Capital One Financial Corp., the U.S. lender backed by Warren Buffett, is set to buy Discover Financial Services in a $35 billion deal that will bring together two of the biggest credit card firms and allow them to compete with other Wall Street behemoths.
Here’s all you need to know about Capital One’s acquisition and what it could mean for consumers:
The deal brings together two storied consumer-finance brands, a combination that will surpass rivals JPMorgan Chase & Co. and Citigroup Inc. by U.S. credit-card loan volume. It will also give Capital One a foothold in the world of payment networks.
Capital One’s Chief Executive Officer Richard Fairbank, said the acquisition is a “singular opportunity” to bring together two companies that can compete with the largest payment networks.
The takeover also marks an opportunity for Discover. In January, the company posted a 62% drop in fourth-quarter profit as it grappled with the fallout from compliance and risk-management lapses that led to the resignation of its CEO last year.
Bloomberg Intelligence’s Ben Elliott called the timing of the deal “opportunistic, given Discover’s legal overhang and weak 2024 outlook.”
The tie-up is set to shake up the credit card landscape in the U.S. and the acquisition marks one of the industry’s biggest deals since the 2008 financial crisis.
Discover is the smallest of the four U.S.-based payment networks, which also include Visa Inc., American Express Co. and Mastercard Inc. Capital One has historically had to partner with Visa and Mastercard to issue its cards. With Discover, it could cut both of those payment giants out of the mix.
Shares of Discover slumped last month after the company said its fourth-quarter profit dropped. The stock has gained since then and rose as much as 18% in premarket trading on Tuesday after the deal was announced. Capital One fell by about 4%. Capital One’s offer for Discover represents a 26.6% premium to Discover’s closing priced on Feb. 16.
That’s not entirely clear at the moment. The deal should allow Capital One to rely on its own network for at least some of its credit cards, having historically relied on Visa and Mastercard for that service. But the companies haven’t said yet whether they’ll keep all their existing products or choose to roll out new cards.
Both companies offer a variety of credit cards. Discover has mainly cash-back cards, while Capital One offers a range of reward cards.
Capital One is known for its commercials featuring celebrities like Jennifer Garner and Samuel L. Jackson asking, “What’s in your wallet?” The company has historically catered to subprime consumers who carry a balance on their cards each month.
Last year, it agreed to buy the digital concierge service Velocity Black to better cater to prime customers who don’t carry a balance and instead prioritize credit-card points and airlines miles.
Discover, on the other hand, has long focused on prime customers with better credit ratings that choose to carry a balance — a group known in industry parlance as revolvers — and has shied away from flashy sign-on bonuses and lavish perks used by many of its rivals.
The deal is pending regulatory approval that’s expected in late 2024 or early 2025. Given the size of the deal, Bloomberg Intelligence expects “significant regulatory scrutiny.” Joe Biden’s administration is also becoming tougher on promoting competition in the sector.
But analysts largely believe this will create more competition for Visa and Mastercard. That could help Capital One and Discover grease the wheels with regulators and gain approval for the deal because antitrust regulators have long had those payment giants in their crosshairs.
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