The Alaska-Hawaiian is something I didn’t see coming. But you know what caught me even more off-guard? The fact that Capital One wants to acquire Discover. As strange as it sounds, the pairing does make a bit of sense, though they have major regulatory hurdles to overcome.
In the U.S., the credit card business is dominated by two major networks – Visa and Mastercard. Of course, there’s also American Express and Discover, but the comparison isn’t even close. According to Capital One’s investor presentation, Visa’s network handled $6.8 trillion in transactions (debit and credit) last year, followed by Mastercard at $2.8 trillion, Amex at $1.4 trillion, and Discover at $550 billion. This matters, as scale often determines how widely accepted your cards are and, thus, how much revenue you can generate on both processing fees and interest.
So growth is desirable. But in this case, it’s the non-network company that’s pushing the growth as Capital One wants to acquire Discover – not the other way around.
Capital One Wants to Acquire Discover
Aside from network transaction volume, let’s look at a couple of other statistics. On the issuer side – the bank that actually issues the cards and funds the balances – JP Morgan Chase is the top dog at nearly $1.2 trillion in credit card transactions in 2023 and $211 billion in outstanding balances. American Express actually follows Chase closely behind in volumes at $1.13 trillion, while Citi claims the second spot for balances at $165 billion. Things get more convoluted as we move down the list, as Amex comes in third for balances at $150 billion, while Capital One takes third for transaction volumes at $606 billion, followed closely behind by Citi at $592 billion.
Why am I covering all of this? Because Capital One wants to acquire Discover to become the largest credit card issuer in the nation. The combined company would have had $250 billion in outstanding balances last year, along with $824 billion in credit card transaction volume. That’s a big deal given that Discover is both a network and issuer – like Amex – meaning they get to keep all the fees they collect for transaction processing (like interchange) and account services (interest, late fees, etc.).
That’s probably why Capital One is also willing to pay a premium for Discover. Its proposed $35 billion acquisition price equates to roughly $140 per share, while Discover’s pre-announcement share price was just over $110.
What Does This Mean for Cardholders
Though Capital One wants to acquire Discover, things aren’t going to move quickly. Currently, executives estimate that the merger will close sometime in late 2024 or in 2025 at the earliest. That said, once the merger does close, things will begin to change. No, your Capital One Venture X probably isn’t going to see significant adjustments to its benefits, but those offered to cardholders by Visa or Mastercard will go away, as Capital One does plan on transitioning its entire portfolio over to the Discover network.
In fact, Capital One executives plan on moving 25 million cardholders, representing $175 million in annual transaction volume, over to the Discover network by 2027. Put in another way, that’s nearly 30% of their current portfolio based on transaction volume – I can’t find the number of existing cardholders. So if the Venture X is part of that group, you can kiss your Visa Infinite benefits goodbye in 2027. That is if the merger goes through.
While it’s hard to tell what benefits are truly from your issuer versus your network brand, here are several benefits that Visa lists on its Infinite page:
- Status/discounts with Avis, Hertz, National, and Audi On Demand
- $100 Global Entry statement credit
- Visa Infinite Luxury Hotel Collection
- Visa Infinite Concierge Services
If the merger does go through, and their current schedule expectation hold, expect to see the first round of conversions happen in Q2 2025.
Regulatory Hurdles Abound
After the bank failures and consolidations last year, I’m sure the Feds are reluctant to approve any unnecessary combinations going forward. As the New York Times notes, the Biden Administration’s Department of Justice is very averse to consolidations that are perceived to have anti-competitive and anti-consumer effects.
I think on the competitive side of things, Capital One-Discover should be ok. Even combined, they will be far from threatening the top two based on transaction volumes, both from an issuer perspective and a network one. In fact, this aspect of it can be seen as a good thing. Lawmakers are always complaining about the Visa/Mastercard duopoly, and this merger will create a stronger competitor to stand up to Visa/Mastercard. In fact, the combined company will be larger than Amex by every measure. However, when we look at consumer impacts, things get far more questionable.
Part of the reason Capital One wants to acquire Discover is that it’ll propel them to the largest issuer spot based on outstanding balances. At a combined $250 billion in balances as of December 31, 2023, they’ll far surpass Chase’s $211 billion. Moreover, Capital One is the largest holder of subprime accounts and balances and has among the highest rates in the nation, while Discover has the highest rate of first-time borrowers. These are very real concerns, as their increased share of outstanding balances can give them leverage to further increase rates, especially on those already paying the highest rates – the subprime and first-time borrowers.
Capital One Wants to Acquire Discover, Final Thoughts
Honestly, I don’t have much of an opinion on the news that Capital One wants to acquire Discover. While both offer compelling products, I just don’t have the transaction volume to spread my spending across more cards. At the moment, I’m heavily focused on the Chase Ultimate Rewards ecosystem and, to a lesser extent, Alaska Miles. However, for those of you who have cards from either brand, I wouldn’t expect core benefits to change. That said, as I mentioned before, you’ll want to be mindful of network-provided benefits, which will go away when your card converts from Visa/Mastercard to Discover.
As to whether or not I think this merger will go through, it’s hard to say. It really depends on how strongly the government wants to attack the Visa/Mastercard duopoly versus how concerned they are about potential harm to subprime and first-time borrowers. It’s really hard to say. But if it were up to me? I’d approve the deal. After all, you don’t only have to borrow from banks. I’m sure local credit unions can accommodate the individuals regulators are concerned will be harmed.