Capital One & Discover Merger - First Look // Cornerstone Hot Takes

Hey, GonzoBankers. Tony DeSanctis, wanted to touch base on the Capital One-Discover merger. Obviously, big news coming off the long weekend.

A couple of things we wanted to talk about. As with any merger, there are always three components to it.

First is the growth. They’ll become the largest credit card issuer in the country. They’ll be about $40 billion bigger than Chase, which sounds like the main reason to do something like this. But in actuality, there are a couple of other things I want to talk about.

The second, for those of us who know how fun it is to try to gather up deposits in today’s environment, they’re going to add about $84 billion in deposits from Discover.

So the ability to basically become the sixth-largest depositor in the country, from a deposit cost perspective, is a huge benefit in the current rate environment. Certainly some benefit there.

The third piece is what I want to spend a little bit of time on, which is the cost-save side of things.

So in a typical merger, we know there are efficiencies, operational efficiencies, marketing expense. What’s interesting in the investor presentations here is they’re only projecting about half of the savings to come from those traditional operating expenses.

The biggest component, almost half of the overall savings they’re projecting from this deal, is the network migration.

So by purchasing Discover, which also owns Pulse as a single-message network, they’re going to migrate their entire debit portfolio and some significant portion of their credit portfolio over to the Discover networks, thereby reducing their dependency and also the cost structure around what they pay today in their relationships with Visa and Mastercard.

Richard Fairbank was quoted as talking about Pulse being a significant portion of the reason for the move and the 4,500 banks that are already on the Pulse network.

So that’s super interesting because it’ll be an environment where, as Discover has in the past, Capital One could potentially start partnering with banks and credit unions, offering that secondary network.

There are CCCA implications, which we haven’t talked about. We’ll save that for another video, and as we get more information, we’ll be looking forward to sharing it with you.

So stay tuned.