Why Capital One’s $35 Billion Purchase of Discover Is A Big Win for Consumers

Capital One has come to an agreement to purchase Discover for $35.3 billion, about a 25% premium over last week’s value for the payments network and card issuer. The deal would create the largest card issuer, with approximately 19% of the total market.

Discover is smaller by charge volume than Visa, Mastercard, and American Express and has been an industry laggard. Over 80% of credit cards in the U.S. are either Visa or Mastercard., while about 8% are Discover.

Launched in 1985 by Sears, as part of a plan to create one-stop financial services in Sears stores, it later was owned by Morgan Stanley before being spun off into a public company 17 years ago. While so-called consumer activists are already pushing back against the deal, it seems strongly pro-competitive.

My general take here is that there’s no immediate consequence for consumers or travel rewards, over time this is good for lending and good for competition in a way that bolsters rewards rather than putting them at risk. It’s a far better alternative to the current legislative push to cap interchange rates.

  1. This deal will take time for benefits to materialize. Don’t expect to see Capital One move most of its cards and payments to process over its own network for years, as the deal first has to close and there are existing contracts in place – plus shifts like these generally happen slowly. There’s a lot of technology on regulatory hurdles along the way. We could see a Capital One Mastercard process both over the Mastercard and over the Capital One (‘Discover’) network as well, not just over a single network.

  2. This will make Capital One a better, more efficient lender. Discover, like American Express, is a three party network. Capital One can process payments for the cards that it issuers. That gives it not just a potential cost advantage, but also substantially more data – about its customers and their purchases. That makes it a better-informed lender, and could reduce bad debt expense as well as allow it to lend more wisely. And it will keep more of its swipe fees as it moves over time to process its own payments.

  3. This is bad for Mastercard. While Venture and Venture X are Visa products (no doubt the rich rewards from those products are funded in part by Visa cutting a favorable deal here) Capital One is predominantly a Mastercard issuer.

  4. It doesn’t pose an anti-trust problem. This doesn’t create any concentration in payments networks, and positions the smallest one as a stronger competitor. It increases Capital One’s scale in credit cards, but that remains highly competitive. Surely it’s can’t be illegal to challenge Chase? Capital One would still have less than a 20% share of the market (with Chase at 16%).

  5. There’s no longer a justification for Congressional action on ‘credit card competition’. “Durbin-Marshall” is designed to elevate another payment network to compete with Visa and Mastercard. This does that by bolstering discover. And it does that without being a huge transfer from consumers to merchants or risking the payments processing system or availability of consumer lending.

It would be bizarre for the Biden administration to go after this deal on anti-trust grounds at the same time that Congress is pushing for stronger competition across payment networks, since this bolsters precisely that competition. Durbin-Marshall seeks to require cards to be used either on the American Express or Discover networks as a challenge to Visa and Mastercard. This deal massively bolsters Discover, creating more competition in payments processing.

Ultimately by promoting competition without legislative action (and legislative destruction), this is great for consumers and rewards. And Capital One has been an exclusive Taylor Swift partner for the past five years. No one wants to go against Taylor in an election year.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Don’t worry demented Joe will oppose it. There hasn’t been a merger recently his administration hasn’t fault. Most un business friendly President ever. We have to get that man and his disciples out of office

  2. If this doesn’t pose an anti-trust problem…Why could JetBlue not challenge AA, DL, WN, UA? Same kind of market with 4 MAJOR players and a few small to mid size. As long as Biden is in office…business will not be easy.

  3. Unless there’s a pro-Union angle to this merger, I can’t see Uncle Joe signing off on it.

  4. Let the insipid irrelevant comments begin… oops, too late.

    @Gary – Nice Taylor Swift plug.

  5. Capital One favors the low end of the market which you have discussed is often more hurt than helped by rewards cards. This deal cuts the cost of processing those cards and COULD enhance rewards at the lower end of the card ecosystem – if COF decides to do that.

    there SHOULD BE few governmental reasons to oppose this deal.

  6. @ Retired Gambler — Oh yeah, we will be much better off with a pro-Putin, pro-WW III, 91-felon, financially desperate, bankrupt, soulless president who will allow Putin to do whatever the hell he wants, including allowing the meltdown of Europe’s biggest nuclear plant and decades-long destruction of multiple Eastern European countries. Sounds like a great plan for making Putin Great Again and the rest of the world screwed.

  7. It seems a little naive to conclude that merging two enormous financial service powers in a market that is already overconcentrated will be good for consumers. This is exactly the sort of rhetoric we hear around airline mergers, which are always anti-consumer. This deal is mainly good for Discover shareholders, whose company has been distressed, and Capital One managers, who will get to exert more pricing power.

