Buying Discover would make Capital One bigger — and give it a payments network

Capital One, a bank and credit card issuer (known for its celebrity-studded ads) wants to buy the credit card company Discover for $35 billion in stock. If the deal goes through, it would make Capital One the nation’s largest credit card issuer, surpassing JPMorgan Chase.

But Capital One isn’t looking to become too big to fail, it’s trying to buy a payments network.

What’s a payments network, you ask?

Well, when I go into my local coffee shop and tap my credit card on the reader, it connects to a payments network. (There are four big ones in the United States: Visa, Mastercard, American Express and Discover.) David Schiff of the consulting firm West Monroe describes what happens next.

“It sends out a signal over the network to say, ‘Does Stephanie have money in her account that allows this transaction to occur, yes or no?'” Schiff said.

Hopefully, the answer’s yes. Then there’s a satisfying little “boop!”

I can take my coffee, and whoever owns the payments network takes a little slice of what I paid. 

Add that up over millions and millions of transactions, and it’s real money.

Schiff, who’s worked on other projects for Capital One and Discover in the past, said if this acquisition goes forward, Capital One would get Discover’s payments network. That means anytime someone buys their coffee with a Discover-branded card, Capital One wouldn’t have to pay another network for the transaction. Also, it could charge other credit card issuers who use the Discover network.

That is “collecting that money from other issuers that want to ride on the Discover rails, the Discover network,” Schiff said.

Buying a payments network is a lot easier than starting one, which can take decades.

“It’s an extremely difficult thing to build up, as you have to go sort of merchant by merchant,” said Andrew Davidson, chief insights officer at Comperemedia, which provides market intelligence around financial services marketing.

Owning a payments network would also put Capital One in much closer contact with those merchants. So it could say, “Hey, coffee shop! Would you like any of these other services that we offer? A loan? A line of credit?” 

“For example, Capital One has been moving, and has been for a while, offering business credit cards and business banking and other types of services,” Davidson said.

He also said with this acquisition, Capital One would have an even bigger marketing budget.

That means we might see even more of those star-studded ads.