Transcript: Discover what’s in Capital One’s wallet

This is an audio transcript of the FT News Briefing podcast episode: ‘Discover what’s in Capital One’s wallet’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, February 21st, and this is your FT News Briefing.

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Former US President Donald Trump is losing support from small donors and two major US credit card companies wanna join forces. Plus, Barclays is in a slump and the strategy it’s laid out isn’t really inspiring confidence.

Stephen Morris
So I’m not sure you would have heard anything yesterday from executives at the strategy day that would change your mind about this company. If you were sceptical before, you are still sceptical now.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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Donald Trump has about 200,000 fewer donors now than he did at the same point in the 2020 election. The data comes from the second half of last year. It’s a troubling sign for the Republican party presidential frontrunner. Small donors have been critical to Trump’s campaigns. He tends not to get a whole lot of support from Wall Street or deep-pocketed backers. And the decline comes right when Trump is in need of a lot of cash to get through a slew of legal problems. Just Friday, a judge ordered him to pay more than $350mn in fines for committing financial fraud.

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Capital One finally has an answer to what’s in your wallet. Turns out it’s Discover. The lender agreed to buy Discover Financial Services on Monday for $35bn. Capital One is looking to wrap up that deal later this year or early 2025. Here to talk about the acquisition is the FT’s Josh Franklin. Hi, Josh.

Joshua Franklin
Hey.

Marc Filippino
All right. So just give me a quick rundown of how big of a deal this merger is and what it means for Capital One.

Joshua Franklin
This is the biggest merger that we’ve seen in US banking in more than a decade. And the holy grail for Capital One in all this is the credit card network that Discover has built. And it’s incredibly hard to build a payments network. And that’s what Discover has done. Then if you think about the payments landscape in the US, you really have four main credit card networks: Visa and Mastercard — by far the biggest — then you have American Express and then you have Discover in fourth place. And that is one of the really vital things that Capital One is getting through this deal is an at-scale card network that it hopes by bringing its business on to that platform, it can really help grow and certainly be worthwhile for them.

Marc Filippino
Are there any hurdles that this deal might run into?

Joshua Franklin
It’s by no means a sure thing that this deal goes ahead and I think there’s a few different dynamics at play. You could make a case that it would limit credit card competition, in that it would consolidate things more in the credit card industry from when you’re competing with the likes of, you know, JPMorgan and Citi. It kind of consolidates things around the bigger players. But what it could do potentially is increase competition in the credit card networks standpoint, from the point of view of creating a bigger competitor to Visa and Mastercard. And this is something that merchants have really wanted in the US for a long time because they don’t like the fees that they have to pay the credit card networks of Visa and Mastercard. So potentially giving them more choice and competition could be good for competition in that line of things. So I think it’s gonna be interesting to see how Capital One tries to pitch this deal to regulators.

Marc Filippino
Yeah. Tell me a little bit more about that. What does this deal say more broadly about the mergers and acquisitions landscape in the United States banking industry right now?

Joshua Franklin
There’s been a lot of appetite among different banks to do deals from everything I hear. But where deals often fall down before they’re even announced, is uncertainty about whether or not you can get regulatory approval for the deal. So I think this is gonna be a really interesting test case. Very, very high profile deal of two very large banks. But one of the big themes for the Biden administration has been a very aggressive, muscular approach to antitrust policy and really giving lots of deals very heavy levels of scrutiny and bank deals in particular because it’s such a heavily regulated industry, get a lot of scrutiny from regulators. So I think this is gonna be a long path to get this deal done.

Marc Filippino
Josh Franklin is the FT’s US banking editor. Thanks, Josh.

Joshua Franklin
Thanks, Marc.

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Marc Filippino
Barclays has pledged to return £10bn to shareholders over the next three years. It’s part of a larger strategy to make its investment banking arm do more with less, so it stops weighing on the company as much. It’s the first major strategy update at the British bank since 2016. It marks the biggest test for chief executive CS Venkatakrishnan. I’m joined now by the FT’s Stephen Morris to talk about this. Hey, Stephen.

Stephen Morris
Hello.

Marc Filippino
All right. So what is the point of the shake-up at Barclays? What is it hoping to do?

Stephen Morris
Barclays hasn’t held a meaningful strategic update for eight years. And during that time it’s been one of the worst-valued major international western banks. So what we saw yesterday is really an attempt by the bank to provide more clarity on how it thinks it can earn more money, return more cash to shareholders, and really change the rather negative narrative that has been surrounding this big London-based bank for, I would say, eight or more years now. So what we saw yesterday is Barclays trying to make an argument that they could be a legitimate competitor to Wall Street in investment banking, while also trying to pacify or mollify investors slightly by mapping out a path to grow the other parts of their business, like credit cards and the UK consumer unit. So they want the investment bank to do more with less resources. They’re not gonna give any more money, they’re not gonna put any more assets into that bank. And then they said that they were basically gonna lend more, take more risk in credit cards and try and juice returns.

Marc Filippino
Stephen, why is Barclays’ investment banking arm been struggling so much?

Stephen Morris
Barclays is really the last non-US bank trying to make it in investment banking in a substantial way. This requires vast IT systems, investment in the people. You have to pay a lot of money to persuade someone to join Barclays from its bigger, you know, better-resourced competitors like JPMorgan or Goldman Sachs. And it takes a little while for this to bed in. So you’ve got very high costs and it takes a while for the revenues to feed through. So that’s, you know, part of the issue. And it just basically has to spend more to earn less than its bigger rivals.

Marc Filippino
So, Stephen, how did investors react to the changes that Barclays announced yesterday?

Stephen Morris
Well, the investors reacted somewhat positively. I would say the shares were up as much as 7 or 8 per cent at some point. But remember, since Venkat as the CEO is known, took over in November 2021, the shares have fallen 21 per cent, so it’s hardly a resounding success for the strategy. And there’s a lot of scepticism out there. Barclays didn’t say anything that any other investment bank hasn’t said before. It said it wants to make more money from the same clients. It wants to cross-sell more, it wants to be more efficient. So what we saw here was very much kind of just a fine-tuning, an evolution of the existing strategy that investors are not big fans on, rather than some kind of big new direction for the company.

Marc Filippino
Now, I know it’s still early, but do we have a sense of how this might impact the broader banking industry?

Stephen Morris
I think it’s interesting in the sense that if Barclays is unable to show that it competes and it has to reverse course over the next few years, change executive, what have you. I think it’ll be an interesting time because essentially, you know, everybody that isn’t a US-based investment bank will have had to give up that essentially hand control of international capital markets, at least in the west, into the hands of the US banks. There are obviously big implications for that on London’s future as a financial centre. You know, the ability of European corporates to raise money cheaply and quickly. So I think we’ll have to see. I think yesterday went better than people at Barclays probably had feared but I don’t think a small bounce in the share price should be taken as an indication that Barclays has changed its story, has changed its narrative.

Marc Filippino
Stephen Morris is the FT’s banking editor. Thanks, Stephen.

Stephen Morris
Thank you very much.

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Marc Filippino
Before we go, we wanna tell you about the perfect resource to catch you up on the 2024 US elections: the FT’s US election countdown newsletter. It’s written by FT’s Washington reporter Steff Chávez. And in it, she’ll dive into the latest campaign news and data points, plus scenes from across the campaign trail. Sign up for free. Just go to FT.com/USelectioncountdown. We also have that link in the show notes.

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This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.