Notice: Capital One Agrees to Acquire Discover in $35.3 Billion Merger to Build a Payments Network

In February 2024, Capital One Financial Corporation announced plans to acquire Discover Financial Services in a transaction valued at $35.3 billion, a deal that, if completed, could create one of the nation's largest consumer financial institutions and reshape the United States card and payments landscape. Fortune reported that the combination would make Capital One the largest card issuer in the country, pushing ahead of JPMorgan Chase, according to a Capital One investor presentation. The companies said the transaction would not close until late 2024 or in 2025, and only if government regulators approve it.

What the companies announced

The agreement brings together one of the nation's largest banks and credit card issuers with a company that both issues cards and operates its own payments network. Discover creates the infrastructure that facilitates payments between merchants and card issuers when customers make a purchase, charging fees along the way. Acquiring Discover would give Capital One access to its own payments network and the ability to collect those fees, something other major credit card issuers, including JPMorgan Chase and Bank of America, do not do on their own. Among the four major United States payments networks — American Express, Mastercard, Visa and Discover — Discover is the smallest, though it is accepted by many merchants and in more than 200 countries and territories.

• Capital One agreed to acquire Discover Financial Services in a transaction valued at $35.3 billion.
• The combined company would become the largest card issuer in the United States, ahead of JPMorgan Chase, according to a Capital One investor presentation.
• Capital One executives said on an investor call that they expect to add over 25 million Capital One cardholders and over $175 billion in Capital One purchase volume to the Discover network by 2027.
• Discover is the smallest of the four major United States payments networks and is accepted in more than 200 countries and territories.
• The companies said the deal would close in late 2024 or in 2025, subject to regulatory approval.

The strategy behind the deal

Richard Fairbank, founder, chairman and chief executive of Capital One, framed the transaction as a chance to build a payments network that can compete with the largest payments networks and payments companies. “Our acquisition of Discover is a singular opportunity…to build a payments network that can compete with the largest payments networks and payments companies,” Fairbank said in a press release about the deal. Capital One executives said the injection of volume and investment would help Discover be competitive with the leading networks, and that a goal is to change the perception among consumers that Discover is not widely accepted by merchants. Analysts noted the structural significance. Michael Seaman, chief executive and founder of payments consultancy Swipesum, said the deal gives Capital One “a key to the backdoor of the payments industry,” and that pairing Discover's network with Capital One's issuing scale could create an entity similar to American Express, one that issues cards, controls loans and credit, and fully manages transactions.

What the deal means for cardholders

Fortune reported that it is not entirely clear what will happen to consumers' current cards, though cards are likely to be accepted more widely and may eventually offer more competitive rewards programs. Current Discover consumers might benefit from improved customer service and access to new technologies. Greg McBride, chief financial analyst at Bankrate, said that assuming the transaction receives regulatory blessing and ultimately closes, “the card lineups will eventually be optimized, which could mean some offers going away and new offers coming to market,” though he added that any of that is likely a year or more away. If the company changes its credit card offerings, it will need to alert consumers 45 days before any changes are made to the terms of their cards.

Regulatory and political scrutiny

The deal requires government regulatory approval, and consumer groups and the Biden administration are likely to watch it closely. Capital One has a larger portfolio of subprime borrowers than other credit card issuers, while Discover's portfolio is composed of many people early in their credit journey. Senator Elizabeth Warren called on regulators to block the merger immediately, saying in a February 20, 2024, post that it “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families.”

The transaction set up a high-stakes test of consolidation in consumer finance as Capital One sought to pair its issuing scale with Discover's payments network. Company details: Capital One Financial Corporation, official website capitalone.com; Discover Financial Services, official website discover.com.