Two of the biggest players in the payment industry want to consolidate power in a move that could end up harming consumers.
Capital One has agreed to buy Discover Financial Services in a $35.3 billion deal that will merge two of the nation’s largest credit card firms and position the combined company to more easily compete with major payment processors like Mastercard and Visa, according to a news release.
Under the terms of the all-stock transaction, Discover shareholders will receive Capital One shares valued at just under $140. This represents a 26.6% premium based on Discover’s closing share price of $110.49 on Friday, February 16.
By merging the two companies, the combined business will be better positioned to generate value for stakeholders as technology continues to transform the payments and banking marketplace, according to Capital One founder, chairman, and CEO Richard Fairbank.
“Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” Fairbank said in a statement.
While the merger could prove beneficial to Capital One, the deal could have negative consequences on customers, according to a new report by the Consumer Financial Protection Bureau (CFPB). In its report, the CFPB found that larger banks impose higher credit card interest rates than other financial institutions.
“Our analysis found that the largest credit card companies are charging substantially higher interest rates than smaller banks and credit unions,” said CFPB director Rohit Chopra. “With over $1 trillion in credit card debt outstanding, the CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year.”
In general, credit card debt totaled almost $1.13 trillion in Q4 2023, marking a roughly $50 billion (4.6%) increase over the previous quarter and the highest balance since tracking began in 1999, according to data from the Federal Reserve Bank of New York.
Despite Americans facing mounting credit card debt, Discover president and CEO Michael Rhodes suggested the merger will create tremendous upside potential for shareholders.
“The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth and maximizes value for our shareholders, enabling them to participate in the tremendous upside of the combined company,” said Rhodes in a statement.
“This agreement underscores the strength of our business and is a testament to the hard work of Discover employees. We look forward to a bright future as part of the Capital One family and to providing expanded opportunities for our loyal customers,” he said.
Although Capital One and Discover have agreed to the deal, the proposed merger will still have to make it past federal antitrust regulators, which could pose a problem given “the vertical integration of Capital One’s credit card lending with Discover’s credit card network,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, per WFAA.
