Capital One is Spending $35B To Capitalize On America’s Credit Obsession – The Average Joe


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    Capital One is Spending $35B To Capitalize On America’s Credit Obsession

    Noah Weidner

    February 20, 2024

    Cash or card? Nowadays, it’s all about the plastic. In the past four years, American credit card spending has hit one record after another, with balances topping $1.13T at the end of 2023 — all while average credit card interest rates have soared to 21.5%.

    This lucrative pairing has been a goldmine for lenders investing heavily to attract customers with targeted offers and bonuses. However, one of America’s major creditors is taking a different approach to capitalize on the nation’s love affair with credit — by acquiring its closest competitor.

    All-in on credit cards: In what marks the biggest deal in credit card industry history, Capital One (NYSE:COF) is buying Discover (NYSE:DFS) in a massive $35B all-stock deal — combining two of the most prominent players in the space.

    • Post-merger, the combined entity will emerge as the largest US credit card company, with outstanding loans exceeding $257B — surpassing JPMorgan’s (NYSE:JPM) $211B.
    • The acquisition will also add over 61M Discover cardholders to Capital One’s roster — expanding its total card accounts to 170M.

    It’s a strategic and savvy move…

    Capital One cards are issued by Mastercard (NYSE:MA) and Visa (NYSE:V), which handle over 90% of the US payment volume. However, acquiring Discover gives Capital One access to its payment network — positioning it to disrupt the payment duopoly and potentially abandon its existing card relationships.

    • Plans are in motion at Capital One to transition some credit cards to the Discover network — dodging the ~1% network fee currently paid to competing networks, sending $MA and $V down 3% and 1.5%, respectively.
    • Capital One anticipates that this switch could generate an extra $1.2B ****in revenue in 2027 — but changes will be slow to roll out due to Capital One’s recent renewal of partnerships with existing payment networks.

    Lina is calling: The substantial similarities between Discover and Capital One customers guarantee that 2024’s largest deal will have to face off with regulators at Lina Khan’s Federal Trade Commission (FTC), which have put up roadblocks for big takeouts like the $3.8B Spirit-JetBlue combination and the $24.6B Albertsons-Kroger merger. So don’t hold your breath; this major deal may take years to complete.

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