Capital One-Discover Deal Shakes Up Payments Sector: QuickTake

Capital One Financial Corp., the US lender backed by Warren Buffett, is set to buy Discover Financial Services in a $35 billion deal that would bring together two of the biggest credit card firms and allow them to compete with other Wall Street behemoths. Here’s all you need to know about the acquisition and what it could mean for consumers:

1. Why does Capital One want to buy Discover?

The combination, if approved by regulators, would allow Capital One to surpass rivals JPMorgan Chase & Co. and Citigroup Inc. to become the largest US credit-card issuer. It would also give it a foothold in the world of payments. That’s because on top of being a credit-card business, Discover operates three payment networks of its own: the Discover global network, Diner’s Club and Pulse, a system for processing debit card payments. Historically, Capital One had to rely on companies such as Visa Inc. or Mastercard Inc. for its cards. Acquiring Discover would allow it to cut them out of the picture for some of its cards and reap more revenue.

2. Why do the deal now?

Capital One is pouncing on Discover in a moment of weakness. The company recently lost longtime Chief Executive Officer Roger Hochschild after a series of compliance lapses caused its shares to plunge. Then, in January, the company posted a 62% drop in fourth-quarter profit. Bloomberg Intelligence’s Ben Elliott called the timing of the deal “opportunistic, given Discover’s legal overhang and weak 2024 outlook.”

3. What does the deal mean for the industry?

The tie-up would shake up a US payments landscape that’s long been dominated by Visa and Mastercard. It’s been hard to challenge them as anyone trying to establish a rival network needs to convince merchants to accept their cards. For that, the retailers want to know how many consumers use them. But consumers won’t apply for a credit card if no merchant accepts the payments network it relies on. Capital One aims to move more than 25 million of its cardholders representing $175 billion in annual spending — more than the combined credit card turnover of Bank of America Corp. and Wells Fargo & Co. combined — over to the Discover network. That would give it the firepower it needs to mount an effective challenge to Visa and Mastercard.

Read More: Capital One-Discover Deal Aims to Challenge Visa, Mastercard

4. Will Capital One or Discover customers get a new credit card?

While a big chunk of Capital One cardholders would be moved over to the Discover network, the company is most likely to do that first for debit card customers, and even then it’s unlikely to disrupt their payments experience very much. Capital One would probably wait longer to move more of its credit cardholders over as the Discover network still has low levels of acceptance by merchants overseas.

Capital One founder and Chief Executive Officer Richard Fairbank has promised to keep the Discover brand, but it’s not clear if there will be changes to Discover’s card products. Discover is known for being one of the top providers of so-called cash-back credit cards — where users are handed a portion of cash when they make purchases using the cards — and Fairbank did say he admired how loyal the firm’s customers are. It’s likely he would want to preserve that loyalty however he can.

5. How do Capital One and Discover credit cards differ?

Capital One is known for using technology to successfully market its cards to subprime consumers who struggle to pay off debts and have weak credit ratings. It can be a lucrative business as those customers often end up paying the high interest rates that apply when they don’t pay off their monthly balance. More recently, it’s also chased the premium consumers that long flocked to rivals like American Express Co. or JPMorgan. It’s been building airport lounges for its cardholders and expanding its travel offerings. Last year, it agreed to buy the digital concierge service Velocity Black.

A Capital One credit card.

Photographer: Jeff Chiu/AP Photos

Discover, on the other hand, has long shied away from the flashy sign-on bonuses and lavish perks used by many rivals to attract new consumers. Instead, it’s typically focused on prime customers who carry a balance on their cards — a group known in industry parlance as revolvers.

5. Will regulators approve the sale?

Capital One expects banking regulators to give a green light to the takeover in late 2024 or early 2025, though it will still face close scrutiny, with Joe Biden’s administration getting tougher in upholding competition in the sector. Analysts say the impact of having one fewer player in the market would likely be offset by having a stronger Discover network that’s better able to stand up to Visa and Mastercard. Regulators have long had those two payment giants in their crosshairs due to the influence they wield over how much merchants must pay each year to accept electronic payments.

To contact the reporter on this story:
Aisha S Gani in London at agani10@bloomberg.net

To contact the editors responsible for this story:
Tom Metcalf at tmetcalf7@bloomberg.net

Jenny Surane, Thomas Pfeiffer

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