Capital One’s $35B bid to buy Discover would create America’s largest credit-card lender
Charge it to the card… Capital One agreed to scoop up Discover Financial Services in a $35B all-stock deal — the biggest proposed merger so far this year. Capital One is one of the US’s largest credit-card issuers with 100M+ customers in the US, Canada, and the UK. But Discover has something Capital One doesn’t: a credit-card network that competes with Visa, Mastercard, and American Express. Discover’s network is used by 305M+ cardholders. By merging, the two could better compete in the payment-processing market, which Visa and Mastercard dominate.
Cash back: The deal would create the largest US credit-card company by loan volume and could save Capital One $1.5B/year (#synergy).
Networking: If the merger’s approved, Capital One expects to add at least $175B in payments and 25M+ cardholders to Discover’s payment network by 2027.
Ballooning balances… Capital One has long catered to customers who carry higher balances and have lower credit scores (think: <660) compared to rival card issuers like Amex. That’s because higher-risk borrowers are typically charged higher interest rates, which can translate to more $$ for lenders. Meanwhile, nearly half of Americans are leaning on debt to get by, racking up a record $1.1T in credit-card balances. Lofty rates aren't helping: the average annual percentage yield (APY) on a US credit card is ~21.5% — the highest since the Fed began tracking it in 1994.
Tough times can be good timing… By uniting, Capital One and Discover would be better poised to capitalize at a time when consumer debt and interest dues are ballooning. But skeptics are concerned over the duo’s potential to raise rates on cash-strapped borrowers. Advocates say the merger could finally introduce real competition for Visa and Mastercard, and possibly reduce swipe fees. But only half of investors expect that the deal will go through.