By Telis Demos

Capital One Financial once featured gnarly barbarians threatening high interest rates in its ads. More recently, it has featured Taylor Swift at an airport lounge.

But the real work is now happening behind the scenes, as the credit-card giant embarks on its own new era.

Last month, Capital One completed its $35 billion acquisition of Discover Financial Services. That greatly expanded its size and brought a valuable new asset: the Discover card network. The market is just beginning to reckon with what that means for its business.

Adding a debit- and credit-card network can, in theory, supercharge Capital One's banking and card businesses. It can also help with what Chief Executive Richard Fairbank has described as its "quest" to go to the top end of the card market.

Since the 1990s, Capital One has grown from a card lender specializing in attractive rates for people with less-than-perfect credit into one of the country's biggest retail banks by deposits. It has also expanded its card-customer base, adding heavy spenders willing to pay hundreds of dollars a year for rewards cards and who crave perks such as special access to concert tickets.

Reflecting all that, the market has started to differentiate Capital One in how its earnings are valued. But there is still a lot of room to run.

At roughly 12 times forward earnings today, Capital One's valuation sits well above that of other mass-market card lenders. Yet it is still a bit below banks overall in the S&P 500, perhaps reflecting the perception of the riskiness of lending to a broad consumer base.

And it is well shy of where American Express -- which also combines lending, offering rewards, issuing cards and operating an independent card network -- trades, at closer to 20 times earnings. Pure-play network operators Visa and Mastercard enjoy even higher multiples.

On the banking side, the Discover network gives Capital One the ability to make more money from debit-card payments than peers. Federal laws cap what larger banks can earn via so-called interchange fees on debit cards. However, the cap doesn't apply when the card issuer and network are the same, as they can now be for Capital One.

In a recent note, analysts at JPMorgan Chase estimated that Capital One could potentially earn $1 billion in incremental interchange revenue from moving its debit cards over to Discover's network.

That money could drop to the bottom line. Or, even more ambitiously, this revenue could be used to fund debit-card rewards to lure key customers, as well as their deposits. JPMorgan equity analysts in their note described cash-back debit as "a highly differentiated product."

On the credit side, there is also potential to keep expanding Capital One's business. The company has already made big inroads with heavy-spending travelers with its Venture X rewards card. That card, launched in 2021, carries a $395 fee.

In a 2025 survey of U.S. cardholders by analysts at Bank of America, 43% of respondents called Capital One a "premium" card brand -- almost double the share in the same survey in 2023. That nearly caught it up with Chase, which was at 50%.

Capital One has made a lot of investments to get to this point. It has its own airport lounges, plus an airport restaurant in partnership with José Andrés Group. It has upgraded its Capital One Travel portal, built up a shopping portal and recently acquired a digital luxury concierge, Velocity Black.

But in theory, having the merchant connections that a network brings, plus additional revenue and the ability to set its own fees, can help fund even more investment and deliver better rewards and deals.

When it comes to chasing the biggest spenders, there is plenty to keep up with. Chase recently said it was raising the annual fee for its Sapphire Reserve card to $795, and loading it with more credits and benefits. Amex also has announced "major updates coming" for its Platinum cards.

There are still hurdles. While Discover's U.S. merchant acceptance by number of locations is on par with Amex, Mastercard and Visa, it lags behind in global acceptance, according to recent Nilson Report industry data.

Capital One also has said that Visa and Mastercard are important parts of its future at the high end of the market. Still, in BofA's survey, 79% of people with a premium card were willing to consider getting a Discover card.

Capital One can also continue to carve out its own niche in rewards, suited to its strengths. If rivals keep raising their fees, Capital One might find itself in a middle ground, offering a relatively lower-fee but also possibly simpler card that appeals to a segment of people who don't treat card benefits like a hobby.

"You can imagine Capital One building a mass-market Amex," says Bank of America analyst Mihir Bhatia.

Of course, it might take time for Capital One to build up the perception and global acceptance of Discover's network among the highest echelon of spenders. Amex and Chase offer a variety of tiers of rewards cards, too. And consumer lending and spending will have its natural ups and downs.

But in the highly competitive world of cards and banking, a plausible path to faster growth and a higher-value business can be a real perk.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

June 27, 2025 05:30 ET (09:30 GMT)

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