There are plenty of articles about the Capital One merger with Discover. At a high level, the deal is both good and bad for consumers. Here are some of my thoughts on the matter.
Current Trajectory
Capital One entered the premium travel space with the launch of the Venture X card. They are competing with American Express and Chase on premium travel benefits like lounges. Competition is getting fierce! However, acquiring Discover may position Capital One in a better stance to compete effectively by size and market share.
Although the card is still fairly new, Venture X is better than Chase and Amex for the everyday consumer because it is easy to use and has a low annual fee. For $395, the $300 travel credit and 10,000 annual miles means the card pays for itself. The rewards structure (at least 2 miles per dollar spent) is also better than most other credit cards.
The Closed-Loop Network
Any card issuer today that issues a Visa or Mastercard must pay a small fee. They are also bound to the rules/benefits of Visa or Mastercard. Amex is unique because they are both the issuing bank and the payment network (known as a closed-loop network). It allows Amex to conduct their own research and tailor offers to customers. They are also dependent on overall spending as opposed to the volume of transactions.
By acquiring Discover, Capital One can tap into the Discover payment network (another closed-loop network). There’s potential for increased targeting towards more affluent customers (similar to Amex) which may mean more premium benefits.
Though, Capital One has announced that they will keep Discover separate from the other products, so we will see!
Market Share
Combining Capital One and Discover will create a larger banking and credit card company. This means that they can effectively compete with the other leading issuers. By keeping both separate, Capital One can focus on its brand, while driving value from both.
Some are concerned with increased interest rates with less competition. I’m personally not too worried about this, and neither should you. I always tell people to NEVER carry a balance on a card. I will stand on my soapbox and defend that statement to death. If you need to borrow money, taking out a loan is a much more sensible option. Even if my credit card charged me 100% interest, it wouldn’t impact me because I always pay off in full.
Accelerated Growth
Once the dust settles, Capital One can grow at a faster pace with larger client bases and increased revenue. This may be good news as cardholders wait patiently for new lounges to open and new benefits to arrive. The strength in their position also makes it easier to build loyalty. I personally don’t see myself spending $695 every year on my Amex Platinum, but I definitely would do $395 for a similar premium card!
Regulatory Scrutiny
There are still some regulatory hurdles that Capital One and Discover must work out. No changes are expected for at least one year, so time will tell what exactly this will look like. I normally wouldn’t be concerned about the government intervening here, but multiple mergers have been blocked in recent years. The Jetblue and American Airlines reversal was painful for me personally. The Jetblue and Spirit failed merger left an indent on the air travel industry. Perhaps a judge will find this to also be unreasonable.
Final Thoughts
I’m leaning toward a positive rating on the merger news. As a Capital One customer, I look forward to tapping into Discover’s network. I might be a part of a company that grows much quicker in just a few years. While there will be hurdles along the way, I don’t find an issue with the market share issue. If anything, I feel the credit landscape continues to become more competitive.