  8. @Gene – people like you are a major part of the problem. Hating Trump is fine and while 1A, allows you to say uneducated and uninformed things; don’t be the person that does it and then complains about politics.

    Russia has invaded Ukraine twice in the last 20 years, neither time on Trump’s watch. No administration was harder on Nord Stream 2 than Trump’s, to the point he was openly mocked for it. If anyone is easy on Putin, start with the Clintons, Obamas, and Bidens- they will play tough and then backroom deal with him for their benefit. I bet you believe the money “for” Ukraine is for Ukraine…..its theft, the elite in United States and Ukraine are stealing from US taxpayers and using the young men of Ukraine and Russia as their meal ticket.

  9. @Tom: You forgot the bankers, lawyers, and consultants who will make millions off facilitating the merger.

  10. @greg – I still have my Diner’s Club card. The number of transfer partners has declined a lot in the last decade though.

  11. I agree with Retired Gambler. President Paw Paw has managed to screw up everything from the kitchen to the laundry, the bathroom, the garage, international diplomacy, the military, our connections to Israel, NATO and other allies…why not screw up our finances? Wait..he’s done that too and the myrmidons continue to vote for him. Now days, one should vote for the lesser of the evils!

  12. I admit I do not know all the information so I honestly cannot say that I would be for this deal or against it. I have a tendency to not like mergers. I do not like large corporate entities. I think it reduces choices and market competition but this may be good for everyone.

  13. Jesus y’all are such a bunch of whiners. You read the word “Biden” in a sentence and suddenly have a mental breakdown rant about how much the guy sucks. Yeah we get it. Y’all bought the $5,000 gold sneakers and are wearing the red hat so no need to walk around saying it all the time you bunch of whining snowflakes.

  14. I’m not sure how strong Discover’s fraud protection is, especially compared to Visa. Most of them fraud protection is done by the processor, not the credit card issued. Capital One would be getting that capability, but initially would be mostly using Visa and MasterCard for everything but the Discover portfolio it bought. My understanding is that much of the transaction processing world has lots of Cobol at it’s core. Capital One, at least internally, brands itself as a technology company that owns a bank. I suspect Discover technology will be found to not have had huge investments, and Capital One may need to focus on integration activities and technology stacks before they start a lot of card conversions. As a 1980s company, Cobol was already on the way out, but whatever they started with at the beginning is still likely to be pretty old tech.

  15. Can’t see Capital One being as generous as Discover as far as having 5x categories and Bank bonuses.

  16. Biden will go after this deal on antitrust grounds. The left is steamed at him on immigration and Gaza; this gives him an opportunity to play to their gallery. After November there will either be a different President, or Biden’s handlers will continue to oppose it out of anti-business convictions.

  17. I don’t see a legitimate antitrust case either, but I also don’t see this as good for people in the points game. Discover is a bit of its own animal, and while the benefits are not great, they’re different, and sometimes valuable. At least they’re not “essential” to anyone playing the game.

  18. I expect Bidens DoJ to pull a certain dirty trick, specifically delaying the court case by as long as possible to kill it.

    While I do feel for those Discover customers who will have to deal with crappy Capital One customer service, this deal with bring proper competition to the others on a *global* scale.

  19. @ James — Yes, the comment doesnt “go” here, but the nut job is not I. The general point is that the current President may not be ideal, but the prior one returning to office would be FAR, FAR worse than people seem to realize. The Russian situation is the most serious issue our country faces and clearly the prior guy would be the worst choice imaginable.

  20. While I agree with some of Garry’s comments, large mergers–by definition–rarely favor anyone but the purchasing corporation. Think back to all the times we’ve heard “but they’ll save money and be more efficient” and it never happens.

    Regardless of whether this merger is approved or not, it should start putting serious pressure on MC & Visa to reduce their fees. Remember that Chase was seriously considering creating a new payment network until they got a sweetheart deal with Visa.

  21. Not sure why the Biden Admin will do anything to stop this acquisition. If anything, I expect it will eventually get green-lighted by the Man from Delaware if he is still in power 10-11 months from now.

    Notably, Discover card holders tend to have significantly higher credit scores than non-Discover cardholders. Part of that is almost certainly related to their more aged demographic and how the boomers have accumulated over the years.

  22. The issue I see is that Capital One’s customer service is -5 on a scale of 1 to 10. Discover is about a +7. I fear Capital One will bring Discover down to their level.

