Hey fintech friends,

On Monday, Capital One announced it will acquire Discover in a $35 billion deal that will form the largest card company in the US by loan receivables– by some estimates, accounting for a combined ~20% share of the card market. 

On its surface, this deal makes sense for Cap One because of:

• Market positioning- Discover enables Cap One to move down-market at a time when consumer credit card debt is at a 23-year high and Discover’s near-prime customer portfolio is delivering a more attractive net interest margin (of 10.98% vs. Cap One’s NIM of 6.73%).
• Interchange ✨synergies- Cap One called out in yesterday’s earnings call that they plan to migrate $175 billion of card volume to Discover’s network by 2027. Processing transactions on their own card network would allow Cap One to recapture anywhere between 10bps - 50bps in network assessment fees on every transaction, driving an anticipated $1.2 billion in “network synergies” for Cap One. 

$1.2 billion in savings on network fees is cute, but it’s nothing compared to what Cap One can make if Congress passes the Credit Card Competition Act this year. “Durbin 2.0”, if adopted, will give merchants the option to route payments from Visa- and Mastercard-branded credit cards to unaffiliated networks that might offer more favorable interchange rates. Altogether, Durbin 2.0 would enable unaffiliated networks to compete for >$15 billion in network assessment fees that are predominantly routed to Visa & Mastercard today. 

Let’s dive into how Durbin 2.0 would overhaul the economics of credit card processing, and what the proposed regulation means for card networks, issuers, and fintechs.

Durbin 1.0: How debit networks became interchangeable