Discover Financial shareholders will receive Capital One shares valued at nearly
Both companies have benefitted from Americans' increased use of credit cards. In the fourth quarter of 2023, Americans held
As they run up their card balances, consumers are also paying higher interest rates. The average interest rate on a bank credit card is roughly 21.5%, the highest it’s been since the
At the same time, the two lenders have had to boost their reserves against the possibility of rising borrower defaults. After battling inflation for more than two years, many lower- and middle-income Americans have run through their savings and are increasingly running up their credit card balances and taking on personal loans.
The additional reserves have weighed on both banks’ profits. Last year, Capital One’s net income available to common shareholders slumped 35% versus 2022, as its provisions for loan losses soared 78% to
Discover’s customers are carrying
Beyond boosting bank deposits and loan accounts, the acquisition would also give Capital One access to the Discover payment processing network. While smaller than industry giants
Discover has been operating under heightened scrutiny from regulators. Last summer, the company disclosed that beginning around mid-2007, it incorrectly classified certain card accounts into its highest merchant pricing tiers. The company also received an unrelated consent order from the
Analysts at Citigroup say the regulatory issues may have prompted the sale.
“We are surprised that DFS would sell, but suppose that its regulatory challenges such as its recent October FDIC consent order and the card product misclassification issue may have opened the door for the board to consider strategic alternatives that it may not have in the past,” wrote analysts
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