Capital One CEO and Chairman Richard Fairbank.
Marvin Joseph | The Washington Post | Getty Images
Capital One Recently announced $35.3 billion get of Explore Finance It’s not just about getting bigger — gaining “scale,” in Wall Street parlance — it’s about protecting yourself from rising fintech and regulatory threats.
This is a game played by Capital One CEO Richard Fairbank, one of the savviest long-term thinkers in American finance. As co-founder of Bank of America, a top-10 company by assets, his tenure is rare in a banking world dominated by institutions such as these. JPMorgan Its origins date back to shortly after the signing of the Declaration of Independence.
Fairbank became billionaire Capital One, which has built it into a credit card giant since its 1994 IPO, is betting that acquiring rival credit card company Discover will put it in a better position to navigate the dark future of global payments. The industry is a dynamic network, with players ranging from traditional banks to fintech companies and technology giants seeking to gain a share of market value. Trillions Save dollars by cannibalizing existing players amid the rapid growth of e-commerce and digital payments.
“This deal gives the company a stronger position to compete with other banks, fintechs and big tech companies,” said Sanjay Sakhrani, senior retail finance analyst at KBW. “The more they can stand out from the crowd, the better they will be.” The more adaptable we are to the future.”
The deal, if approved, would allow Capital One to surpass JPMorgan Chase as the largest credit card company by loans and solidify its position as the third largest by purchase volume.It also adds weight to Capital One’s banking business $109 billion Discover digitizes the bank’s total deposits and helps the combined entity reduce expenses by $1.5 billion by 2027.
“Holy Grail”
But on Tuesday, when analysts asked Fairbank about the strategic value of the deal, it was Discover’s payments network — the “rails” that move digital dollars between consumers and merchants and collect tolls — that Fairbank repeatedly praised.There are only four major card networks: Giants visa and MasterCardThen American Express Finally, there is the smallest group, Discover.
Capital One and Discover Credit Card were arranged on Tuesday, February 20, 2024 in Germantown, New York, USA.
Angus Mordants | Bloomberg | Getty Images
“This network is a very, very rare asset,” Fairbank said. “We have always had a belief in being able to be an issuer with its own network so that we can deal directly with merchants.”
Fairbank said that since Capital One was founded in the late 1980s, he envisioned creating a global digital payments technology company by owning payment channels and dealing directly with merchants. Over the next few decades, Capital One stayed ahead of stodgy banks and earned a reputation in tech circles for its forward thinking and innovative capabilities. early adopter Cloud computing and agile software development.
But its growth relies on Visa and MasterCard, which accounted for the vast majority of payment volume last year and processed nearly $10 trillion in U.S. transactions.
Capital One intends to grow the Discover network, which had $550 billion in transaction volume last year, by quickly moving all financial card transaction volume to the Discover network and increasing its share of credit card transactions over time.
By 2027, the bank expects to add at least $175 billion Payments and 25 million cardholders access the Discover network.
own toll road
Still, analysts say the real potential of the Discover deal lies in what Capital One can do in the future if it owns the toll roads.
By creating something more like a closed-loop end-to-end ecosystem between shoppers and merchants, it can fend off competition from rapidly mutating fintech players, such as clogged and Paypalas well as buy now, pay later companies such as confirm and Klarna, which have already made inroads with businesses and consumers.
Fairbank said Tuesday that Capital One aims to deepen relationships with merchants by showing them how to boost sales, help them prevent fraud and provide data insights, all of which make them harder to evict. Analysts say it could use some of its network fees to create new loyalty programs, such as a debit rewards program, or underwrite merchant rewards or experiences.
“Having one network allows us to deal more directly with merchants rather than with network intermediaries,” Fairbank told analysts. “We create more value for merchants, small businesses and consumers and benefit from vertical integration. Gain additional economic benefits.”
This is a capability that technology or fintech companies may covet.Discover Network alone would be worth up to $6 billion if sold to letter, apple or FeserSahrani wrote in a research note on Tuesday.
Will the supervisory authority approve it?
Capital One’s merger with Discovery could help the credit company fend off another potential threat from Washington.
suggested legislation Sen. Dick Durbin’s goal is to limit the fees charged by Visa and MasterCard, which could undermine the economics of credit card rewards programs. If the proposal becomes law, the competitive position of the unrestricted Discover network will suddenly improve. Brian Grahamco-founder of consulting firm Claros Group. This reflects earlier laws Durbin Amendment Did it for debit card.
Chairman Dick Durbin (D-IL) speaks during a U.S. Senate Judiciary Committee hearing on Supreme Court ethics reform on Capitol Hill in Washington, DC, May 2, 2023.
Mandel Yan | AFP | Getty Images
“There are a lot of things that are targeting the card network and the ecosystem in some way,” Graham said. “If Capital One controls the network, those pressures could be one of the factors that creates opportunities for Capital One in the future.”
The big question for Capital One, its clients and investors is whether the merger will ultimately win regulatory approval. While Fairbank said he expects the deal to close in late 2024 or early 2025, industry experts say it’s impossible to know whether the deal will be blocked by regulators like a series of high-profile acquisitions between banks, airlines and technology companies .
Democratic Sen. Elizabeth Warren on Tuesday urged regulators to quickly block the deal, calling it “dangerous.” Sen. Sherrod Brown, D-Ohio and 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 facilitating a failing payments network, or allowing an already dominant card lender to gain scale – another way Fairbank may underline the importance of the network reason.
“From a public policy perspective, which thing you care about more is going to determine whether you think it’s a good deal or a bad deal,” Graham said.
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