Capital One Financial has recently announced its plan to acquire Discover Financial Services by early 2025. The acquisition will bring together two of the nation’s biggest lenders and credit card issuers in a $35 billion deal.
The deal merges two of the largest credit card companies that aren’t banks, similar to JPMorgan Chase and Citigroup, as well as American Express. It also brings together two companies whose customers are largely similar: often Americans who are looking for cash back or modest travel rewards.
“This marketplace that’s dominated by the big players is going to shrink a little bit more now,” said Matt Schulz, chief credit card analyst at LendingTree.
The deal also will give Discover’s payment network a major credit card partner that could make the payment network a major competitor once again. Currently, the U.S. credit card industry is dominated by the Visa-Mastercard. AmEx ranks third place, and Discover comes in at an even more distant fourth place.
As for now, it remains unclear whether Capitol One will adopt the Discover payment system or set up a payment network that allows parallel use of Discover and a second payment network like Visa, ABC reported.
“Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” said Richard Fairbank, the chairman and CEO of Capital One, in a statement.
With its purchase of Discover, Capital One expects Americans will continue to increasingly use their credit cards and keep balances on those accounts to collect interest. Capital One has long had a business model looking for customers who will keep a balance on their cards, aiming for customers with lower credit scores than American Express or even Discover.
Discover’s customers are carrying $102 billion in balances on their credit cards, up 13% from a year earlier. Meanwhile, the charge-off rates and 30-day delinquency rates have climbed.
Analysts at Citigroup say the regulatory issues may have prompted the sale.
“We are surprised that DFS would sell, but suppose that its regulatory challenges such as its recent October FDIC consent order and the card product misclassification issue may have opened the door for the board to consider strategic alternatives that it may not have in the past,” wrote analysts Arren Cyganovich and Kaili Wang in a note to clients.
Whether the deal will pass regulatory scrutiny is up in the air. According to ABC News, nearly every bank issues a credit card to its customers, but there are few companies that are credit card companies first and banks second. Both Discover — formally the Sears Card — and Capital One started off as credit card companies that expanded into other financial offerings like checking and savings accounts.
Consumer groups are expected to put heavy pressure on the Biden Administration to ensure the deal is good for consumers and shareholders.
“The deal also poses massive anti-trust concerns, given the vertical integration of Capital One’s credit card lending with Discover’s credit card network,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition.
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