Currently, Capital One ranks as the third-largest issuer of Mastercard and Visa cards in the US, accounting for approximately 10% of credit card spending.
Capital One Financial Corp. CEO Richard Fairbank announced plans on Feb. 19 to acquire Discover Financial Services in a monumental $35 billion deal. This merger, the largest globally announced this year, would bring together two renowned consumer-finance brands, positioning the combined entity as the largest credit card issuer in the United States by loan volume, surpassing industry giants like American Express, Citigroup, and JPMorgan Chase.
However, almost immediately after the announcement, opposition arose from Democratic senators such as Sherrod Brown and Elizabeth Warren. Brown, chair of the committee on Banking, Housing, and Urban Affairs, expressed concerns about the deal’s size. At the same time, Warren outright opposed it, citing threats to financial stability, reduced competition, and increased costs for consumers.
Despite the initial pushback, Fairbank remains confident in the approval process, stating during a conference call with analysts that Capital One is well-positioned for regulatory approval. Analysts note that while the size of the combined companies is a consideration, the dominance of market leaders like Visa and Mastercard adds complexity to the regulatory assessment.
For Fairbank, this merger represents the realization of a growth strategy conceived decades ago when Capital One was founded in the late 1980s. From its inception, Capital One aimed to cater to consumers overlooked by the traditional credit card industry, steadily expanding its services to include auto loans, savings accounts, and more, serving over 100 million customers.
One asset that Capital One has long coveted is a payment network to rival Visa and Mastercard, and Fairbank views the acquisition of Discover as the “Holy Grail” in achieving this goal. While Discover would still lag behind Visa and Mastercard in size, controlling its network could strengthen Capital One’s relationships with consumers and merchants, potentially driving additional revenue by eliminating intermediary costs.
Currently, Capital One ranks as the third-largest issuer of Mastercard and Visa cards in the US, accounting for approximately 10% of credit card spending. Fairbank anticipates migrating more than 25 million Capital One cardholders to the Discover network over time, representing $175 billion in annual spending. However, the combined entity would still rely on Visa and Mastercard for certain transactions, ensuring a diversified approach to card issuance.
If the deal proceeds, the combined company would boast over $250 billion in credit card loan volume as of Dec. 31, solidifying its position as the leading player in the industry. Yet, while the merger would enhance Capital’s market presence, it would not immediately surpass competitors in purchase volume. Analysts emphasize that the merger’s success hinges on Capital One’s ability to address Discover’s historical perception challenges and capitalize on its expansive network.
Fairbank’s vision for Capital One’s future echoes sentiments shared by co-founder Nigel Morris, who acknowledges that the idea of partnering with merchants and creating a closed-loop payment network traces back three decades. As Capital One moves forward with this historic acquisition, it aims to leverage Discover’s network to broaden its international footprint and reinforce its position as a dominant force in the financial services industry.
Additionally, the merger would allow Capital One to diversify its revenue streams and expand its product offerings, potentially attracting a broader customer base. It could also lead to cost synergies and operational efficiencies, ultimately driving profitability and shareholder value. By leveraging each other’s strengths and resources, Capital One and Discover could create a powerhouse in the financial services sector that is well-equipped to navigate the evolving landscape of digital payments and fintech innovations.
The proposed acquisition of Discover by Capital One represents a significant milestone in the evolution of both companies, with the potential to reshape the landscape of the credit card industry in the United States and beyond.