NEW YORK (AP) — Since the pandemic, Americans have become more reliant on credit cards. That's why Capital One is betting more than $30 billion not to break this habit.
Capital One Financial announced Monday that it will acquire Discover Financial Services for $35 billion. The merger could shake up the payments industry, dominated by Visa and Mastercard.
For business customers, that could ultimately mean more benefits and more merchant acceptance of Discover cards, leading to more competition in the payments industry. But most of the benefits will accrue to the businesses themselves, not just the merchants who accept these cards.
Why is trading important?
Some of the largest issuers of credit cards include banks such as JPMorgan Chase and Citigroup. But Capital One and Discover are first and foremost credit card companies. Similar to American Express, but with a different customer base. The company has tens of millions of customers, Americans who don't travel frequently outside the U.S. and who want to get more value from everyday purchases like gas, groceries, and domestic travel. is the target of our products. In other words, people who don't typically carry premium credit cards.
The combined company will be able to lend to customers with more credit cards than JPMorgan and Citigroup combined. The merger will also allow the Discover network to compete on a more equal footing with Mastercard and American Express in a way it has never been able to do in its 40-year history.
“We want customers and sellers to choose you as a company, either for our products or our brand, and this deal gives them ample opportunity to make that case. Sanjay Saklani, payments industry analyst at Keefe, Bruyette & Co., said. forest.
Who uses Capital One and Discover?
Capital One is one of the nation's largest credit card companies and banks. The company typically operates what is known in the credit card industry as a “barbell” business model, offering credit cards to people with poor credit, very good credit, and everyone in between. Published. One group maintains a balance and generates interest income for the company, while high-end customers spend a lot of money on cards and generate fee income from merchants.
Although Discover's customers are small, their loyalty to the company is high. The company consistently wins customer service awards, and its cashback card is considered one of the most profitable in the industry.
However, Discover suffers from the perception that its payment network is less desirable because it is smaller than Visa, Mastercard, and AmEx. Also, Discover is rarely available as a payment option outside of the US.
Capital One executives announced Tuesday that they will begin allowing customers to use the Discover payment network immediately after the deal closes, which could happen by the end of the year. Capital One will also maintain the Discover brand with the card, but the card could be co-branded.
What does this agreement say about credit card spending?
At the heart of the deal is a big bet that Americans will keep increasing their credit card balances.
Amid two years of high inflation, Americans are rapidly increasing their credit card balances. Americans held $1.13 trillion in credit cards in the fourth quarter of 2023, and total household debt increased by $212 billion, an increase of 1.2%, according to the latest data from the New York Fed.
Consumers are also paying higher interest rates on those balances. The average interest rate on bank credit cards is about 21.5%, the highest since the Federal Reserve began tracking the data in 1994.
Capital One's critics have long said the company relies heavily on people who can't afford to carry high-interest balances on their credit cards. Historically, Capital One has had higher default and 30-day delinquency rates than JPMorgan, Citi, Discover and American Express.
What makes Discover so valuable?
In today's market, it's virtually impossible to build a credit or debit card network from scratch. Capital One executives described the effort so far as a “chicken-and-egg” problem, noting that it is difficult to get merchants to sign up to a payment network when there are few customers; The same is true vice versa.
Chicago-based Discover may be small, but its infrastructure makes it poised for growth, especially as more transactions move from cash. The U.S. credit card industry is dominated by the duopoly of Visa and Mastercard, with AmEx a close third and Discover a distant fourth. About $6.8 trillion is under management in Visa's credit and debit network, compared to just $550 billion in Discover's network.
Owning Discover's network will allow Capital One to generate revenue from fees charged on every merchant transaction performed on the network.
Capital One will also become a rare credit card company that controls the cards, payment networks, and banks that issue the cards. He says there is only one other company that has achieved this at scale: American Express.
Will regulators approve this deal?
It is unclear whether the deal will pass regulatory review. Almost all banks issue credit cards to their customers, but few companies are first a credit card company and then a bank. Discover (formerly Sears Card) and Capital One both started as credit card companies and expanded into other financial products such as checking and savings accounts.
Banking regulators have long indicated they want to tighten their oversight of large-scale mergers in the financial services sector. The combined company of Discover and Capital One will have more than $600 billion in assets, making it larger than most large regional banks in the country.
Consumer groups are expected to put strong pressure on the Biden administration to ensure that the deal is good not only for consumers but also for shareholders. Left-wing politicians like Sen. Sherrod Brown, the powerful Democratic chairman of the Senate Banking Committee, are already calling for closer scrutiny of the deal.
“Given the vertical integration of Capital One's credit card lending with Discover's credit card network, this transaction also raises significant antitrust concerns,” said President and Chief Executive Officer of the National Community Reinvestment Coalition. CEO Jesse Van Tol said.
