Capital One Aims to Buy Discover: What Does that Mean?

Three Capital One credit cards photographed.
Capital One credit cards are shown in Mount Prospect, Ill., Tuesday, Feb. 20, 2024. Capital One Financial is buying Discover Financial Services for $35 billion, in a deal that would bring together two of the nation’s biggest lenders and credit card issuers. Nam Y / AP Photo

Capital One is attempting to buy Discover — does that matter for you?

It matters for consumers who depend on credit to live their lives and who pay high interest rates for the privilege. It also matters to the corporations that make money off the credit extended to those people.

Capital One and Discover cards would continue to be issued and Discover would remain its own brand. However, the merger would reduce the number of companies offering expansive lines of credit. Less competition can translate to higher interest rates for consumers.

It does also mean all of the benefits of the two cards in terms of checking, savings and loan accounts would likely extend to each other. So customers could have more banking products and services available to them.

The firms that make money off the high interest rates already in service could see the merger as a market opportunity to extend more credit at higher rates.

However, Capital One buying Discover is not a done deal.

What’s Next

For any of this to happen, the merger must be approved by federal regulators. The current climate among them is to carefully examine large transactions among financial institutions. The deal has already drawn the attention of the nation’s premier watchdog of banking transactions that could harm consumers – Sen. Elizabeth Warren (D-MA).

One hitch in the deal is that Capital One and Discover are not bank-owned credit companies. They are pure credit card companies that have expanded into banking services. That status could raise the ire of the banking industry and its powerful lobbying machinery.

However, most observers believe the deal will close in late 2024 or early 2025, pending regulatory approval and a vote of shareholders of each company. Unless and until Capital One buying Discover goes through, the average consumer likely won’t be affected.

The Competition

Capital One’s $35 billion offer to purchase Discover is seen as an attempt to compete with the two powerhouse credit cards in the world — MasterCard and Visa. The merger would give the new company the largest total credit amount extended to consumers in the form of loans and advances.

Capital One and Discover are best known among consumers for catering to a less global and less affluent clientele than the other major cards. But Capital One benefits from one of the most expansive reward programs in the field. That entices high-end consumers looking to take advantage of their extensive spending habits.

Discover, too, has a popular reward program for its largely penny-pinching, perhaps overextended, clientele. Discover has more than 60 million cardholders, while Capital One has more than 44 million accounts. The one characteristic that holds back the Discover Card is that fewer firms accept that card as payment. The merger would likely improve Discover’s appeal among producers.

The Stakes

Credit card balances have climbed to noticeable heights. That is largely because of high inflation during the first two years of the decade. The Federal Reserve Bank of New York estimates Americans’ total credit card debt was at $1.129 trillion in the fourth quarter of 2023, a portion of the $17.5 trillion in total household debt that includes mortgages, automobiles loans and home equity lines of credit.

A major cause of the debt level is the high rate of interest on bank credit cards, which averages 21.5%. Because Americans don’t seem to mind paying such high interest for the benefit of credit, all card issuers are trying to take advantage of the mood swing among consumers.

Bankrate estimates that almost 50% of consumers carry a credit card balance month over month.

The bottom line is: nothing will change for the companies’ customers until the merger goes through.

Kent McDill is a veteran journalist who has specialized in personal finance topics since 2013. He is a contributor to The Penny Hoarder.