XM bietet keine Dienstleistungen für Personen mit Wohnsitz in den Vereinigten Staaten von Amerika an.

Capital One scales banking’s Mount Improbable

<html xmlns="http://www.w3.org/1999/xhtml"><head><title>RPT-BREAKINGVIEWS-Capital One scales banking’s Mount Improbable</title></head><body>

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By John Foley

NEW YORK, May 30 (Reuters Breakingviews) -It’s easy to imagine that a bank chief nearly 40 years into the job would be looking for new challenges. Capital One COF.N boss Richard Fairbank is taking that to extremes. The $35 billion bid he launched in February for rival Discover DFS.N, which would create the biggest U.S. issuer of credit cards, is a masterclass in self-belief. To make it work, Fairbank will have to win over bank regulators, a combative antitrust watchdog, millions of merchants, investors, and then – if he really wants to make the deal work out – the whole world.

Fairbank founded Capital One in 1987, with a single-product offering: credit cards. The twist was to offer different rates and fees for different customers, at a time when other banks peddled standardized plastic. Capital One went public in 1994, adding in auto loans and bank accounts, and is now the ninth biggest U.S. bank. Its total assets have grown almost nine times over in the last 20 years, faster than any of its top-10 peers. Adding Discover would make it the U.S. number 6. Two decades ago, by comparison, it was number 44.

From the get-go, the deal differs from most bank mergers, which are about consolidating branches and deposit bases. The two companies combined would have fewer than 300 real-world outlets – compared with around 2,300 at PNC Financial PNC.N, the lender that they would leapfrog in asset size. More importantly, Discover doesn’t just issue credit cards: it also owns a major payments network, akin to Visa V.N, Mastercard MA.N and American Express AXP.N. These payment rails are critical for retailers accepting credit cards that sit in 80% of American wallets.

That’s where the ambitious part kicks in. Discover is a distant also-ran to the bigger networks, illustrated by the fact that consumers outside of the United States have basically never heard of it. Visa processed 25 billion credit-card transactions in the last financial quarter, while Discover handled a relatively measly 883 million. Even within the United States, Discover-stamped cards are valid almost everywhere but seldom seen, a challenge Fairbank himself calls low “perceived acceptance.” With blue-sky thinking, the prize is huge.

So, though, are the obstacles, the first of which is to persuade regulators. Capital One’s deal will be approved or denied by the Federal Reserve and Office of the Comptroller of the Currency. But the Department of Justice gets to make its views known, too. And if it doesn’t agree with the banking agencies, it can sue to block the deal.

The first task is to show that bigger isn’t badder, and ideally that the merger can be actively good for competition. On one hand, a larger provider could be better for customers – able to extend credit more widely, and fund more generous reward programs. On the other, size brings market power, and as Fairbank told analysts in February, scale matters in credit cards even more than other kinds of banking. While the two firms will only have 22% of overall credit card balances, the market is not monolithic. Consider less creditworthy customers, and their market share edges closer to the 30% level traditionally seen as problematic, according to rough numbers crunched by University of Michigan assistant professor Jeremy Kress.

The Fed and the OCC also have to weigh the risk to the financial system of an enormous bank with more than half of its lending in consumer cards, just as credit conditions are turning south. While Capital One is already subject to onerous oversight, the failures of four lenders last year, including Silicon Valley Bank, showed holes in the supervisory process.

Even if the bank overseers are relaxed, there’s the Department of Justice to contend with. After three decades of being relatively laissez-faire, the agency has threatened to toughen up its stance on bank mergers. Antitrust chief Jonathan Kanter says the department will view deals from more angles, although the new approach hasn’t yet been officially detailed. The watchdog’s sprawling case against concert promoter Live Nation LYV.N last week shows Kanter is feeling his oats. Credit cards would make for another appetizing meal.

Capital One says the deal leaves only winners, of course, but that’s not necessarily true. The most thorny competitive issue will be how merchants fare after a Capital One-Discover union. Retailers and other businesses that accept cards pay a swipe, or “interchange,” fee with each transaction. Typically amounting to a couple of percent, this fee isn’t something the merchant can haggle over, or easily pass on to customers. Instead, they must take or leave all cards on a given network.

The proposed merger wouldn’t much change that. If anything, a stronger Discover would be one that retailers couldn’t feasibly decline to accept. It would have more power, in theory, to keep its interchange fees high. Merchants might be able to get other perks when they use a beefed-up Discover network, like access to data or anti-fraud services. In any case, they get no direct say on the deal, though will certainly feature in any antitrust deliberations.

