In a bold move consolidating their foothold in the finance industry, Capital One Financial Corp. is set to acquire Discover Financial Services in a massive $35 billion deal, bringing under one roof two of America's heavyweight lenders and credit card moguls. Following Friday's market close, where Discover's shares ended at $110.49, a joint press release announced Discover Financial shareholders are due to receive Capital One shares valued at around $140 each.
Merging their considerable assets, the Virginia-headquartered Capital One, which Chicago Sun-Times ranks as the 12th largest U.S. bank, and Illinois-based Discover, ranked 33rd, look to dominate an industry that has seen a rampant surge in credit card use. The American populace, having accumulated $1.13 trillion in credit card debt, reflects this trend distinctly, underscoring an alarming 1.2% bump in household debt balances witnessed in the latter quarter of 2023.
The ramifications of this acquisition extend beyond mere market presence expansion. Capital One is poised to bolster its deposit and loan portfolio significantly and will gain control over Discover's payment processing network, tapping into fees generated from the swath of merchant transactions coursing through the network. This development was confirmed by the Hindustan Times, noting Capital One's strategy to woo premium customers harmonizes with Discover’s affinity for prime customers with robust credit scores.
However, Discover's recent path has not been without its regulatory hurdles. Last summer, the company reported misclassification of certain card accounts dating back to 2007. Compounding their headaches, an unrelated consent order from the Federal Deposit Insurance Corporation regarding its customer compliance management surfaced. Banking analysts at Citigroup have suggested these regulatory challenges may have greased the wheels for this major corporate transaction. "We are surprised that DFS would sell, but suppose that its regulatory challenges such as its recent October FDIC consent order and the card product misclassification issue may have opened the door for the board to consider strategic alternatives that it may not have in the past," was penned down in a note to clients, which analysts Arren Cyganovich and Kaili Wang scribed.
Both financial institutions have been padding their reserves in anticipation of potential borrower defaults, a move reflecting the precarious financial state that numerous lower- and middle-income Americans find themselves in, struggling under the weight of persistent inflation and dwindling savings. The past year saw a remarkable dip in profits for both, with Capital One's net income taking a 35% nosedive and Discover's profits plummeting by 33.6% as reported by the Chicago Sun-Times.
