Podcast Summary
Understanding the roles of banks, processors, and issuers in credit cards: Banks issue credit cards, processors handle transactions, and issuers set terms. Capital One's acquisition of Discover's processing services could lead to increased competition and cost savings.
The recent $35 billion acquisition between Capital One and Discover involves the merging of their credit card processing and settlement services. This deal might have left some people confused about the roles of different entities in the credit card industry, such as banks, processors, and issuers. To clarify these concepts, we'll answer five key questions about how credit cards work, with the help of NPR business correspondent, Scott Horsley. First, it's important to understand that a bank issues a credit card, but a processor handles the transactions when you swipe or insert your card. The issuer sets the terms of the credit card, such as the interest rate and rewards program. The processor, like Discover, handles the behind-the-scenes logistics of processing and settling transactions. Capital One, as a bank, didn't have access to Discover's processing services, but now, with this acquisition, they will. This merger could lead to increased competition and potential cost savings for both companies. Stay tuned as we delve deeper into these concepts and answer more questions about the credit card industry.
Understanding the relationship between Capital One and Discover as credit card issuers and payment networks: Capital One is a major credit card issuer and full-service bank, while Discover is a credit card issuer and operates its own payment network. Capital One's interest in acquiring Discover includes gaining access to their payment network.
While both Discover and Capital One offer credit cards, they operate in different ways within the credit card landscape. Capital One is a full-service bank and a major credit card issuer, known for its catchy advertising campaigns. Discover, on the other hand, grew out of the old Sears business and is not only a credit card issuer but also operates its own payment network. This distinction is significant for Capital One, as acquiring Discover's payment network is a major part of their interest in the deal. It's essential to understand that when you see a credit card with a specific issuer's name, such as Capital One or Discover, the card may also carry the branding of a larger payment network, such as Visa or Mastercard. This complex relationship between issuers, payment networks, and banks is largely invisible to the average consumer.
Entities Involved in a Credit Card Transaction: When you use a credit card, issuer, payment network, and retailer are involved. Issuer provides loan, payment network processes transaction, retailer pays swipe fee.
When you use a credit card to make a purchase, there are three main entities involved: the issuer, the payment network, and the retailer. The issuer, such as Capital One, provides the loan for the purchase, while the payment network, like Visa or Mastercard, processes the payment transaction between the purchaser and the retailer. When you swipe or tap your card at a retail establishment, the point of sale machine connects to the payment network, which then communicates with the issuing bank to approve the transaction and charge the purchaser's account. The issuing bank extends a short-term loan for the purchase amount, and the processing network facilitates the transfer of funds. Every time a credit card transaction occurs, there is a fee, known as a swipe fee, charged to the retailer. This fee is typically around 2% of the transaction amount. While it may seem insignificant, the sheer volume of credit card transactions results in a substantial amount of revenue for the payment networks. Therefore, a significant portion of the value of a credit card purchase goes towards covering these fees and supporting the infrastructure of the payment processing system.
Swipe fees go to issuer banks with rebates as rewards: Swipe fees totaled $160B last year, primarily paid to issuer banks, with smaller portions to networks. Smaller businesses bear significant expense. Capital One aims to gain more leverage in negotiations through Discover acquisition.
The swipe fees for credit card transactions primarily go to the issuer bank, such as Capital One, with a smaller portion going to the processing networks like Visa or Mastercard. The issuer bank may then rebate some of these fees to customers in the form of rewards. The negotiation of these fees is done between the merchants and the processing networks, not the banks. The swipe fee market is a large one, with over $160 billion in fees generated last year. For smaller businesses, these fees can be a significant expense. Capital One's proposed acquisition of Discover is driven in part by the desire to gain access to Discover's customer base and its status as a payment network, potentially giving Capital One more leverage in negotiations with Visa and Mastercard. If the merger goes through, Capital One may absorb Discover's network, but it's unclear whether they would keep or spin off this asset.
Potential shake-up in credit card industry with Capital One's acquisition of Discover's processing business: Capital One's acquisition of Discover's processing business could impact competition in the credit card market and payment processing sector, potentially enhancing or reducing competition, and the outcome for consumers is uncertain.
The proposed acquisition of Discover's payment processing business by Capital One could significantly shake up the credit card industry. Capital One's CEO expressed interest in Discover's processing network, which could potentially help Capital One grow its own credit card issuing business and challenge the dominance of Visa and Mastercard. However, the impact on consumers is uncertain, as regulators will need to decide whether to focus on the potential reduction of competition in the credit card market or the potential enhancement of competition in the payment processing sector. As for personal preferences, both Scott and Whelan are "inserters" when it comes to using credit cards. The Indicator episode was produced by Julia Ritchie, engineered by Sina Lofredo, fact checked by Sierra Juarez, edited by Alex Goldmark, and is a production of NPR. A special message comes from NPR sponsors BetterHelp and Saatva. If you're considering therapy, BetterHelp offers a safe space to help manage stress, and you can get 10% off your first month with the code NPR. Saatva supports NPR and offers high-quality mattresses for a better night's sleep.
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