Capital One credit card shift to Discover seen limited

Investing.com -- Capital One's conversion of credit card volumes to Discover is expected to be significantly smaller than the over $100 billion initially suggested when the deal was announced, according to Bernstein analysts.

The company converted approximately $70 billion in debit card volumes from Mastercard to Discover earlier this year. At the time of the deal announcement, Capital One indicated it would migrate $175 billion in total volumes to Discover Card by 2027, with roughly $70 billion from debit and over $100 billion from credit.

Bernstein analysts said the financial case for credit card migration differs substantially from debit cards. Credit card net interchange stands at around 100 basis points, with Capital One generating more than twice that amount from net interest income. The potential revenue increase from switching networks would be only 5% to 10%, making the conversion highly sensitive to customer losses.

The debit card migration tripled Capital One's net revenue per transaction, from roughly 50 basis points on regulated Mastercard debit to 122 basis points on unregulated Discover interchange, plus an additional 15 to 30 basis points in network fee savings.

Capital One management said on its recent earnings call that it is testing select conversions of both new and existing customers. Mastercard extended its partnership with Capital One on credit cards earlier this year and will serve as the network for a large portion of newly acquired credit accounts.

Of Capital One's 117 million Visa and Mastercard cards last year, 70 million were Mastercard and 47 million were Visa. The company's $660 billion credit card portfolio represents 10% of U.S. credit card volumes and likely includes $50 billion to $100 billion in co-brand card volumes, where network choice rests with the partner.

Bernstein noted that cross-border transactions present a challenge, as Discover's international acceptance remains limited compared to Visa and Mastercard. The firm estimates front-book volumes at approximately $100 billion annually.

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