It is more than a big deal that the Capital One-Discover acquisition passed its last two regulatory hurdles. The biggest credit card deal in U.S. history moves forward in mid-May 2025.
In an all-stock deal, more than $100 billion in loan book will pass to Capital One, leaping the Richmond, VA lender to the top of U.S. credit card issuing, as The New York Times reports.
For Richard Fairbank, the CEO since the company IPO’d in 1985, the acquisition is quite an accomplishment and will bring a business transformation to the firm and to U.S. payments itself. This is not the firm’s first acquisition, but it is undoubtedly the largest. Capital One is a spin-off of Signet Bank, a financial institution that dates back to its organization in 1795, when it was organized as a Morris Plan bank. A Morris Plan bank is chartered to make small consumer loans, in contrast to a broader commercial bank.
Welcome Discover
Aside from its massive size, this acquisition is interesting because it is not one large bank swallowing up another bank. In that scenario, there is a common bond of a bank culture that is tied together by deposits. This is the marriage of two significant credit card businesses that both struck out as alternative card issuing companies: Capital One as a bank spin-off and Discover as a retailer-based firm that broke the norm with a new payment network brand, facing off directly with American Express, Mastercard, and Visa.
In contrast to card rewards tied to airline miles, Discover brought the first Cash reward program that is now key to every other issuer. Discover also brought a focus on U.S.-based call centers, which will likely change with its large business that will need to contend with call center overflow and diversion. Based on the firm’s new size, it will likely queue up one million collection calls a day, which will require plenty of machine learning and artificial intelligence to make it through the workday.
The two firms overlap in many of its strategic focuses, but there are some differences. According to Javelin Card Bench, a competitive intelligence tool engineered for top credit card issuers, Capital One has 31 one card programs aligned to specific card products, while Discover operates all cards under the “it” line. Legacy Discover cards have traditionally lower APRs than Capital One, and while both issuers do not generally charge annual fees, it will be interesting to watch what happens to APR rates.
The New Business Is More of a Challenge to Top Issuers than Small Banks
Small issuers have enough problems to deal with as they contend with 4-digit charge-off rates. The proposition for small banks is to sell service, local presence, and down-home community support. Local presence is an angle that the new Capital One will need to contend with as the new organization has less than 500 branches.
But for top banks, the likes of Bank of America, Citi, Chase, and Wells Fargo, the battlefield is full of questions. How much does the new business overlap with their portfolios? Will the new Capital One integrate Discover’s payment network and shift American Express’ aspirational card model to an every-man (or woman’s) card network? Can Capital One change the game and use their model to self-issue and service smaller banks? So many opportunities to consider.
Kick-Off begins in Less Than a Month
You can be certain that the business integration team is dealing with hard business issues, like credit policy and aligning best practices. Melding the cultures will be interesting to watch. Will it be the Capital One card running on the Discover Network, or a new snappy name? And merging the cultures will be interesting. Will they take a page out of the successful integration of Fiserv and First Data, where the business took a creative approach and painted everything orange?
But for now, the thing to watch is the stability of the portfolios, and you can be sure that the entrepreneurial Capital One business head has his eyes on the ball.
