Under a $35 billion agreement that unites the largest US credit card firms, Capital One will purchase Discover

Capital One Financial announced that it will purchase Discover Financial Services for $35 billion. This would combine two of the country’s credit card businesses and may potentially upend the Visa and Mastercard-dominated payments sector.

Discover Financial stockholders will receive Capital One shares valued at about $140 as part of the terms of the all-stock transaction. Compared to the $110.49 at which Discover shares ended on Friday, that is a sizable premium.

With the significant exception of American Express, the agreement unites JPMorgan Chase and Citigroup, two of the biggest credit card firms that aren’t banks. Additionally, it unites two businesses whose clientele is essentially similar: Americans often seeking low-cost travel rewards or cash back in lieu of the premium credit cards offered by AmEx, Citi, and Chase.

Additionally, it will provide Discover’s payment network with a significant credit card partner, which may resurrect the network as a key rival. The Visa-Mastercard monopoly dominates the U.S. credit card market, with Discover coming in even farther behind and AmEx coming in third. Uncertainty surrounds Capitol One’s potential adoption of Discover or possibility of establishing a payment network that would enable Discover to be used in tandem with a second payment network, such as Visa.

Capital One is wagering that Americans would continue to use credit cards more often and maintain balances on such accounts in order to earn interest by purchasing Discover. According to the most recent figures from the New York Federal Reserve, as of the fourth quarter of 2023, Americans owed $1.13 trillion on credit cards, while total household debt levels rose by $212 billion, or 1.2%.

Whether the deal will pass regulatory scrutiny is unknown. Customers may get credit cards from almost any bank, but not all businesses are banks first and credit card firms second. Both Capital One and Discover, which was once known as the Sears Card, began as credit card firms before branching out into other financial services including checking and savings accounts.