Could Capital One Become the Next Visa or Mastercard?
Capital One's (NYSE: COF) credit card business is a highly profitable one. Thanks to the average credit card APR of about 25% in the current environment and relatively low deposit costs, Capital One has a net interest margin (NIM) of about 6.7% throughout its business. Other big banks would typically be happy with a NIM in the 2%-3% range.
However, the business is about to get a whole lot bigger. Capital One announced in February that it had agreed to acquire Discover (NYSE: DFS) in an all-stock transaction that values the business at about $35 billion. While this clearly is a big move for Discover, I think it can be an even bigger deal than many investors believe. Here's why I think the Discover merger could eventually put Capital One in the same realm as (NYSE: V) and Mastercard (NYSE: MA).
It might not seem like it, but this move will make Capital One's credit card business several times larger. The bank currently has about 100 million credit card customers, while Discover has three times as many. This size could create some major efficiency advantages, and many of the credit card programs could be complimentary in nature. For example, Capital One currently doesn't offer a card with rotating cash back categories like the popular Discover it Cash Back card, and Discover doesn't offer high-end travel cards like the Capital One Venture X. The combination will have a far more complete line of cards to offer customers.
Source Fool.com
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