, so let’s jump back in. We’ve talked a little bit about the banks and that, but we have processors helping the banks, we have payment service providers helping the merchants. Both love a world of complexity. Assuming everything happens, does this make them happy because things get more complicated, or does this make them unhappy because things get less complicated? Where are the opportunities?

Drew Edmond:

Less complexity brings an opportunity to differentiate.

Yvette Bohanan:

And create a new revenue stream, or an augment existing revenue stream.

Russ Jones:

It also brings an opportunity to assess merchants with a change fee.

Drew Edmond:

Yeah. I think if you look at some of the things that could change as a result of this, there are some implications that could affect PSPs or their relationship with their customers, with their merchant customers. One is cost. I think if you’re a PSP providing services to a merchant, and the underlying payment mix shifts with the interchange costs related to debit, or goes in the other direction, either way. Especially if you’re in a world where you’re providing bundled payment pricing for smaller merchants, potentially, your margins will be affected by those payment shifts. That’s just one thing that will happen anytime the costs shift around these models.

Less interesting, if it’s passed through already the merchant’s going to see that cost change on their end and less applicable there. I think that if this introduces a world where routing options change or become more complicated, or what if Capital One/Discover decide to co-network their credit cards before CCCA even passes? And they say, “Oh, we’ve got Visa and MasterCard and all these, what if we just throw Discover on there now? Let’s see what happens there.” Or all of a sudden the Pulse network gets a lot more interesting and they make changes to their costs to attract more volume.

Then you start to have more different conversations with underlying merchant customers around, where are these cards going? What are the costs of these cards? What are the approval rates? Look at all the logic and the analysis that we can do for you to help you make these decisions better. I think the routing piece could get interesting, similar to the conversations that we’ve had around CCCA and things like that, because it just gets more and more complex there. I think that one thing that we haven’t really touched on, is hopefully it wouldn’t be something that lasts for a very long time, but conversions of large card portfolios don’t always go well.

Yvette Bohanan:

You mean as in smoothly?

Drew Edmond:

As in smoothly. As in, is this data accurate? As in, is this price accurate? Am I getting billed correctly? Is this showing up the right way in my analytics? What is it going to look like for merchants all of a sudden when a huge chunk of their cards on file switch over, and does that look right? I think it’s something that a forward-looking PSP would say, “Let’s do what we can to help support our merchants through this, and do what we can to help normalize that data, or help to make sure that everything looks right for folks that depend heavily on that type of data.” I think there’s a few things there that PSP should be thinking about if this comes to fruition.

Russ Jones:

I think the lineup here, Drew, is we have from a PSP’s perspective, and the merchant’s perspective too, is you have the old-fashioned card updater works in batch, supports portfolio conversions. Real-time card updater doesn’t.

Drew Edmond:

There you go.

Russ Jones:

And I don’t think the tokenization, the EMV co-tokenization model supports portfolio conversions either.

Yvette Bohanan:

I think that’s correct, Russ.

Chris Uriarte:

And we’re dealing with portfolio conversions across two networks here, across two brands. That is certainly something that’s a little bit untested at this scale, for sure. And I think just in general, the large portfolio migrations that have happened in the past probably will pale in comparison to the size of this migration that we’re talking about here. We talked about that PSP impact, that if I’m a merchant, obviously we’ve got cards on file. We have risk management models that have been keeping track of performance of certain cards over the course of days, months, years now that get thrown out. Just general models altogether that are looking at the balance between different cards and strange behavior that today had a bunch of MasterCards running through it that tomorrow have lots more Discover cards running through it. Might throw some merchants, might throw some risk service providers off when they see this change in behavior.

Yvette Bohanan:

Initially, there is a lot of complexity, basically. Until the dust settles, and that can take a little while. What did you say, the forward-looking PSPs and processors? Yes.

Drew Edmond:

Not all of them fall under that bucket.

Yvette Bohanan:

But those that do. Any final thoughts? That covered off a little bit on what’s going on or what should be going on in the merchant’s minds in terms of cost, in terms of potential complexity, in terms of with their PSP. Any more thoughts on merchants and consumers though? Any final? Because they’re eventually the ones that have to use all of this and accept it.

Drew Edmond:

Yeah, I think from the consumer side with Discover cardholders that exist at Capital One, these are different companies and they think differently about card issuance. And both the product side of it, how do we think about rewards and cash back and annual fees? And the customer experience side that’s reflected in the operations to support these things. Discover’s been well-known for a long time. They have great customer satisfaction scores related to their products. They have 24/7 customer support based in the US. Discover cardholders are very happy cardholders oftentimes. Not to say Capital One cardholders aren’t, but they just approach things differently.

And so, I think that there’s been some talk about Discover card holders being like, “What’s going to happen? What’s going to happen to me? Am I going to get the same level of service? Will I get the same cashback rewards? Am I going to have to pay an annual fee now, that I maybe don’t want?” Maybe I’m a lower income consumer on that side of the income bracket and not paying an annual fee is very important to me, while still getting some of the benefits they get with their Discover card.

I think that there’s going to be some deep conversations to figure out how they approach these things, both from an internal operational perspective on who are the teams responsible for doing what, who’s better at what across these different organizations? What are the best practices that we want to share and use, and how does that end up coming to fruition? And then overall, from a product perspective, how do they continue to approach the different segments in the market when it comes to the higher end segment that Capital One is starting to want to go after more and more, versus the traditional entry level and mid-market customers that Discover has, that Capital One has had in the past? And just a lot of conversation about that strategic focus going forward and how that plays out.

Chris Uriarte:

Discover has always had this reputation of being the friendly card issuer. Sort of like your pal down the street is lending you some money for a month or two months or so. It’s beloved by a lot of its longtime consumers, so there is power in that brand. Now, I think Capital One has noted that there’s probably a lot of opportunities for improvement in the brand. But nonetheless, it is a strong brand, and its customers have generally been happy. And Discover has placed highly in JD Power customer satisfaction surveys right up there with Amex over the years. Customers like that brand.

Yvette Bohanan:

Yeah, they’re super loyal. Super loyal. Yeah, of course they’ll be a little concerned. All right. Well, we’ve established it’s complicated. We’ve established that there’s a lot of facets to it. We established that it may not be a big check mark, yeah, just do the whole thing. It could get part and parceled out here, which could have ramifications. But it is exciting nonetheless. No matter what, it’s given us something to talk about for a while.

It’s that special time when we have to wrap things up, so thank you all for sharing your thoughts. Really appreciate it. We’ll have to recap this one when we find out what actually happens.

Chris Uriarte:

Yeah, absolutely.

Yvette Bohanan:

Thanks a million. And to all of those listening, thanks for joining us. And until next time, keep up the good work. Bye for now.

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