The Biggest Reason Why Capital One Is Buying Discover (It's Not What You Think)

Earth-shaking news hit the credit card industry on Feb. 19, 2024, with Capital One's announcement that it is buying Discover® for $35.3 billion. This merger still needs to be approved by company shareholders and federal regulators, but it has the potential to turn Capital One into America's largest issuer of credit card loans.

But buying Discover won't just turn Capital One into a bigger company. This deal could deliver big benefits for credit card customers and the merchants (restaurants, retailers, and other businesses) that take card payments.

Let's look at the underlying reason for why Capital One is buying Discover, and how this deal could shape the future of credit cards.

It's all about the Discover payment network

Discover is a unique credit card company in many ways. It offers generous cash back rewards on credit cards and debit cards, and has full-service online banking with high-yield savings accounts. One reason why Discover can offer such extensive rewards programs is because Discover isn't like most credit card companies: Discover owns its payment network.

Capital One is buying Discover not just to get bigger by adding Discover's customers to its total. And Capital One is not trying to eliminate the Discover brand (Capital One has already announced that the Discover brand is not going away). Instead, one of the biggest opportunities of buying Discover is that it will enable Capital One to own a payment network. This is a huge advantage for a credit card company.

How credit card companies make money

Every time you swipe your credit card at a store checkout or make an online purchase, credit card companies make money by charging the merchant a small percentage of what you spent. This little cut of every credit card transaction is called a credit card processing fee, or "swipe fee." Most people don't know about it and don't notice it, but swipe fees add up to billions of dollars per year.

Credit card companies have to pay a portion of those behind-the-scenes fees to payment networks like Visa and Mastercard (the top two biggest payment networks). Because Discover owns its payment network, it doesn't have to pay credit card processing fees to Visa or Mastercard. (American Express is another company that has its own payment network; the third largest after Visa and Mastercard.)

By controlling its own network, Discover can keep a little extra money from all of those credit card swipe fees. This makes it easier for Discover to be profitable, and to offer those unique cash back rewards programs. Capital One wants in on this action.

How Capital One buying Discover could change credit cards

If you're an average credit card user, you're not likely to see any big changes overnight because of Capital One buying Discover. But if you're a customer of either company, there are a few longer-term changes that you could start to see happening in your wallet.

By owning Discover's payment network, Capital One can save lots of money that it currently pays to Visa and Mastercard for processing fees. Capital One can also use the large scale and profitability of its newly acquired payment network to create new financial products. No one knows for sure if or when Capital One will change the logos on the front of its cards, or what kinds of new products it might launch. But here are a few ideas.

Capital One could create new programs for merchants/retailers

CNBC reported that Capital One might use the additional fees from owning Discover's payment network to work more closely with merchants. Credit card customers might not notice right away, but Capital One could use this opportunity to develop interesting new loyalty programs, payment options, or incentive programs to shop with merchants and retailers.

If you're a Capital One customer, you might start to see some compelling new benefits, perks, or special offers from your favorite brands where you shop most often. By owning the Discover payment network, Capital One might start working with retailers on creative ways to earn more of your business -- while processing your payments.

Capital One debit cards could become more like Discover

Debit card rewards programs (similar to Discover's cash back rewards debit card) could also be a new feature for Capital One customers as a result of this merger. Capital One already offers highly rated rewards credit cards. But its checking account does not match the benefits of the Discover® Cashback Debit account, which pays 1% cash back on up to $3,000 of qualifying debit card purchases per month.

Sometimes when companies go through a merger or acquisition, the two companies learn from each other and adapt (and build upon) each other's best ideas and strategies. By buying Discover, Capital One has the chance to create exciting new products and value-adding experiences for its current and future customers.

Bottom line

Owning Discover's payment network is the ultimate prize of Capital One's newly announced acquisition. By being able to control its own payment network, and avoid paying fees to Visa and Mastercard, Capital One is opening up new opportunities for its customers, and for Discover customers. There might be interesting new product innovation and additional competition coming to the world of credit cards.