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Capital One plans to buy Discover Financial Services in a deal that would merge two of the largest credit-card companies in the U.S., the Wall Street Journal reported.
The all-stock deal could be announced Tuesday, according to people familiar with the matter. Discover has a market value of about $28 billion, and the takeover would be expected to value it at a premium to that.
Buying Discover would give Capital One, a credit-card lender with a market value of a little over $52 billion, a network that would vastly increase its power in the payments ecosystem.
Card networks are critical to enabling transactions and setting fees that merchants pay when consumers shop with credit cards. Though much smaller than Visa and Mastercard, Discover is one of the few competitors to those companies in the U.S. and it is one of a small number of card issuers that also has a payments network.
Capital One, the ninth-largest bank in the country and a major credit-card issuer, uses Visa and Mastercard for most of its cards. The bank plans to switch at least some of its cards to the Discover network, while continuing to use Visa and Mastercard on others. Those larger networks have more merchant acceptance abroad than Discover does.
Capital One also plans to maintain the Discover brand on the cards and network—assuming regulators sign off and the deal is consummated.
Discover, based in Riverwoods, Ill., is an online institution so the takeover wouldn’t come with physical bank branches, except for one location in Delaware.
The deal follows a tumultuous period for Discover that has included increased regulatory scrutiny and a change in leadership.
The company disclosed last year that an internal review found it had misclassified certain credit-card accounts beginning in 2007, incorrectly placing them in the highest merchant-and-acquirer pricing tier. The company established a liability of $365 million to account for estimated compensation owed to merchants and acquirers.
Discover has been approached by large banks and technology companies about an acquisition of all or a part of its business over the past decade or more.
Tech companies have been interested in acquiring its network so that they can play a more central role in payments, but prior senior executives at Discover weren’t interested in separating the company’s credit-card lending side from the network.
For Capital One, the deal would also further expand the number of cardholders it will count as customers for its credit-card lending business. Many Discover cardholders have high credit scores.
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