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Sunday, April 14, 2024

Capital One’s Big Move Shakes Up the Credit Card Market

Capital One Discover Acquisition Shakes Up The Card Market
Eric Bank

Written by: Eric Bank

Eric Bank
Eric Bank

Eric Bank is an M.B.A. who has covered financial and business topics since 1985, appearing regularly on Credible, eHow, WiseBread, The Nest, Zacks, Chron, and dozens of other outlets. Eric specializes in taking complex subject matters and explaining them in simple terms for consumer audiences, particularly in the world of personal finance. Eric holds a Master's in Business Administration from New York University and a Master's in Finance from DePaul University.

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Edited by: Lillian Guevara-Castro

Lillian Guevara-Castro
Lillian Guevara-Castro

Lillian Guevara-Castro brings more than 30 years of editing and journalism experience to the CardRates team. She has written and edited for major news organizations, including The Atlanta Journal-Constitution and the New York Times, and she previously served as an adjunct journalism instructor at the University of Florida. Today, Lillian edits all CardRates content for clarity, accuracy, and reader engagement.

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Reviewed by: Ashley Fricker

Ashley Fricker
Ashley Fricker

Ashley Fricker has more than a decade of experience as a finance contributor and editor, and has specialized in the credit card industry since 2015. Her credit card commentary is featured on national media outlets that include CNBC, MarketWatch, Investopedia, and Reader's Digest, among many others. She has worked closely with the world’s largest banks and financial institutions, up-and-coming fintech companies, and press and news outlets to curate comprehensive content and media. Ashley holds a bachelor's degree in multimedia journalism from Florida Atlantic University.

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On February 19, 2024, Capital One decided to add Discover’s credit cards to its wallet. It announced it will use $35.3 billion in stock to purchase Discover Financial Services. Capital One will pay 1.0192 of its shares for each share of Discover, about a 26% premium to the previous closing prices.

Capital One shareholders will own 60% of the merged company, with the other 40% going to Discover investors. Three Discover directors, as yet unnamed, will join Capital One’s board.

Not only is Capital One gobbling up the Discover card portfolio, it’s also buying Discover’s global payment network. This merger helps put Capital One on a stronger footing as it competes with Visa, Mastercard, and American Express, the other three US-based payment networks.

Let’s take a closer look at what it will mean for Capital One to bring Discover into its fold. This move could shake things up quite a bit in the financial services world. Here’s how it could play out across different levels.

On the Big Picture Front (Strategic Impact)

Snapping up Discover will give Capital One a bigger slice of the pie in the credit card and financial services market. Bloomberg estimates that the new entity will surpass Chase and Citibank in domestic card loan volume.

Capital One and Discover logos
The Capital One acquisition of Discover is expected to surpass Chase and Citibank in domestic card loan volume. Source: Bloomberg

The move combines Discover’s loyal customer base and strong brand with Capital One’s wide range of services. This combination will create a global payments platform with 70 million merchant acceptance points in more than 200 countries and territories.

Obtaining Discover’s state-of-the-art payment technology means faster, more secure transactions for Capital One customers. The acquisition will open new doors for Capital One, letting it tap into markets and merchant relationships previously beyond reach.

By adding Discover’s offerings to its lineup, Capital One could attract even more consumers looking for financial products. With a larger share of customers, Capital One could flex its muscles a bit more when dealing with merchants, possibly snagging better fees and sweeter agreements, thereby boosting its bottom line.

Before any of this can happen, the merger will need the green light from federal regulators. This may mean jumping through some hoops to ensure the deal is fair play in the market. This includes compliance with payment processing standards, data protection laws, and anti-money laundering directives.

Paradoxically, the deal may help the other payment networks, especially Visa, whose fees are under scrutiny by regulators. The other payment services can now claim that they face heightened competition and therefore need to retain their current rates.

Getting Down to Business (Tactical Impact)

It’s not just about shaking hands and signing papers. Blending Discover’s operations with Capital One’s will be a huge task, from syncing up tech systems to making sure customer service doesn’t skip a beat.

The tactical impact of Capital One inheriting Discover’s payment services platform spans several critical areas, from technical integration and security enhancements to regulatory compliance, customer experience optimization, and strategic market expansion. Each of these areas presents its own set of challenges and opportunities, requiring careful planning, execution, and ongoing management to fully capitalize on the potential benefits of such a significant strategic move.

Capital One will need to integrate Discover’s payment services into its existing infrastructure. It’s about aligning technology, ensuring systems communicate smoothly, and transferring knowledge so that the teams can manage the new tools effectively. The goal here is to make the transition so seamless that customers hardly notice the change, except for the improved services they receive.

Capital One and Discover Bank CEOs
Capital One Chairman and CEO, Richard Fairbank, pictured left, and Discover Financial Services CEO and President, Michael Rhodes.

Of course, security is paramount, especially when it comes to financial transactions. Capital One would have the task of not only integrating Discover’s security protocols but also potentially upgrading them. This could involve deploying advanced fraud detection systems, enhancing encryption methods, and implementing more robust cybersecurity measures. These tasks must succeed if the new company is to maintain customer trust.

With a bigger pool of customers, Capital One could get creative, offering tailored products that hit the mark just right, boosting loyalty and value. Capital One could leverage Discover’s innovative payment solutions to provide more flexible, efficient, and user-friendly payment options. This may involve introducing new mobile payment capabilities, simplifying online transactions, or offering more personalized payment services.

The Day-to-Day Stuff (Operational Impact)

Bringing two companies together means meshing two different cultures. It’s crucial to make sure everyone’s on the same page to keep things running smoothly and keep talented folks around.

The biggest task will be merging Discover’s technology with Capital One’s existing systems. This goes beyond simply adding new software into the mix; it’s about integrating data systems, payment processing workflows, and customer service tools in a way that enhances efficiency without disrupting services. 

It means training staff on new platforms, possibly redesigning some operational processes, and ensuring that all systems work together seamlessly. This integration is crucial for maintaining a smooth operation that supports both the backend processes and the customer-facing services.

By combining forces, Capital One may cut costs in places where there’s overlap, such as redundant operations or tech systems. It’s all about being smarter with resources, but it also means some employees at all levels may be facing layoffs. 

Capital One may see an influx of new customers as it expands the services it offers to existing ones. This expansion requires scaling up customer support operations to handle increased inquiries and issues that may arise from the new services. 

Operational adjustments may include expanding customer service teams, implementing more sophisticated service technologies, and enhancing training programs to ensure that all team members are well-versed in the nuances of the new payment options. The aim is to keep customer satisfaction high during and after the transition.

With the tech and know-how from both sides, Capital One could push the envelope even further, using Discover’s tech-savvy ways to speed up its own digital makeover.

The Bottom Line

Wrapping it up, snagging Discover will be a game changer for Capital One, but it’s not without its challenges. From blending cultures to getting the regulatory thumbs up, there’s a lot to tackle. Yet, if Capital One can navigate these waters, the merger could be a win-win, offering more to customers, shaking up the market, and setting the stage for some exciting innovations.