Capital One Discover: Debit Disruption Is Here

Hey, GonzoBankers. Tony DeSanctis back with another hot take.

Well, it’s official. The Capital One-Discover merger is going through, scheduled to close on May 18th, essentially creating the largest credit card issuer in the country, surpassing JPMorgan.

But that’s not the real story. I wanted to take a minute to just kind of refresh what we talked about when the merger was first announced, which is the debit disruption that has the potential to come out of this deal.

So I think we’ve talked about it before, but just as a recap, the Durbin Amendment applies to all institutions over $10 billion for four-party transactions. So merchant, merchant acquirer, network and issuer.

What the merger does for Capital One is it consolidates two of those so that instead of it being a four-party transaction, it is a three-party transaction, which essentially means Capital One-Discover, as a combined entity, is no longer subject to Durbin.

Which means that Capital One-Discover has the same interchange opportunity as smaller banks and credit unions that are under $10 billion.

This is a significant opportunity for them. They’ve identified it as about a $1.2 billion opportunity, but more importantly, it’s a real risk for us as community banks and credit unions because they now have not only the size and scale of a large institution, but they have the interchange of a non-regulated, non-Durbin-subject institution.

And so we’re going to see some pretty aggressive marketing, potentially robust rewards offerings and a very difficult competitive environment as they come into the market and consolidate these.

Capital One has already said they’re going to move all of their existing debit cards to the Discover brand, which will put them into this three-party transaction and essentially put them in a position to be able to start offering way more robust, potentially, rewards and value props within their checking products than they already do today, and they’re already very competitive.

So we need to be aware of this. There’s not much we can do about it at this point now that it’s happening, but we need to be aware of it and be prepared for how we’re going to position ourselves competitively against a strong, robust product like this.