Capital One to Merge with Discover and Create Largest Credit Card Company

While this may be good news for Capital One and even better news for the shareholders of Discover Financial Services, the provider of the Discover credit card, the industrial consolidation this means will be mostly bad news for the American public which is already hooked on too much credit card debt.

Virginia-based Capital One, the company leading the acquisition, is currently ranked fourth largest in the country both by total purchase transactions and total number of credit cards issued. In 2022, the company was responsible for total credit card transactions of $534.5 billion. In the most recent report ranking the various credit card companies, it was delivering that total credit card debt via approximately 107 million credit cards distributed.

Ranking above Capital One with respect to total credit card transactions and total numbers of cards were:

Chase: Total transactions in 2022 of $1.14 trillion and 149 million cards, making this lender the largest in total transactions. It is also currently the largest in total cards in use as a lending institution.

American Express: Total transactions in 2022 of $1.03 trillion, making it the second largest by this measure, but it made that via a much smaller number of cards – only 48 million. AMEX cards ranked seventh in the country based on total number of cards outstanding.

Citi, also known as Citibank: Total transactions of $563.4 billion with 68 million cards in use. Citi is the third largest supplier of funds via credit cards in the world and the fourth largest by number of cards distributed.

The company Capital One is acquiring, Discover Financial Services, with headquarters in Chicago, Illinois, supported $210.7 billion in transactions in 2022 and currently has 61 million cards in circulation. That made it the sixth largest provider of credit card transactions and fifth largest by number of cards.

Assuming the merger of the companies goes through, the new Capital One – Discover financial entity would be supporting a combined total of $745.2 billion (as of 2022) in transactions and 168 million cards. That would push the combined company to the third largest credit card company based on total card transactions as of 2022 but also now the biggest in terms of total credit cards issued.

A separate analysis by Bloomberg Intelligence revealed that, in reviewing this transaction, the combined Capital One – Discover company would also jump to the number one position above all credit card companies in terms of total outstanding loans provided to cardholders. This is a different ranking than the total amount of purchases transacted using the cards.

What this means is that this new credit card company is currently managing the largest outstanding debt load of all credit card companies, will have the largest number of cards in use, and will be third biggest in terms of total card transactions. It gives this combined business entity unprecedented financial power over consumers everywhere.

Capital One is buying Discover Financial Services for $35.3 billion in a 100% stock deal. Discover shareholders will receive just slightly more than one share of Capital One stock for every share of Discover stock they already hold. When the deal is complete, former Discover shareholders will own 40% of the combined company and those who owned Capital One will control 60% of the total stock outstanding.

The deal is a timely one for Capital One and Discover alike. Via a combination of higher interest rates charged by the credit card companies, which in turn were strongly influenced by the Federal Reserve Board’s prime banking rate increases over the last two years, and consumer confidence jumping in 2023 by an average of over 21% on all three indicators monitored by a highly respected university survey, total consumer debt has soared to a record $1.13 trillion in 2023.

That $1.13 trillion figure for the total consumer debt was estimated by the Federal Reserve Board of New York.

What this means for the “new” Capital One, as it likely will be called once all details of the merger are finalized perhaps by sometime early next year, is that it will be in prime position to control the lion’s share of that total $1.13 trillion of consumer debt, equivalent to a whopping 19% market share of the consumer economic lending business. It will also have the ability to manipulate that debt even higher through aggressive directed marketing to the holders of its 168 million credit cards outstanding, along with tight management of everything from late payments (which can result in even higher interest rates and default fees) to other special lending opportunity promotions via the cards.

It is no surprise then why CEO and Founder Richard Fairbank of Capital One spoke of the acquisition in a statement released Monday as an “opportunity to bring together two very successful companies with complementary capabilities and franchises.”

“Through this combination, we’re creating a company that is exceptionally well-positioned to create significant value for consumers, small businesses, merchants, and shareholders as technology continues to transform the payments and banking marketplace,” Fairbank continued.

With the merger concentrating such sizable control of consumer credit in what would now be just one company, economists eyeing the merger expect there to be many concerns raised about the impact this could have on competition as well as consumer debt. With consumer spending responsible for over two-thirds of the nation’s GDP, both directly and indirectly, higher debt could also cause the U.S. economy to hit a very sizable speed bump as it continues to rise, even with new hiring in the country continuing to rise faster than most economists had expected.

With multiple banks such as Silicon Valley Bank, First Republic Bank, Signature Bank, and others having failed in the last year because of poor financial management practices, the Biden White House made tighter monitoring of bank performance and especially banking mergers a priority in 2023.

That directive led in June 2023 to the Justice Department’s Assistant Attorney General for its antitrust division, Jonathan Kanter, to declare that his organization would now more “closely scrutinize mergers” of financial institutions. In making those comments, he quoted a seminal U.S. Supreme Court decision from 1963 which, he said still stands as important as ever today, in which the Justices warned that, in Kanter’s words, “excessive consolidation in the banking sector could imperil the free and fair functioning of the broader economy.”

These comments were made at the Brookings Institution’s Center on Regulation and Markets Event “Promoting Competition in Banking” on June 20, 2023.

Though Capital One CEO Richard Fairbank optimistically predicted that his offer to acquire Discover Financial Services might be approved and completed within the current year, most expect the analysis of its impact on lending competition and the growth of consumer debt to push any final completion of the deal until at least early 2025.