Evaluation: Capital One’s $35 Billion Discovery Deal Relies on Championing Consumers

By Maggie Last updated Feb 21, 2024

What’s in your wallet? Capital One is making a big move, betting $35 billion that more people will soon have credit cards.

In a major announcement on Monday, the bank announced plans to acquire Discover Financial Services (DFS). The total stock is worth $35.3 billion. Subject to shareholder approval, the acquisition of Capital One (COF) will create the largest credit card company by loans in the United States.

So what does this mean for consumers like you?

Not much change is expected in the short term. The deal is not expected to close until late 2024 or early 2025; This means Discover and Capital One customers shouldn’t expect sudden changes.

Additionally, competition regulators may extend this period. The Biden administration has been a staunch supporter of corporate governance and has demonstrated a willingness to combat mergers in industries ranging from technology companies to airlines.

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But looking ahead will have important consequences:

Expansion of Discover card acceptance:

According to Capital One founder and CEO Richard Fairban One, the real change will happen in the first few years. Upon completion of the deal, all First Capital debit cards will switch from Mastercard to the Discover network, CEO Richard Fairbank said during an investor call Tuesday morning.

While the Discover Card is accepted by 99% of US merchants that allow credit card transactions, Fairbank expresses uncertainty about the acceptance of this card. Although Discover’s global adoption is lower than Visa and Mastercard, Capital One aims to strengthen the Discover network while maintaining relationships with other networks.

The ultimate goal is to increase Discover’s merchant acceptance, possibly by adjusting transaction fees to compete with Visa and Mastercard’s lower fees. This move benefits consumers through wider use of credit cards and improved rewards.

Strong Market:

Discover’s market cap is approximately $28 billion, but it is still smaller than the leading credit card network in the United States (Visa, MasterCard, and American Express). Unlike Visa and Mastercard, Discover is not just a credit card, it’s a product.

Capitalizing Discover An umbrella could protect against the bankruptcy of JPMorgan Chase, Bank of America and Citigroup.

Currently relevant to customers:

Currently, approximately 42% of Capital One’s credit cards operate on the Visa network and 58% operate on the Mastercard network. If Capital One switches all of its credit cards to Discover, Mastercard could see a big drop in U.S. credit card volume, while Visa’s impact would be minimal.

This change could result in increased costs for consumers, especially interest on outstanding debt. Capital One has a history of serving customers with credit scores in the subprime range, who often face higher interest rates because they’re considered risky.

Intensifying competition and regulatory scrutiny:

Democratic Senators. Elizabeth Warren voiced concerns about the move, calling it “dangerous” and warning of the harm it could do to workers. She called for administrative intervention to block the deal.

From a policy perspective, increased competition may be related to laws regarding transaction fees paid by Visa and Mastercard. Increased competition may delay or hinder regulatory actions to reduce these costs, which may benefit issuers in the credit card industry.

As the acquisition progresses, its impact on consumers and the broader financial environment will be closely monitored by regulators and industry watchers.