> But the Fed stuck in a loophole for Discover. And that is leading Capital One to buy it.

This isn’t a “loophole”.

It’s the difference between open-loop payment networks and closed-loop.

Visa/Mastercard are open-loop.

Whereas Amex & Discover are closed loop.

On closed-loop, both the issuer and acquirer is the same bank (Discover).

It’s way easier for a merchant to not accept closed-loop than it is open-loop, because they can just elect to not get an acquiring account at that bank (Discover).

This is why Amex and Discover have always been more expensive for a merchant to accept than Visa/Mastercard.

This article is way longer that it should be and it sensationalizes a fairly well known and simple difference.

Do people do enough debit card transactions to make this loophole worthwhile? I avoid using my debit card as much as possible since the impact of theft is much worse for me as a consumer. I experience fraudulent credit card charges every few years, but it's not real money gone from my account. I'd be much more annoyed if it was.

“ known as an ‘interchange fee,’ from the merchant, roughly 1.5-3.5% of every transaction”

This jumps out because it is such a wide margin. In reality the average interchange fee is 1.8%. Amex at their _highest_ rate, which is the highest of all the networks is 3.5.

So “roughly” is doing a lot of heavy lifting in that sentence which gets further amplified later in the article when they use it to multiply by the total credit volume.

I don’t know that it fully discredits the argument but it is certainly a weak rhetorical tactic.

In the payments space margins are measured in basis points, 2% seems small to laymen. 200 bips seems crazy big to anyone in the industry.

Lots of speculation but no real data. No, Capital One didn't buy Discover for $35B so they could raise their debit card transaction fee by a few bps. People don't use debit cards enough for it to be worthwhile. The real reason is the boring one – there is a lot of value in the Discover brand and network and Capital One wants that.

Discover has always been stuck in a weird place in the US market. They've lived and died on their customer service reputation, yet ultimately they are just another credit card company. But with a card that really doesn't have any advantages over the others, while having a non-zero chance of not being accepted somewhere (more common than Amex).

They haven't had any other offerings at all which I've found compelling. And their banking services are too sparse to switch to as a main provider. Hard to say it will be missed.

Why on earth isn’t the Federal Reserve providing an easy money moving service that also acts as a ledger? I know about FedNow but they could also back bone transaction networks as the definitive payment pipe and cut out the middleware companies entirely

To be honest Visa type services should be provided via the central bank (again, Visa itself isn’t a credit card issuer) so businesses don’t have to soak the payment percentages

Recent and related:

Capital One to buy Discover Financial in $35B stock deal - https://news.ycombinator.com/item?id=39437387 - Feb 2024 (122 comments)

Capital One Is Buying Discover Financial - https://news.ycombinator.com/item?id=39433109 - Feb 2024 (35 comments)

I feel this title is misleading. Fed = Federal Reserve. This is Congress’s doing.

Discover has alqYs bewn stuck in a weird place in the US market. They've lived and died on their customer service reputation, yet ultimately they are just another credit card company. But with a card the really doesn't have any advantages over yhe others, and a non-zero chance of not being accepted somwehwere (more common than AmEx). They havn't had any other offerings at all which I've found compelling. And their banking services are too sparse to switch to as a main provider.

The thing that confuses me about fee-based payment businesses is in theory, a Surcharge for a particular payment method should cover the gap.

Is there a reason surcharges aren't sufficient to drive down interchange and take fees? Do customers just not care about paying a 2% fee? Do merchants judge that it's not worth pissing off a subset of their customer base if they use a high-fee card and just eat the expense?

It seems clear to me that the problem comes down to customers not actually paying the cost of using a particular card or network.

> Though American Express’s status as a three party network isn’t strictly accurate, U.S. Bank does issue credit cards that operate on AMEX

I'm pretty sure ScotiaBank does as well. They even offer their points programme (Scene) with it.

https://www.scotiabank.com/ca/en/personal/credit-cards/ameri...

I was a little bit surprised that there are no EU-based/originated payment networks. How comes?

At least, in Japan, there is JCB, and in China there is UnionPay / Alipay?

Whey did they make such a hole? Sounds like corruption.

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