When opponents of the $35 billion merger between Capital one and Discover show up to a public hearing on the proposed deal Friday, they’re likely to sound off about the possible harm to credit card holders with low credit scores and the potential for higher interchange fees.

Consumers and their advocates will have the chance to comment on McLean, Virginia-based Capital One’s move to buy the Riverwood, Illinois-based Discover in a virtual forum Friday. The proposed transaction, which was announced in February, would create the nation’s largest credit card company if it’s approved by regulators.

The Federal Reserve Board and the Office of the Comptroller of the Currency, which are scrutinizing Capital One’s planned acquisition of Discover, will accept comments from advocates and the general public beginning at 9 a.m. EST.

Written comments already submitted provide a glimpse of concerns that may be aired.

“Mergers create larger banks that can exercise market power to impose higher costs on consumers, reduce the volume or quality of banking services, or become so large that they pose a risk to the entire financial system and real economy,”  the advocacy group Americans for Financial Reform wrote in a regulatory filing.

In written comments and in interviews, opponents of the deal outlined what they planned to say on Friday. They presented two major critiques: the merger would give Capital One a significant share of the non-prime credit card market — non-prime denotes a credit score between 601 and 660 — along with the leverage to raise the interchange fees on credit card transactions.

Non-prime credit card holders

If approved, the deal “would create a company with more than 30% of the market for consumers with non-prime credit card scores,” Patrick Woodall, AFR’s managing director of policy said in an interview with Payments Dive, citing his organization’s analysis of regulatory filings and publicly available data. “That would give them tremendous market power.”

Americans with non-prime credit scores have difficulty qualifying for credit cards, leaving them with fewer options, Woodall said. If Capital One swallows Discover, that will exacerbate the situation. Furthermore,Capital One would gain the power to raise their interest rates with abandon, he added. 

“By acquiring Discover, Capital One will have more opportunities to gouge their non-prime credit card customers,” Kevin Hill, senior policy advisor for the National Community Reinvestment Coalition, told Payments Dive in an interview.

Non-prime consumers who have Capital One cards could no longer switch to Discover, or vice versa, he said.

The Durbin amendment

The merger would give Capital One the capacity to raise prices in other ways, Hill and Woodall said.

The Durbin Amendment, part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, limits the interchange fees that debit card issuers with more than $10 billion in assets can charge, but includes an exemption for so-called “three-party networks” in which the card issuer also acts as the card network.

“If Capital One acquires Discover, they'll be eligible for the exemption to the Durbin Amendment,” Hill said. “They would not have any caps on debit interchange rates, and they can really use that to their advantage because small businesses would be locked in.”

“It’s very hard for small businesses to say ‘we're not going to use this new network,’ when you consider how many cards would be on the Capital One network,” he added.

Such a move could raise prices for consumers, if merchants pass on the extra costs to customers, Hill said.

What is Capital One offering?

Capital One and Discover did not respond to requests for comment on the non-prime credit card market or its plan for interchange fees. But in a move meant to appease regulators, Capital One on Wednesday announced a five-year, $265 billion community benefit plan. The plan includes $200 billion intended for loans to low and middle-income consumers and $44 billion for development work.

Woodall and Hill said the plan does not change their minds about the merger.

A June 18 letter to regulators signed by dozens of advocacy groups including the NCRC said the deal is simply too flawed for approval.

“We believe that the myriad of issues associated with this merger are too severe to effectively address through conditional approvals or the development of a community benefits plan given Capital One’s business practices and history,” the letter reads.