Why Capital One-Discover Merger Is A Threat To Visa, Mastercard: Creation Of New Credit Card Giant

The $35 billion takeover of Discover Financial Services DFS by Capital One Financial Corp COF creates the U.S.’ biggest credit card operator, and a major headache for rivals Visa Inc V and Mastercard Inc MA.

The synergies created are what drove the deal. Capital One now has a credit card network of its own and, if it chooses, can move its cards issued on the Visa and Mastercard networks to that of Discover.

Capital One, however, has recently negotiated renewed partnerships with both Visa and Mastercard, so the transition will be some time in the making.

Market Share And Synergies

In the U.S. alone, the deal ensures Capital One nearly a quarter of the market, according to Goldman Sachs analysts.

Lead analyst Ryan Nash said that the synergies of the combined group would equate to cost savings for Capital One of $1.5 billion and network synergies of $1.2 billion by 2027.

“When we combine the standalone companies and include available disclosures, we estimate potential earnings accretion in the 12-16% range,” Nash said.

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Threat To Visa And Mastercard

Currently, around 42% of Capital One’s credit cards run on Visa, while the other 58% are issued on Mastercard. This isn’t likely to change immediately, as Capital One has recently renegotiated its deals with the two operators.

“Capital One probably would not want to make immediate major changes that could cause cardholder
disruption,” said Mihir Bhatia at Bank of America.

He added, however: “The transaction announcement indicated that Capital One’s debit purchase volumes and selected credit card volumes will be moving to Discover in pursuit of Capital One’s targeted network synergies of $1.2 billion in 2027.”

In a worst case scenario, the analyst said, where all of Capital One’s cards flip to Discover — based on the mix of cards issued by Capital One on both Mastercard and Visa — Mastercard could lose around 25% of its U.S. credit volume, while Visa could lose around 9%. That’s 5% and 2% respectively of global purchase volume.

Potential Regulatory Hurdles

But the deal is not yet done. Given the scarcity of players in the credit card payment networks industry, the proposed takeover could yet face a regulatory investigation.

“When looking at market share and size of the combined institution, we believe this proposed deal could face regulatory scrutiny,” said Nash.

Bhatia added: “In general, credit card lending is highly concentrated with the 10 largest issuers currently accounting for over 80% of total credit card loans outstanding.”

The question for regulators, however, will be whether the merger creates a company whose size and scale — servicing a network of more than 300 million cardholders — will allow the company to influence pricing and fees.

Investors already appeared to have concerns over the implications for rivals. Mastercard shares were down 3% at $454.31, while Visa fell 1% to $275.78 on Tuesday. American Express AXP, which isn’t seen as being directly affected, rose 0.2% to $212.97.

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