Cap One, Discover join forces to rival Visa, Mastercard

As credit cards go, Discover is a bit of youngster. Discover Card was launched by Sears Roebucks & Co. subsidiary Dean Witter in 1986 and became the publicly traded Discover Financial Services in 2007. As large banks go, Capital One is a bit of a newcomer, too, created when Signet Financial spun off its credit card division in 1994.

Sears filed for bankruptcy in 2018, and Signet is now part of Wells Fargo. But the two relative newbies are preparing to take the credit card world by storm following a combination created through an all-stock transaction valued at $35.3 billion.

Capital One Financial Corp., the ninth largest bank in the nation, with nearly $469 billion in assets, is purchasing a majority interest (60 percent) in Discover. "This is an incredible opportunity," said Richard Fairbanks, the bank's founder and CEO.

Fairbanks described the move as an effort to build a global payments company that can rival the likes of Mastercard and Visa. "It will accelerate the company's long-standing journey to work directly with merchants to leverage its customer base, technology, and data ecosystem to drive more sales for the merchant and great deals for consumers and small businesses," he said.

More than a card or a network

One way Discover differs from Visa and Mastercard, of course, is that Discover issues its own cards. The company claims 60.6 million cardholders. Discover also runs a fast-growing direct savings bank, with no brick-and-mortar locations. Capital One plans to retain the Discover brand and shift at least some cardholders to Discover cards.

"From Capital One's founding days, we set out to build a payments and banking company powered by modern technology," Fairbanks said in a message to employees.

Discover CEO and President Michael Rhodes stated, "The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth." Discover boasts a global payments network with 70 million merchant acceptance locations in more than 200 countries.

Beth Robertson, managing director at Keynova Group, a competitive intelligence firm specializing in financial services, said the Capital One-Discover deal would create a "larger network entity" that offers synergies as transactions could be run across the Discover or Pulse networks. Pulse is a regional ATM/POS network and early innovator in POS debit that Discover purchased in 2005. It serves over 4,400 financial institutions and connects over 380,000 ATM and POS devices.

"This could introduce some cost efficiencies for merchants that could drive down at least some merchant pricing and potentially transfer additional merchant servicing activity to the merged entity," Robertson said.

Under terms of the deal, Discover shareholders will receive 1.0192 shares of Capital One for each their Discover shares, representing a premium of 26.6 percent based on Discover's closing price of $110.49 on February 16. The deal and its terms are subject to regulatory approval. Expectations are that the deal will close in late 2024 or early 2025. Three Discover board members will join the Capital One board of directors once the combination is complete, the two companies said.

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