Thredd’s McCarthy: Capital One-Discover Deal Will Transcend Market Share Grab

The news that Capital One has launched a $35 billion bid to acquire Discover Financial has shaken up the financial services industry.

Jim McCarthy, CEO of Thredd, told Karen Webster that speculation over what the combo of the two credit card giants might mean — should regulators let the deal go through — “is what’s been lighting up my phone through the last couple of days.”

Many of the calls have been from Wall Street analysts, said McCarthy, seeking insight (underpinned from his days with Visa), as to who the winners are in the credit card arena. The hot take might be that Mastercard and Visa are the losers here, given the fact that Capital One has its own network, and now may be on the (eventual) road to inheriting the Discover Network.

But both agree that is probably wrong.

The Challenges and the Opportunities

Still, challenges abound, McCarthy said — and nothing’s all that cut and dried.

McCarthy’s observations were part of the inaugural installment in the “Afterthoughts” PYMNTS TV series, where he and Webster reflected on the news of the day and the conversations that take shape in the wake of that news.

As to the challenges themselves, he observed that Discover has had relatively low market share in the card space, and issuers have had little incentive to join that company’s network because of low merchant discount rates. “Unless Capital One wants to dip their toes heavily into the merchant acquiring side of the business — and play in a bigger profit pool but at a lower price point,” he said, many of the Wall Street analysts’ focal points are off the mark. If anything, McCarthy and Webster posited, Capital One might decide to turn Discover cards into Visa/Mastercard products in order to capture a more affluent customer who expects better rewards and broader card acceptance.

That said, the real strategic intent of the deal, said McCarthy, might lie with the fact that other areas, such as PIN-less activity, are poised to, in his words, “take off.” Should the legislation on Capitol Hill governing debit payments — and routing them over additional networks — be codified, a combined Capital One/Discover could be, said McCarthy, “in an interesting position.” Discover’s PULSE was one of the first networks to offer one-time PIN-less debit payments, and its PIN-less Bill Pay service debuted decades ago, in the mid 1990s.

Discover also has a history of innovation, and of crafting partnerships with forward-thinking providers, said McCarthy. “They were the pioneers,” he said, “in supporting the FinTechs. If you wanted to issue a FinTech program, in the early days, it was Discover that was willing,” said McCarthy, “to ‘rent a BIN’ to get you on their network … and in terms of monetizing the fixed costs of the network, they were among the early ones.”

Regulation, of course, remains the wild card — not just on interchange and routing fees, said McCarthy, but whether the deal will go through at all. Regulators are sure to train full scrutiny on the fact that the two firms would consolidate a significant share of the card issuing business but also of the payment networks, too.

“There’s going to be a really long runway,” on the deal, said McCarthy, “and Capital One has some hard decisions to make about what they will want to be with this combination of assets.” Specifically, how to monetize a global network that only a select handful of players operate.