Even assuming Fairbank can get his deal through Washington, there’s another group to persuade: his investors. Their expectations are currently low, judging by Capital One’s share-price performance. The two companies’ combined market value has increased by just $3 billion since they announced their merger in February. Had they kept pace with the FTSE USA Banks Index, they would be worth $5 billion more. It’s as if investors fear the deal will destroy value, despite the companies’ estimated annual cost savings of $2.7 billion.

That’s not an idle fear. Discover has been a distant runner-up in credit card transactions for nearly 40 years. Closing the “perceived acceptance” gap will take investment, and lots of it. In particular, any credit card pitched at wealthy customers must be widely usable overseas too. And yet reaching all corners will be costly. Capital One’s $4 billion marketing expense is already almost as big as the colossal JPMorgan’s JPM.N.

Of all the challenges the Discover deal presents, turning a tiny U.S. network into a global one is the greatest. International expansion is rarely successful in retail banking – even JPMorgan is a minnow outside of its home market - and adding enough merchants to achieve critical mass is a guaranteed slog. It’s no accident that Visa’s $540 billion market capitalization is 10 times that of Capital One: it has achieved something impossible to replicate. Fairbank, though, may just see that as the next big career challenge.

Follow @johnsfoley on X

Capital One has grown far faster than the pack https://reut.rs/3Vk3rV1

Investors aren't stoked for Capital One's big deal https://reut.rs/4555BLt

Editing by Lauren Silva Laughlin, Pranav Kiran and Streisand Neto


Rechtlicher Hinweis: Die Unternehmen der XM Group bieten Dienstleistungen ausschließlich zur Ausführung an sowie Zugang zu unserer Online-Handelsplattform. Durch diese können Personen die verfügbaren Inhalte auf oder über die Internetseite betrachten und/oder nutzen. Eine Änderung oder Erweiterung dieser Regelung ist nicht vorgesehen und findet nicht statt. Der Zugang wird stets geregelt durch folgende Vorschriften: (i) Allgemeine Geschäftsbedingungen; (ii) Risikowarnungen und (iii) Vollständiger rechtlicher Hinweis. Die bereitgestellten Inhalte sind somit lediglich als allgemeine Informationen zu verstehen. Bitte beachten Sie, dass die Inhalte auf unserer Online-Handelsplattform keine Aufforderung und kein Angebot zum Abschluss von Transaktionen auf den Finanzmärkten darstellen. Der Handel auf Finanzmärkten birgt ein hohes Risiko für Ihr eingesetztes Kapital.

Sämtliche Materialien, die auf unserer Online-Handelsplattform veröffentlicht sind, dienen ausschließlich dem Zweck der Weiterbildung und Information. Die Materialien beinhalten keine Beratung und Empfehlung im Hinblick auf Finanzen, Anlagesteuer oder Handel und sollten nicht als eine dahingehende Beratung und Empfehlung aufgefasst werden. Zudem enthalten die Materialien keine Aufzeichnungen unserer Handelspreise sowie kein Angebot und keine Aufforderung für jegliche Transaktionen mit Finanzinstrumenten oder unverlangte Werbemaßnahmen für Sie zum Thema Finanzen. Die Materialien sollten auch nicht dahingehend aufgefasst werden.

Alle Inhalte von Dritten und die von XM bereitgestellten Inhalte sowie die auf dieser Internetseite zur Verfügung gestellten Meinungen, Nachrichten, Forschungsergebnisse, Analysen, Kurse, sonstigen Informationen oder Links zu Seiten von Dritten werden ohne Gewähr bereitgestellt. Sie sind als allgemeine Kommentare zum Marktgeschehen zu verstehen und stellen keine Anlageberatung dar. Soweit ein Inhalt als Anlageforschung aufgefasst wird, müssen Sie beachten und akzeptieren, dass der Inhalt nicht in Übereinstimmung mit gesetzlichen Bestimmungen zur Förderung der Unabhängigkeit der Anlageforschung erstellt wurde. Somit ist der Inhalt als Werbemitteilung unter Beachtung der geltenden Gesetze und Vorschriften anzusehen. Bitte stellen Sie sicher, dass Sie unseren Hinweis auf die nicht unabhängige Anlageforschung und die Risikowarnung im Hinblick auf die vorstehenden Informationen gelesen und zur Kenntnis genommen haben, die Sie hier finden.

Risikowarnung: Es bestehen Risiken für Ihr eingesetztes Kapital. Gehebelte Produkte sind nicht für alle Anleger geeignet. Bitte beachten Sie unseren Risikohinweis.