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Dan Loney: Well, the merger
between Capital One and Discover
00:00:02
has apparently been completed.
So what does this deal mean for
00:00:06
the consumers as well as the
firms themselves? Pleasure to be
00:00:09
joined by Paul Nary, who is
Assistant Professor of
00:00:12
Management here at the Wharton
School. Paul, great to talk to
00:00:15
you. How are you?
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Paul Nary: I'm doing great
and really happy to be here chatting with you
00:00:19
today.
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- Thank you. Look, this had been
kind of in the mix for a while.
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But when you think about these
two companies, I think a lot of
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people look at Discover as maybe
the one that was kind of ripe to
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be the target. Fair to say?
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- Perhaps. They were definitely
approached by other potential
00:00:39
acquirers before. They were,
you know, one of the smaller,
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quirkier competitors in the
space. So certainly, there's
00:00:46
been chatter about Discover
being a potential target prior
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to this transaction. Now, based
on the conversations that I've
00:00:53
had with some insiders in the
filing so far, it doesn't look
00:00:56
like they took any of those
prior potential transactions,
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you know, further than just
casual talks. So this was really
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the first serious deal that
they considered, at least in
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last couple of
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years. - So then which side then
gains the most from a deal
00:01:14
between Capital One and
Discover? - Well,
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I think the shareholders of
Discover because they're getting
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a nice, reasonably nice premium,
although this was an interesting
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deal, in that it was a stock
transaction where there wasn't a
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lock on the share, you know, in
case the shares of one or the
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other companies moved too much.
But overall, I think the
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shareholders are getting a nice
premium, and Capital One is
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getting a really interesting
asset that comes with a lot of
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opportunities, but also quite a
few challenges for Capital One
00:01:51
as it tries to put this
transaction together. - Such as
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what? - Well, this is a huge
transaction, and these are
00:01:59
always highly idiosyncratic in
both the opportunities and
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challenges that they offer, but
also just the sheer complexity
00:02:08
of integrating two companies
that are worth tens of billions
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of dollars with all of their
employees, assets, processes,
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systems, etcetera. So
integration here is going to be
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critical for Capital One,
because much of the benefits of
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this transaction that it
foresees, whether they're real
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or not, are based on integrating
the two companies together and
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making joint use of some of the
shared assets that they have.
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- And
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I guess the area of payments
networks in general is just a
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very interesting one to keep an
eye on and see how it continues
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to develop as
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well. - Yes, absolutely. And
again, it's an area with a
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lot of challenges and a lot of
opportunities. From Discover's
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perspective, they're a small
player and the payments networks
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are still below, I believe, four
or five percent of the global payments
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volume. So they're a tiny player
next to Visa, MasterCard, and
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American Express, all of which
have more than -- each of which has
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more than 20 percent market share in
the space. So they're a small
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player there. You don't hear a
lot about Discover, but
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payments certainly, and
vertical integration have been
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ongoing themes in the space, for
better or worse. For example,
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you can look at the transaction
just a few years ago of FIS
00:03:24
acquiring World Pay, which was a
payments company, a similar
00:03:28
vertical integration move, that
was a $43 billion transaction
00:03:32
that failed within a few years.
And if I remember correctly, FIS
00:03:38
had to write off at least 17 or
18 billion dollars, not to mention other
00:03:44
losses and costs associated with
this transaction. So that was a
00:03:48
$20 billion loss of shareholder
value from a similar transaction.
00:03:53
A financial services company
trying to vertically integrate
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into the payment space.
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- Whenever you see a deal like
this, usually the questions come
00:04:01
from Capitol Hill about reducing
competition. Does this deal
00:04:06
significantly impact the
consumer, especially of these
00:04:09
two companies moving forward?
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- I think it's actually going to be
great for the consumer. You
00:04:15
know, it's not creating any kind
of a monopoly in the space. And
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if anything, it's giving
additional resources and support
00:04:25
to the fourth player in the
payment space, that is Discover.
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So if it actually strengthens
the Discover network, it may
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create more opportunities for
customers. It's probably going
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to spur some competition, from
my perspective, because now
00:04:41
there is going to be competition
for, you know, both on the
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merchant side as well as the
customer side. So if anything, I
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think for the customers, we'll
see more promotions, more
00:04:52
bonuses as not only Capital One
tries to make the most of this
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transaction, but also as
American Express, Visa,
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MasterCard, and other banks,
Chase, of course, with their
00:05:03
credit cards the largest player,
try to compete with this
00:05:06
newcomer. So there's going to be
some reshuffling. And I think
00:05:09
ultimately, the consumers will
likely benefit.
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- And I read that, I guess if
you're a consumer of Capital One
00:05:16
and have a card with them, it
sounds like Capital One wants to
00:05:20
move their cards over into
Discover space. So consumers
00:05:24
probably do have to be aware of
some potential changes that
00:05:28
could be coming up in the
future.
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- Yes, so this will be
interesting. So as far as I
00:05:31
know, Capital One will switch
some of their cards to
00:05:34
Discover, but not all there.
From what I understand, they're
00:05:38
planning to switch their debit
cards for Capital One Bank
00:05:41
customers to the Discover
network, which will likely not
00:05:46
create much change for the
existing customers, you know,
00:05:50
especially the US based
customers. But from what I
00:05:53
understand, they're planning --
and this is one of those
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idiosyncrasies and complexities
of this deal. From what I
00:05:58
understand, Capital One is
planning to switch their lower
00:06:02
end, or more sort of US centric
cards to Discover. But
00:06:10
from what I understand, they're
planning to keep their higher
00:06:12
value, sort of higher end cards
that are used by international
00:06:16
travelers, etcetera, they're planning
to keep those on their existing
00:06:22
network, primarily Visa, I
believe, because as of right
00:06:25
now, and this is another
challenge for Capital One,
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Discover does not quite have the
network of Visa, MasterCard,
00:06:32
American Express overseas. So in
order not to alienate those
00:06:37
customers who are using their
cards globally, who travel a
00:06:40
lot, who need access, Capital
One would need to keep those
00:06:44
cards on the bigger payments
networks, at least until they
00:06:49
figure out a way to make
Discover accepted more widely
00:06:51
internationally.
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- Paul, great to have you with us
today. Thanks very much for your
00:06:55
time. All the best. - Yeah, it was
great being here. Thank you.
00:06:58
- Thank you. Paul Nary, who is
Assistant Professor of
00:07:00
Management here at the Wharton
School.
