Capital One to acquire Discover, Diners Club card, Pulse card network in $35.3 billion deal

Capital One to acquire Discover, Diners Club card, Pulse card network in $35.3 billion deal:

“US lender Capital One has agreed to buy rival Discover Financial Services for $35.3bn, in an all-stock tie-up that is, subject to regulatory approval, set to unite two of America’s largest credit card companies”. Subject to regulatory approval, this is not just a merger between similar companies in a highly fragmented market but the pairing up of complementarities that may have longer term strategic implications.

➡ Capital One is a Visa and Mastercard scheme issuer and, the merger would make it the owner of the third larger scheme by number of cards in the US. Discover has a reciprocal agreement with a number of major domestic schemes ranging from UnionPay, RuPay Card, Elo, Prosa and others, being, de-facto, a co-badging competitor with Visa and Mastercard for the enablement of cross-border and online acceptance for smaller networks.

➡ Though the acquisition, Capital One would own Pulse (acquired by Discover in 2005), an EFT/debit network that serves over 4,400 financial institutions and over 380,000 ATM in the US. This implies that 4,400 US financial institutions will be issuing debit cards that are processed, practically, by a competitor.

➡ Discover is accepted by about 99% of merchants in the US. This would give Capital One the ability to leverage price acceptance and benefit by on-us processing capability to potentially influence merchant’s preference throughout the country.

There are a number of questions are being raised by this deal whose answers have a wider market implication:

👉 Will Capital One consider converting its own portfolio away from Visa and Mastercard to Discover and Pulse?

👉 How will other financial institutions issuing Pulse cards, or distributing Discover, react?

👉 What will be Visa and Mastercard position with Capital One becoming a domestic and international payment switch?

👉 Will the new entity remove discover network, to reduce costs, and reduce revenue ?

This also has implications for RuPay cards issued in India. Some RuPay cards run on discover/diners club/pulse network outside India.

If we look at Australia, Discover Financial Services loses all Diners Club International merchants in Australia.

On June 1, 2022, National Australia Bank bought Citigroup's Consumer Banking business in Australia, including the Australian branch of Diners Club.

There was a reciprocal arrangement whereby Diners Australia cardholders could use their card at US Discover merchants, Diners club Australia card holders were able to access RuPay India.

On 1 November 2023, Diners Club Australia announced that it was ending personal cards on 31 January 2024 with no transactions possible after that date. All Diners Club personal accounts will close on 30 July 2024.