In February of 2024, Capital One Financial Corporation inserted a heavy dose of turmoil into the financial sector when it announced its ambitious plan to acquire Discover Financial Services, in a jaw-dropping $35.5 billion all-stock transaction.
If this landmark merger is approved by regulators, it could have dramatic effects on the payment industry, as well as the millions of customers they serve.
With an upcoming shareholder vote later this month, the transaction, if successful, could be the biggest thing to hit this sector since Visa and Mastercard joined forces.
The impact for Capital One.
Capital One, until now only a card issuer, is poised to expand. By incorporating Discover’s payment network into its portfolio, Capital One will see benefits: the potential for increased influence in the payments arena, decreased reliance on third-party vendors, and greater efficiency.
Capital One’s historic position as a card issuer has been strong, offering solutions of various types to appeal to an array of different customer needs and credit statuses.
While this enabled the company to rise to an elevated stature in the industry, a key component remained lacking: the ability to process payments in-house via its own network provider.
The proposed merger allows these two powerhouses to pool their resources and represents a pivotal expansion opportunity for Capital One. Should it be approved, Capital One would quickly become a major rival to the formerly uber-dominant Mastercard and Visa.
No doubt, the marriage of these two giants would rapidly result in a more streamlined payment experience, enhanced efficiency, and a marked reduction in the need for dealing with third-party vendors.
Consequently, the company would gain appeal with a wider segment of customers and have the ability to capitalize on a wider spectrum of opportunities for competition and innovation.
Benefiting from a card industry loophole.
Thanks to a sort of escape clause in credit card law, Discover Card customers can receive a cash-back bonus on purchases. This has not been the case with Visa and Mastercard.
This merger could extend that benefit to Capital One clients as well, making these cards more attractive to customers and further boosting Capital One’s profits.
If Capital One acquires Discover, they could offer credit and debit cards through the Discover network, giving the opportunity to finally enjoy the added customer incentives that were denied to them in the past as an open-network company.
Furthermore, the merger amounts to a rare example of vertical integration in the payments industry. As a direct result of this joint venture, Capital One would be able to forge direct connections with the merchants accepting credit card payments in their ecommerce and brick-and-mortar businesses.
Perhaps best of all from an economic standpoint, Capital One would have access to a new influx of fees that were once reserved only for Mastercard and Visa.
A giant leap toward industry dominance.
This merger could catapult the newly merged Capital One-Discover combination to industry supremacy. This would boost the number of cardholders and cause the company to zoom past the current sector standard-bearer.
According to information from the U.S. Consumer Financial Protection Bureau from 2021, 48% of credit cards in circulation were from Visa, with Mastercard accounting for about 36%. Discover and American Express jointly made up the remaining 16% of circulating cards.
However, according to Global Data, a Discover-Capital One merger would lead to a combined 191 million credit cards, surpassing the current industry leader JPMorgan Chase, and positioning the company’s superiority in the entire sector.
Effects of the proposed merger for consumers.
Customers could soon see the ramifications of a successful merger. These will most likely include new cards, added rewards and incentives, and more fees.
As soon as (and if) the deal passes its final regulatory hurdle, Capital One plans to move all of its debit cards and some of its credit card offerings onto the Discover network. Customers should expect to receive an updated card in the mail and may also find that new terms apply.
U.S. customers switching to a new Capital One card on the Discover payment network would be seamless since the vast majority of domestic businesses accept payments via all three providers, i.e., Discover, Mastercard, and Visa.
However, the process might not be as easy in other countries where the Visa and Mastercard footprint is larger.
One area in which consumers may see a benefit is in terms of the rewards they can earn. Once Capital One has access to its own payment network, it could funnel the money it no longer devotes to paying third-party providers to instead furnish financial incentives to customers.
Sellers could also benefit when the Discover payment network strengthens as it could lead American Express, Visa, and Mastercard to lower the fees they charge to accept payments. This could benefit both customers and merchant service providers.
As soon as consumers begin to sign up for the potential new Capital One-Discover cards, they will most likely be able to earn perks such as cashback and travel points. What the uninitiated may not realize, however, is that these incentives come at a cost.
This usually takes the form of higher APRs, and/or annual fees. Therefore, bargain-seeking consumers should be vigilant, reading all of the fine print and terms before starting to use the card.
Taken separately, both Discover and Capital One are powerful presences in the financial marketplace. Should the proposed acquisition of Discover into Capital One be approved, the juggernaut that results could truly be a game-changer in the industry that revolutionizes the payment experience for merchant service providers, customers, and industry competitors.
