Sustained inflation for three years, which reached 9.1% in mid-2022, has significantly eroded the purchasing power of American consumers.
Now the same product costs two or even three times more than in 2020, in the midst of the health crisis due to the COVID-19 pandemic.
In 2019 and according to Kelly Blue Book data, the average cost of a new vehicle was between $30,000 and $36,000. As of mid-2023, the average value ranged between $45,000 and $52,000, depending on the model and manufacturer.
A two-liter container of Coca-Cola cost between $1.49 and $1.79 in 2020; Today it exceeds $3.50 on average in supermarkets. The 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.
The figure exceeds 44% of the country’s adults.
According to the Bloomberg agency, specialized in economics and finance, in 15 states of the country in mid-2023, almost 4 out of 10 people lived in homes where it is somewhat or very difficult to pay for usual expenses. And in some metropolitan areas such as Los Angeles and Riverside, in California, almost half of the homes suffered from this situation, which, far from improving, has worsened.
Only the magic of credit “saves today” tens of millions of consumers in the US, who know well the disastrous consequences of the current very high interest rates on loans and credit cards with (30% or more) dividends for banks and lenders.
More than 25 million households in the US used credit cards or a loan in 2023 to cover their basic expenses.
Almost 179 million Americans have one or more credit cards, which they no longer use solely to pay for vacations, 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 several million people in the US who need two jobs to generate sufficient income increased.
In 2023, Florida ranked second for the most people asking for 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 is now $1.13 trillion.
The number of people who fell behind on their debt payments on this form of loans increased by more than 50% in 2023. And now many more Americans use this financial means in their daily expenses and services.
The merger of Capital One and Discover
For these and other reasons, the ninth largest bank in the US, Capital One, decided to buy Discover Financial Services for $35 billion, making it the most important rival to card providers Visa and Mastercard.
The purchase and sale agreement merges two of the largest credit card companies in the US.
Discover was characterized by competing with lower interest rates and better benefits, and in that same line was Capital One, which now also assumes losses due to late payments and the stock market value of Discover under a premium of 27%, in accordance with the price of the shares at the closing of the agreement.
Meanwhile, Capital One keeps 60% of Discover’s capitalization value.
Originally a financial subsidiary of the Sears store chain, from which it was quickly separated, Discover developed in the early 1990s with credit cards. In 1997 it was purchased by Morgan Stanley, which made it an independent company in 2005.
The head of Capital One maintained that they will retain the Discover brand on which they will rely to “reinforce” their credit card network.
Discover became known in the United States for being the first to develop the idea of ”cashback”, which allows the customer to recover a fraction of what they spend, and offers banks and credit card networks more data on consumer habits. of their clients.
Capital One is making a big bet at a time of unprecedented boom in the credit card industry.
More consumers are switching from cash to card payments as a result of rewards programs and the digitalization of commerce, a transition that was accelerated by the pandemic.
The rise in credit card debt has provided a new boost to issuers.
The possible impact
It is still too early to predict the measures that will come with the purchase of Discover and the subsequent steps of Capital One, but analysts believe that the potential of the union provides greater benefits to customers in the competition against Mastercard, Visa and American Express, in addition to open the doors to greater loans.
The other question is whether card owners will be able to obtain less variable interest rates and with fewer surcharges, factors that now reduce the medium and long-term financial power of consumers. Between high prices and high interest, credit card owners are ultimately trapped in exorbitant payments to lenders. And rather than solving their financial problems, they end up with unpayable debts.
The purchase gives Capital One, a lender with a market value of just over $52 billion, a network that significantly boosts 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 the few competitors of those companies in the US and one of the few card issuers that also has a payment network.
Regulatory authorities
This merger must be validated by US regulatory authorities, but Capital One founder Richard Fairbank revealed his optimism at a press conference. “These are “two companies well positioned to receive this approval.”
Discover is the fourth plastics network in the country, behind Visa, Mastercard and American Express. It is present in more than 200 countries and its cards are accepted in 70 million establishments and sales entities.
The purchase of Discover “adds $218 billion in annual spending and $102 billion in credits to Capital One’s card network,” Fairbank said. “This allows us to increase our profitability.”
This operation “allows us to quickly change scale,” declared Discover president Michael Rhodes.
The purchase leads to many cards operated by Capital One moving to Discover’s network. The bank will maintain its relationship with Visa and Mastercard, with great strength abroad.
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