  23. I doubt that COBOL will be booted out if it is being used. If it was being used before year 2k and was up to the task after that year, there is no reason to get rid of it now. The coding is as solid as any coding in any computer language. Better to get rid of the people who want to get rid of it.

  24. @ Sean

    Other way around. The only beneficiaries are the shareholders (and management) of the purchased corporation. The buyer is almost always overpaying and the efficiencies as you mentioned never materialize.

  25. @Gene
    You’re delusional. No new wars during Trump. Under Biden the world is on fire. Putin did not annex Crimea or attack Ukraine during Trump, but was emboldened to be aggressive during Obama/Biden. Did you not get the memo that Hilldawg created and pushed the false narrative of Russia collusion? Yet you delusional leftists still pretend like it’s true. “Allow Putin to do whatever”? Nope, he’s encouraging NATO to meet their obligations so that there is a deterrent, unlike under feckless Joe. Trump a felon? Nope, just leftists using the courts to go after political opponents. Weird how nobody accused him of anything until he got into politics. You leftists should be ashamed of your nonstop lies and destruction of our country, that is if you weren’t shameless.

    Biden should let this deal go through, just like he should strongly oppose hamas terrorism, he should enforce our borders and immigration laws, etc etc etc. So you can count on sleepy Joe opposing the deal.

  26. @Gene

    Last time I checked, that man was the only anti war President in the last 100 years who wants to keep out of foreign wars and send the military to protect actual American borders and not defend globalists 5000 miles away. His only crime is going against the uniparty establishment of warmongers and elitist bureaucrats.

  27. @ David Arnett – You make it sound like he was a good president in some way. He was the worst president ever, and a disgusting human being with no redeeming qualities. What has he done since November 2020 – began spreading completely false, unsupported lies that he lost an election that he lost fair and square (why is his loss so surprising to some people, when he is probably the most hated person since Adolf Hitler?), blatantly attempted to overthrow the government of the US, stole mountains of boxes of top-secret documents from the US government, stored them in his toilet at Maro Lago, refused to turn them over to the government when asked a gillion times, showed them to anyone who would kiss his ass and/or give him money, had his employees intentionally flood his server room to hide the evidence, told Putin that he could do whatever the hell he wanted in NATO, told our NATO allies that we would not keep our obligations under NATO, asked the Supreme Court for the power to assassinate his political opponents, and on and on and on and on. Why would anyone support this monster?

  28. David Arnett,

    T-rump is a risk to peace, security and liberal democracy everywhere. That Ye Lord wants to surrender Ukraine to Russia and seems to think it’s fine to ditch alliances and allies on a dime is just part of how T-rump is a security risk for us and the world. In an era where the PRC is rapidly narrowing the global power projection game with us, T-rump is the last kind of person needed for the kind of global peace and stability which made and keeps the US relatively prosperous and also makes many a country reluctant to do a full frontal assault on borders and regional stability.

  29. I agree, I think its great for competition and consumers. I was surprised to see so many articles claiming that this might be anti-consumer.

  30. Discover seemed to be en route to dying like Sears. Discover being acquired by CapOne may be just what is required to give Visa, MasterCard and Amex a bit of a run.

  31. lol. Only a simp could see one less competitor in the market, leading to further oligopolistic situations as being pro competitive.

  32. I concur with Allan Franklin and Dave’s comments. I truly hope we don’t lose the 5% categories.

  33. @747always – respectfully (more respectful than your comment) I do not think you know what an oligopoly is. How many card issuers do you think there are in this market? And don’t you agree that this would make Discover a more competitive payment *network* against Visa/MC/Amex?

  34. I like how the comment moderators allow to leave some of the comments here. It truly showed your biases. Well done!

  35. Gene brings out his crtsyal ball again. What we had was FAR, FAR better. Low interest rates, secure border, low or no inflation, secure border,, NO NEW WARS we have 2 now thanks to a weak weak president, Trump had Putin under control, Putin invaded during OBAMA term and BIDEN term…practically thd minute Trump left office. Remember Obama’s words to Medvedev “I will have more flexibility after the election”. Tell me who is in Putin’s pocket, again? The guys who willingly destroy America, not the one who wishes to protect it, i hope Michael can read and understand this, too. Both low end card companies with little ovdlap.

  36. My concern, when i first read about the merger, was that some cards would get cancelled. Discover allows 2 cards, Cap 1 allows 2 and store specific branded cards. Will the merged company eventually limit those? Will it rebrand accounts that started years, even decades ago so as to negatively impact credit scores or lower limits on cards already issued? Details matter

  37. The Discover Card was one of the largest sponsors of the most racist program on TV the Reidout. Will the support if anti-American and white racism stop with this purchase?

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