Capital One’s plan to buy Discover Financial Services for $35 billion could potentially shake up a payments industry dominated by Visa and Mastercard—if it passes regulatory scrutiny. With the combined company having a larger card loan volume than either JPMorgan Chase or Citigroup, we could be a long way from approval for this acquisition.
“Assuming regulatory approval, the combination of Capital One and Discover would create a global payments powerhouse,” said Brian Riley, Director of Credit & Co-Head of Payments at Javelin Strategy & Research. “We would have two top card issuers leaping to the top of the U.S. credit market, the infrastructure to accept payments in 200 countries and territories, modernized banking, and a specialized business payments network proof-tested in more than 50 countries.”
The deal would marry two of the country’s largest credit card companies that aren’t banks first. It also brings together two companies whose products center around features like cash back or modest travel rewards, as opposed to the premium cards offered by American Express.
Capital One’s business model focuses on customers who keep a balance on their cards. Its customers tend to have lower credit scores than American Express or even Discover. Today, the firm issues no less than 30 different card plans, ranging from the Capital One Platinum Mastercard—which targets the credit impaired—to the Capital One Venture Rewards Card, aimed at top FICO scores.
Discover sits in fourth place in the U.S. credit card industry, which is dominated by Visa and Mastercard, with American Express being the third-largest issuer. But while Capital One conducts its transactions over the Visa and Mastercard payment networks, Discover operates its own network. Capital One’s announcement of the deal called this “a key foundation in Capital One’s quest to build a global payments company.”
Capital One predicts the deal will close in late 2024 or early 2025, but regulatory approval remains a key issue. “With the OCC’s recent effort to slow down the Bank Merger Act from fast track approvals, the merger could linger,” Riley said.
A Future Full of Mergers
When that approval happens, we are likely to see a test of just how much vertical integration will be allowed as the M&A pipeline develops over the next few years. “Much of the coming consolidation strategy will be shaped by the tenor of regulators,” noted Christopher Miller, Lead Analyst for Emerging Payments at Javelin Strategy & Research. “The combination of a large issuer with another large issuer and combination debit/credit network raises many possibilities. Could the large regionals embark on efforts at vertical as well as horizontal growth?
“To the extent that banks are able to extend their franchises vertically, there might be substantial impacts on payments flow in the future,” Miller said. “If the digital advertising business finds new channels, it’s not even that much of a stretch to imagine a devalued tech giant being acquired by an ascendant financial institution looking to capture its remaining distribution potential—a significant reversal of years of the ‘Will Apple be a bank?’ thinking that has characterized the relationship between tech and financial institutions.“
