Capital One CEO and Chairman: Richard Fairbank.
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Capital One’s recently announced the acquisition of Discover finance It’s not just about getting bigger — gaining size, in Wall Street parlance — it’s an attempt to protect itself from a growing tide of fintech and regulatory threats.
It’s a move by one of the brightest long-term thinkers in American finance, Richard Fairbank, CEO of Capital One. As a co-founder of one of the 10 largest U.S. banks by assets, his tenure is a rarity in a banking world dominated by such institutions JPMorgan Chase whose origins lie shortly after the signing of the Declaration of Independence.
Fairbank, which became a billionaire by building Capital One into a credit card giant since its 1994 IPO, is betting that buying rival card company Discover will better position the company for the bleak future of global payments. The industry is a dynamic web, with players of all stripes – from traditional banks to fintech players to tech giants – all trying to carve out a place for themselves in a trillion-dollar market by navigating the rapid growth of e-commerce. Commerce industry is eating up the market share of the incumbent operators. Commerce and digital payments.
“This deal gives the company a stronger position in the fight against other banks, fintechs and big technology companies,” said Sanjay Sakhrani, veteran KBW retail finance analyst. “The more they can stand out from the crowd, the more future-proof they are.”
If the deal is approved, Capital One can overtake JPMorgan as the largest credit card company by loans and solidify its position as the third-largest company by purchase volume. Additionally, it strengthens Capital One’s banking operations with total Discover digital bank deposits of $109 billion and helps the combined company achieve $1.5 billion in cost savings by 2027.
‘Holy Grail’
But it’s Discover’s payments network – the “rails” that move digital dollars back and forth between consumers and merchants while collecting tolls – that Fairbank repeatedly praised on Tuesday when analysts asked him about the strategic merits of the deal. There are only four major card networks: Giants Visas And MasterCardThen American Express and finally the smallest of the group, Discover.
Capital One and Discover credit cards in Germantown, New York, USA, on Tuesday, February 20, 2024.
Angus Mordant | Bloomberg | Getty Images
“This network is a very, very rare commodity,” Fairbank said. “We have always believed that the Holy Grail is to be an issuer with its own network so that you can deal directly with dealers.”
Since founding Capital One in the late 1980s, Fairbank said he envisioned creating a global digital payments technology company by owning the payment rails and negotiating directly with merchants. In the decades that followed, Capital One stayed ahead of slower banks and gained a reputation in technology circles for being forward-thinking and early adopters of cloud computing and agile software development.
However, the growth was driven by Visa and Mastercard, which accounted for the majority of payments volume last year, processing a combined nearly $10 trillion in the U.S.
Capital One intends to strengthen the Discover network, which processed $550 billion in transactions last year, by quickly moving all of its debit volume there and moving a growing portion of its credit card flows there over time.
By 2027, the bank expects to process at least $175 billion in payments and add 25 million of its cardholders to the Discover network.
Owner of the toll road
But the real potential of the Discover deal, analysts say, is what Capital One can do in the future if it owns the toll road.
By creating an end-to-end ecosystem that is more of a closed loop between buyers and merchants, it could fend off competition from rapidly mutating fintech players like… block And PayPalas well as “buy now, pay later” companies like Confirm and Klarna, which have found their way into both companies and consumers.
Capital One aims to deepen relationships with merchants by showing them how to increase sales, helping them prevent fraud and providing data insights, Fairbank said Tuesday, making it harder to displace them. It may use a portion of network fees to create new loyalty plans such as debit rewards programs or guarantee merchant incentives or experiences, analysts said.
“Owning a network allows us to deal more directly with dealers than with a network intermediary,” Fairbank told analysts. “We are creating more value for retailers, small businesses and consumers and leveraging the additional economic benefits of vertical integration.”
It’s a skill that technology or fintech companies are likely to covet. If sold, the Discover network alone would be worth up to $6 billion Alphabet, Apple or FiservSakhrani wrote in a research note on Tuesday.
Will regulators agree?
The combination of Capital One and Discover could arm the company against another potential threat from Washington.
Senator Dick Durbin’s proposed legislation aims to cap fees charged by Visa and Mastercard, potentially blowing up the economics of credit card rewards programs. If this proposal becomes law, the competitive position of the Discover network, which is exempt from the restrictions, will suddenly improve, according to Brian Graham, co-founder of consulting firm Klaros Group. This mirrors what a previous law called the Durbin Amendment did for debit cards.
Chairman Dick Durbin (D-IL) speaks during a U.S. Senate Judiciary Committee hearing on Supreme Court ethics reform on Capitol Hill on May 2, 2023 in Washington, DC
Almond Ngan | AFP | Getty Images
“There are a lot of things that target the card networks and this ecosystem in one way or another,” Graham said. “That pressure could be one of the things that creates an opportunity for Capital One in the future if they have control of this network.”
The biggest question for Capital One, its customers and investors is whether the merger will ultimately be approved by regulators. While Fairbank said he expected the deal to close in late 2024 or early 2025, industry experts said it was impossible to know whether it would be blocked by regulators, like a number of high-profile acquisitions of banks, airlines and technology companies.
On Tuesday, Democratic Senator Elizabeth Warren urged regulators to quickly block the deal, calling it “dangerous.” Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, said he would monitor the deal to “ensure that this merger does not enrich shareholders and executives at the expense of consumers and small businesses.”
The Discover deal’s survival may depend on whether it is seen as bolstering a payments network it also operates or allowing an already dominant card lender to gain scale – another reason why Fairbank may have played up the network’s importance.
“Which issue you’re more concerned about will determine whether you think this is a good deal or a bad deal from a policy perspective,” Graham said.
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2024-02-21 17:00:21
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