Written by: Erica Sandberg
Edited by: Lillian Guevara-Castro
There are a number of compelling reasons the Capital One-Discover Financial Services merger is a positive event, but expanding credit access is at the forefront.
When people are struggling to get their first credit card or rebuild a damaged credit history, they will very often take the first decent account they can get. Once they have it, they will typically stick with that credit card for many years.
This is not just a matter of convenience, but loyalty. That issuer gave them a chance. As long as the account continues to benefit a cardholder, odds are they will keep the card and use it to their advantage.
Per Experian data, the average U.S. adult currently has 3.9 active credit cards in their wallets, and LendingTree reports that the average age of the oldest active credit card account is nearly 22 years. The first card a consumer was approved for, therefore, often wins a key spot in the lineup. Additionally, if they do hold on to that first account for many years (and handle it well), it greatly benefits their credit ratings.
Because credit opportunity, longevity, and score building are so valuable, Capital One’s acquisition of Discover is prudent. Both companies work with near-prime and subprime customers, but Discover is known for offering credit cards with no annual fee, a factor that holds special appeal to people with limited incomes.
Many of their products are designed for relatively easy approval and promoted as a way to repair damaged credit, with a range of accounts for students as well as nonprime consumers.
And that’s just the beginning of the benefits of the merger of these two credit granting giants.
Bringing Subprime Cardholder Market Into the Fold
According to the company’s press release, Capital One is expected to keep the Discover brand active. As a credit card issuer looking to expand its customer base, acquiring an issuer that already works with the subprime market and has a good reputation is a wise move.
Last year, 47 million Americans fell into the subprime-borrower category. Low scores coupled with low income creates qualification challenges, as such applicants may be considered too great a lending risk.
A recent Federal Reserve report found 53% of credit applicants with income below $50,000 experienced credit denials, as opposed to just 16% of applicants with income above $100,000.
Everyone has to start somewhere, though. It’s important to recognize that many of these consumers may start out with no or bad credit, but take action to move up the credit-scoring ladder.
Giving these consumers a leg up with an account that matches their current profile, such as a secured card or one with a low initial limit, and then having it grow with them (or offering additional products) is mutually beneficial.
After proving their merit by paying on time and keeping revolving debt in check, they may get their deposit back or enjoy gradually larger credit lines, both of which can inspire a strong connection with the issuer.
Granting Credit Cards to People Who Fall Under the Radar
The other category of cardholders that need to be served are people with nonexistent credit profiles. These consumers may be financially responsible but haven’t used credit products that show up on U.S. credit reporting agency files. They include:
- Young adults
- Recent immigrants
- Divorced people who relied on their partner’s credit
- Low-income individuals
Combined, this is a massive pool of people who are eager to use credit cards and develop positive credit scores. Yet, without an established history of using credit products well, they are inherently risky.
When Capital One and its new acquisition provides people in this demographic with their first credit card, the cardholders can quickly transform from unknown risk to known risk. It only takes a month or two of having and using a single credit card to create a VantageScore and six months to develop a FICO Score.
Once these cardholders develop a high credit score, they may be eligible for more premium cards with substantially higher credit limits. The more this group spends, the better for all concerned. Big chargers result in increased revenue from transaction fees for the issuer, merchants gain more consumers, and consumers obtain cards with valuable benefits.
The Merger Increases Competition and Helps Consumers
Bringing Discover’s subprime cardholders into the Capital One fold is not just a powerful way to expand credit opportunity, however. It gives the merged company an estimated 30% control over the subprime credit card market.
One of the concerns about the merger is that it could decrease competition among card issuers. Capital One is currently the fourth-biggest card issuer in the U.S., and Discover holds the No. 6 spot. As a forged company, it becomes more dominant in the space.
Both Capital One and Discover don’t just focus on the subprime category. Far from it. This means that all card issuers may up their game to be competitive, offering products and services that will be even more attractive to the full breath of potential cardholders.
The end result may not only be more credit opportunities for people with no or low credit scores, but accounts with lower interest rates, better rewards programs, and more perks.
The merger may also result in reduced swipe fees for merchants, since Visa and Mastercard will be competing with Discover’s payment network. After the merger goes into effect, Capital One will leverage Discover’s unique payment network. Transactions for approximately one-quarter of Capital One’s 100 million cardholders may go through the Discover network.
The Capital One and Discover merger is set to close May 18, 2025. There is little doubt that the event will be disruptive, but the overall advantages, at this stage, seem sure.
