Capital One Plans to Acquire Discover

I thought I knew what this week's post would be about, but then news dropped Monday, on the Presidents' Day holiday here in the U.S., that Capital One, the nation's fourth-largest credit card issuer will acquire Discover, the owner of the country's smallest credit card acceptance network and sixth-largest issuer.^[1]

Wow.

The rumors about Discover being for sale have been around for years. Discover started as a Sears, Roebuck, & Co. project in the mid-1980s. While Sears went through a long decline following the introduction of e-commerce, Discover remained part of the Dean Witter brokerage through a purchase by Morgan Stanley in 1997. Ten years later, Morgan Stanley spun off Discover as an independent, publicly-traded company.

Discover and American Express are unique among all other U.S. card issuers. While most banks participate in the four-party system, in which the network is separate from the bank, and two different banks may own the acquiring and issuing relationships, Discover and American Express are a three-party system. In this case, the bank and the network are one and the same. The bank/network has a direct relationship with both the consumer and the merchant (while merchant processors may still be involved, legally, the network has a direct relationship instead of the member bank, as is true with Visa or Mastercard).

There are so many articles and analyses about this deal, so I won't try to cover all aspects. I would like to highlight a few key items:

1. One part of this is a standard bank deal. Capital One acquires a lot of loans and deposits and grows its franchise. It's a good deal for Discover checking account holders: over time, they should have access to Capital One's branches, cafes, ATMs, and more. Banking is a volume business, and there will be economies of scale.
2. One part of this is the network deal. Capital One has years of existing deals ahead of it with Visa and Mastercard, with incentives for volume. Initial reports also state the bank will maintain some cards on these networks. However, the deal provides a way for Capital One to compete more directly with American Express by having an integrated network. Capital One can use this network to innovate, gain margin, compete on price with Visa and Mastercard, and more.
3. The regulators and politicians will be all over this. Many have already come out against the deal. I prognosticate that some divestitures or agreements will be required, but this will get done. A stronger Discover Network under Capital One is better for competition in a market dominated by Visa and Mastercard. We all win with better competition.
4. Co-brand issuers should be on the lookout. With a network and enhanced scale, Capital One can offer its partners better terms and strike interesting deals on the acquiring side.

However this turns out, there is a long road ahead. Deals like this take a long time.

Dillard's Co-brand Moves to Citi from Wells Fargo

Speaking of co-brand deals, news dropped this week that regional department chain Dillard's is moving its co-brand card from Wells Fargo to Citibank. The Wells Fargo Dillard's card was issued on American Express (yes, AMEX is sometimes also a four-party network, confusing, no?). Wells Fargo migrated its other AMEX product, the Proper AMEX, to Visa last year.

The Dillard's cards will become Mastercards this fall, and new cards will be released this summer. Citi is the second largest private label issuer, according to Nilson.^[2]

CardsWTF: Score Dating App

The folks at Neon Money Club have been getting a lot of press for their Valentine's Day PR stunt: Score. An unnamed Totavi employee tried the dating app, and it didn't work. I love the free press angle of this whole thing, but I do not like the idea of it. Many people have their credit scores damaged by reasons out of their control. The idea that you should filter dates by credit score is offputting to me.

Starbucks Tries A New Angle on Cards

While the Starbucks mobile app, loyalty program, and gift card program have been hugely successful, their efforts at co-brand cards have been lacking. Starbucks discontinued its first attempt, the Duetto Visa in 2010, which was issued by Bank One (now Chase). The two companies launched the Starbucks Rewards™ Visa® Card, which integrated into the successful loyalty program in 2018, but sunset the program in 2023, after discontinuing applications in 2022.

Last week saw the announcement of a new style of partnership with Bank of America. Recognizing that consumers do not want a co-brand credit card just for coffee, the new program provides a cashback incentive when any Bank of America branded card is used at the chain, provided the user opted into the deal via BankAmeriDeals.

BankAmeriDeals is the branded version of Cardlytics' card-linked offers on the BofA platform. Typically, offers are pretty small, like 5% back at Starbucks up to $2.00. (I've done OK, saving more than $800 since the program launched more than a decade ago.)

BofA customers can enroll in the deal and earn an incremental 2% cashback, plus an additional Starbucks star per every $2 spent via the app. I'm unclear if users will also earn their BofA Rewards bonuses, but it's a pretty good deal. I found the enrollment a bit clunky, but it worked: I'll be reloading my Starbucks App with my Bank of America TravelRewards card, earning an effective 4.625% cashback instead of my Chase Sapphire Reserve (earning 3 points per dollar on dining, worth up to 1.5 cents or 4.5% effective cashback). That 0.625% really counts, not to mention the bonus star! (Don't judge: I have teenagers. We go to Starbucks a lot.)

Me, Elsewhere

Bank Automation News quoted me in Capital One, Discover integration could cost $2.8B discussing the likelihood of a successful acquisition and the technical migration.

CardsFTW

CardsFTW is a weekly newsletter, released most Wednesdays, that offers insights and analysis on new products in the credit and debit card industry for consumers and providers. CardsFTW is authored and published by Matthew Goldman and Ellen Perl of Totavi, LLC. Totavi is a boutique consulting firm specializing in fintech. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.

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1. Nilson Report, May 2023, Issue 1242 ↩︎
2. Nilson Report, February 2024, Issue 1249 ↩︎