Capital One, the new credit card colossus

Three years of persistent inflation, which reached 9.1% in mid-2022, has significantly eroded the purchasing power of American consumers.

Now, amid the health crisis caused by the COVID-19 pandemic, the price of the same product is two or three times higher than in 2020.

In 2019 and according to Kelley Blue Book data, the average cost of a new vehicle was between $30,000 and $36,000. As of mid-2023, the average price was between $45,000 and $52,000, depending on the model and manufacturer.

The price of a two-litre container of Coca-Cola ranged between $1.49 and $1.79 in 2020; Today it averages more than $3.50 at the supermarket. Price increases at gas stations and other establishments. In some states it goes up to $5. And like this example, hundreds of other goods and services.

Crossroads, big debts and Florida

More than 100 million Americans are struggling to make basic payments, including food, shelter, household products, health, education, transportation and insurance.

This figure is more than 44% of the country’s adults.

According to the Bloomberg agency specializing in economics and finance, in 15 states across the country in mid-2023, nearly 4 in 10 people lived in households where it is somewhat or very difficult to pay for ordinary expenses. And in some metropolitan areas in California, such as Los Angeles and Riverside, nearly half of the homes were suffering from a condition that, far from improving, has worsened.

Only the magic of credit “saves today” millions of consumers in America, who know very well the disastrous consequences of the current very high interest rates on loans and credit cards with dividends (30% or more) for banks and lenders.

More than 25 million households in the US used credit cards or loans to cover their basic expenses in 2023.

Approximately 179 million Americans have one or more credit cards, which they no longer use only to pay for vacations, to satisfy tastes and preferences as they did several years ago; But as a necessary means to cover fixed expenses, given the impossibility of doing so with the income from a full-time job.

Under the Joe Biden administration, the number of people in the US who need two jobs to generate adequate income has increased by several million.

In 2023, Florida ranked second for the most people seeking help with their credit card debt. Applications increased by 63.4% compared to the previous year.

The Federal Reserve Bank of New York indicated that Americans’ total credit card debt now stands at $1.13 trillion.

The number of people falling behind on their loan payments on this type of loan increased by more than 50% in 2023. And now many Americans use this financial instrument in their daily expenses and services.

Merger of Capital One and Discover

For these and other reasons, Capital One, America’s ninth-largest bank, decided to buy Discover Financial Services for $35 billion, making it the most significant rival to card providers Visa and MasterCard.

America’s two largest credit card companies have merged in a purchase and sale agreement.

Discover was characterized by competing with lower interest rates and better benefits, and in the same line was Capital One, which now also considered losses due to late payments and priced Discover’s stock under a premium of 27% according to the market. Value of the shares at the conclusion of the agreement.

Meanwhile, Capital One holds 60% of Discover’s capitalization value.

Originally a financial subsidiary of the Sears store chain, from which it was soon separated, Discover was developed in the early 1990s with credit cards in mind. In 1997, it was purchased by Morgan Stanley, making it an independent company in 2005.

The head of Capital One said they will retain the Discover brand which they will rely on to “strengthen” their credit card network.

Discover became known in the United States as the first to develop the idea of ​​”cashback”, which allows a customer to recover a fraction of their spending, and gives banks and credit card networks more control over consumer habits. Provides data. Customer.

Capital One is making a big bet at a time of unprecedented boom in the credit card industry.

Rewards programs and the digitalization of commerce are resulting in more consumers switching from cash to card payments, a transition that was accelerated by the pandemic.

The increase in credit card debt has given issuers a new boost.

potential impact

It is still too early to predict the measures that will come with the purchase of Discover and subsequent moves by Capital One, but analysts believe the potential for a union would provide greater benefits to customers in competing against MasterCard, Visa and American Express. Is. Apart from this, doors for more loans will also open.

The second question is whether card owners will be able to get by with lower variable interest rates and lower surcharges, factors that now reduce consumers’ medium and long-term financial strength. Between high prices and high interest, credit card owners end up getting stuck paying excessive amounts to lenders. And instead of solving their financial problems, they sink into unpaid debts.

The purchase gives Capital One, a lender with a market cap of more than $52 billion, a network that significantly increases its power in the payments ecosystem, according to analysis by The Wall Street Journal.

Although much smaller than Visa and MasterCard, Discover is one of those companies’ few competitors in the US and one of the few card issuers that also has a payments network.

Regulatory Authority

The merger must be validated by US regulatory authorities, but Capital One founder Richard Fairbank expressed his optimism in a press conference. “These are two companies that are well positioned to receive this approval.”

Discover is the fourth plastic network in the country after Visa, MasterCard and American Express. It is present in more than 200 countries and its cards are accepted in 70 million establishments and points of sale.

“The purchase of Discover adds $218 billion in annual spending and $102 billion of credit to Capital One’s card network,” Fairbank said. “This helps us increase our profitability.”

Discover President Michael Rhodes announced, “This operation allows us to quickly scale up.”

Purchases move to Discover’s network of multiple cards operated by Capital One. The Bank will continue to maintain its strong relationships with Visa and Mastercard overseas.

lmorales@diariolasamericas.com

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