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Capital One and Discover merger may be a response to an adjacent concern: the Visa and Mastercard duopoly, economist says

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Capital One’s proposal to acquire Discover for $35 billion would be the largest banking deal in nearly two decades if it goes through, a Northeastern expert says. However, the merger faces a tough road to approval in the present regulatory environment as antitrust watchdogs have challenged a slew of deals in recent years — from the JetBlue and Spirit Airlines deal to Microsoft’s bid to take over Activision Blizzard

John Kwoka, the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University, says the merger points, and is perhaps responding, to an adjacent concern in the banking sector — namely, the market power Visa and Mastercard share in setting payment processing fees. “One aspect of this that hasn’t been much discussed … is the payment processing duopoly that Visa and Mastercard have at present,” he says.

While Capital One and Discover are on stable financial footing, Kwoka contends that Discover’s payment processing system might present Capital One with an opportunity for cost savings. “If there are cost savings that Capital One and Discover think they’re going to achieve here, it’s really because the Visa and Mastercard duopoly is setting very high merchant fees,” Kwoka says. “Capital One may be trying to bypass that by owning a piece — or all — of an alternative payment processing system that Discover has.”

Continue reading at Northeastern Global News.

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