I could tell you who is probably having a busy morning: top execs at Visa (V), Mastercard (MA), and American Express (AXP) following Capital One’s (COF) $35.3 billion deal for Discover (DFS).
I suspect they will be fielding calls from investors who will be curious about their thoughts on what this transaction could mean for the future of competition in the payments space (notice I say could, because in this regulatory climate and ahead of an election, a consumer credit card deal will be very closely scrutinized by regulators).
Some initial talking points for what this combined company will look like:
The vibe on the Street this morning is that the deal makes strong sense for Capital One and is the right move even if the price tag is stiff (said price tag is hitting Capital One’s stock to the tune of over 3%).
But it’s the commentary around the implications for Visa, Mastercard, and Amex that has captured most of my attention this morning(note: shares of Visa, Mastercard, and Amex are all lower).
For your review:
“According to The Nilson Report, Capital One issued debit and credit cards generated ~$600 billion in purchase volume in 2022 (3% of V/MA global volume), making it the third largest domestic issuer of V/MA credit cards (~60% of its credit card portfolio being with Mastercard according to Nilson, ~40% Visa) and the twelfth largest debit card issuer (primarily Mastercard, we believe). We expect any transition away from V/MA would likely be slow (Mastercard renewed its network partnership with Capital One in 1Q22, Visa in the fourth quarter of calendar year 2022) and portfolio by-portfolio (V/MA have a ~40% larger global acceptance network). Acknowledging Discover’s network is much smaller generating 2% the volume as V/MA globally, it gives Capital One the optionality to negotiate away from (or price-down) the global networks over time, in our view.” -JPMorgan analyst Tien-tsin Huang
“We believe the combination of COF and DFS should be strategically compelling from a competitive perspective vs. V/MA. At a high level, the risk to the networks is simple—can COF monetize DFS’s network capabilities, which historically have not gained much market share vs. the networks? COF’s strong card and banking presence could prove to be the combo platter that starts a more competitive environment vs. V/MA and AMEX. Obviously, V/MA do not underwrite credit and therefore must rely on their card issuing bank relationships for direction and non-anonymized data, but in an environment of AI, whereby large ‘specific’ data assets are becoming more valuable, the combination of Capital One and Discover becomes more compelling, in our view. All else equal, we believe the combination could prove to be more competitive for V/MA and thus worth watching.” -RBC analyst Daniel Perlin