After receiving regulatory approval for the Discover acquisition, Capital One is now turning its attention to integrating the card network company and preparing for a multi-year challenge of technology modernization and global acceptance expansion.

Less than a week after the Federal Reserve and the Office of the Comptroller of the Currency conditionally approved the $35.3 billion merger, Capital One executives reiterated on Tuesday (April 15) the synergy targets set when the deal was announced (February 2024), but pushed back the timeline by about six months to align with the expected May 18 closing date.

The deal is expected to generate $2.7 billion in cost savings by 2027, including approximately $1.5 billion in "expense synergies" and $1.2 billion in "network synergies," as Capital One previously stated.

Upon completion of the deal, Capital One will become the largest credit card issuer in the United States, with assets reaching $660 billion.

On the banking side, Capital One CEO Richard Fairbank said integrating Riverwoods, Illinois-based Discover will bring greater scale and momentum to the bank. He also noted that aside from this acquisition, Capital One's growth agenda does not involve expanding through acquiring national banks, as the McLean, Virginia-based bank focuses more on digital capabilities rather than physical branch presence.

"The benefits of vertical integration with a network allow us to enhance margins in our thin-margin business and enable us to invest more heavily and invest more in building a national bank," he said during Tuesday's first-quarter earnings call. "This is exactly the key way the Discover acquisition will help accelerate our national bank."

On technology integration, Fairbank said Capital One has a roadmap to migrate Discover's credit card business onto Capital One's technology stack. After Capital One's 12-year technology transformation, "the investments we've made at the bottom of the technology stack are very well suited for acquisitions, especially for acquiring a credit card company," he said.

But he also acknowledged that on the network side, Capital One lacks a corresponding mature solution or roadmap, so the process may face more unknowns. "From a technology perspective, the new thing for Capital One is, of course, the network," he said. Operating a network is a "very complex, high-risk activity."

"We will re-enter the data center space" and continue for "several years," as Discover has moved some operations to the cloud but still retains data centers and mainframe systems, Fairbank said.

He added that over time, the bank plans to modernize the network Discover built and hopes to put that network through the same transformation journey as the rest of Capital One's operations.

"But I think this will take many years, because they built a global network, and moving it to the cloud quickly is not easy," Fairbank added.

The CEO also reiterated the company's long-term goal of increasing international acceptance of Discover cards and raising awareness of the global network brand.

"We don't plan to aggressively promote the network brand through national TV advertising immediately after the acquisition closes," Fairbank said. Before that, Capital One needs to "bring international acceptance to a level where it's instantly recognizable."

This global effort is crucial to strengthening the network, which Fairbank called a "business deeply dependent on scale."

During the call, one analyst noted that increasing network acceptance may face a "chicken-and-egg" problem—merchants want to know how much customer volume the network can bring, while customers want to ensure merchants accept the card. Fairbank agreed but stressed that "it's not starting from zero."

"We have a ready playbook, and we will actively use it," he said, "and we may go deeper than they (Discover) did in the past, because we see the opportunity and the rich rewards at the end."

According to an earnings report, Capital One recorded $110 million in Discover integration costs and $198 million in legal reserves in the first quarter. Capital One reported net income rose 10% to $1.4 billion, while quarterly net revenue fell 2% to $10 billion.

Fairbank also noted that Capital One's network synergy estimates assume the lower debit card interchange fees proposed by the Federal Reserve in October 2023 under Regulation II will take effect, and those proposed rates are still facing multiple lawsuits.

If current debit card interchange fee levels are ultimately not reduced, "this would lower Capital One's debit network synergies, because the comparison baseline would increase by about $170 million," he said. "But this would not affect the company's future revenue, because the debit business would then run on the Discover network."