16th Apr 2024

Capital One-Discover acquisition: Unpicking the consumer and competitive benefits

Last month’s announcement from Capital One that it had reached an agreement to acquire US card network and issuer Discover has sparked considerable interest from the media, industry and consumers alike. As a deal that brings together two giants of the US banking and payments landscape, the attention paid to the proposed acquisition is no surprise. Not least, the hefty $35.3bn price tag will make it the fifth largest bank merger in US history! However, this deal is far more than just a large financial transaction; it’s a smart strategic move from Capital One that promises to redefine the credit card market.


Merger motivations

Scale will undoubtedly be one motivation for the merger. Combining the two entities will create a pro forma $250 billion credit card loan book, the largest in the US, surpassing J.P. Morgan’s $211 billion. However, scale is not just about the numbers; it’s also about the ability to serve customers more effectively, increase investment, and, naturally, find efficiencies.

There is also likely to be a degree of regulatory arbitrage at play. Discover’s carve-out from the Durbin amendment means that the combined entity will benefit from a higher rate of debit card interchange revenue.

Yet, arguably, the most exciting aspect of the deal is that it will create a large closed-loop network, operating as both issuer and network at scale. Discover is currently the fourth-largest card network, but with Capital One’s extra firepower, the combined entity will be a genuine competitor to the three major card associations: AMEX, Visa, and Mastercard.


Increasing competition

There has even been speculation that the additional competition created by the merger may prevent Congress from passing the Credit Card Competition Act. The Act seeks to boost competition between the major card networks by allowing merchants to choose their preferred network for processing card transactions rather than being locked into the network shown on the card. However, critics argue it will reduce interchange income and could lead to the end of credit card reward programmes.

In contrast, the Capital One—Discover deal will not only increase competition but is likely to spark more creative credit card offers and better customer benefits, challenging the status quo. Discover, and Capital One’s customers will benefit from an improved and more varied product portfolio. For instance, we may see improved Discover card rewards by introducing Capital One’s Venture miles for Discover cardholders. Conversely, Capital One customers may have the option of more “Discover-like” products.

There is also significant potential for new product development. Unlike open-loop networks, closed loops allow merchants and consumers to access more granular data and unique, value-added services, enhancing the overall transaction experience. These benefits will not just be reserved for Capital One and Discover customers. The increased competition is likely to drive the development of more innovative products from other credit card companies, benefitting consumers as a whole.


The road ahead

For now, the road ahead will be long. A deal of this magnitude is naturally complex and will be scrutinised closely by regulators. Nonetheless, there are many arguments to suggest that it aligns with Congress’s broader goal of fostering competition between the card networks and will deliver industry-wide consumer benefits.