A couple months ago, I highlighted American Express (AXP) as a high-quality stock to buy on pullbacks. When rumors surfaced that Capital One (COF) was courting Discover Financial Services (DFS), the market viewed it as a long‑shot that has now become a reality. Regulators have approved a $35.3 billion all‑stock acquisition that will close on May 18, 2025. This acquisition will catapult Capital One into rare company, an issuer that also owns the payment rails.
The deal reshapes competitive lines in U.S. cards. Visa and Mastercard will still dominate the underlying payment networks. JPMorgan Chase and Citi still dominate large‑scale lending. Only American Express has historically done both. Until now. So, the central question is: Does the Capital One–Discover combination threaten Amex’s premium moat?
Amex vs. Capital One–Discover: Two Models
To answer this question, we must first explore how Amex’s moat works, and then measure the new competitor against it.
Amex’s Moat
American Express guards one of the widest moats in finance because it owns the entire payment loop, a structure commonly described as a closed‑loop network. It issues the card, runs the network, and acquires the merchant, so every card swipe funnels both merchant-discount fees—interchange and network fee—into the same P&L.
The model is overwhelmingly fee‑driven. In 2024, ~75 percent of Amex’s $66 billion in revenue came from merchant‑discount fees as well as card fees. That fee engine thrives on affluent cardholders that spent $1.55 trillion last year, an average $24,600 per card.
With that scale, the network flywheel is self‑reinforcing. This gives Amex premium pricing power allowing for merchants pay a 2.5 – 3.5 percent discount rate to reach high‑ticket, low‑risk customers, while cardholders value acceptance in 198 countries plus signature perks (Centurion lounges, Delta upgrades, Fine Hotels & Resorts).
On the commercial side the moat is even deeper allowing Amex to control 35 percent of U.S. business card spend. Small and medium sized businesses (SMEs) are offered high‑limit, reward‑rich credit lines that double as financing and create durable switching costs.
What the Merger Actually Creates
The combined Capital One–Discover franchise will look like a three‑layer stack:
1. A universal bank at the core. Even after the deal, Capital One will make most of its money taking deposits and lending them out. The company’s primary revenue driver will be interest from card balances as well as auto and personal loans to a lesser extent.
2. A midsize payment network (the rails). Discover, Pulse, and Diners Club give Capital One ownership of the network rails. This means that every card swipe directed over those rails will now yield the second piece of a the merchant-discount fee—the network fee—that used to bypass Capital One completely. The fee would normally be kept by Visa or Mastercard for carrying the payment from the shopper’s bank to the merchant’s bank.
3. A merchant‑acquiring arm. Because Discover also signs up merchants, Capital One gains direct relationships (and data) with roughly 11 million U.S. acceptance points, plus international partners.
That architecture makes the bank a hybrid in that some transactions will be full closed‑loop similar to Amex, while others will continue to be processed by Visa or Mastercard. Management’s stated goal is to migrate enough volume to lift non‑interest revenue from roughly 20 percent of the total today to something closer to 30 percent over five years.
Why This Matters to Amex
Capital One’s takeover of Discover gives the bank something it has never had: a fully vertically integrated card business. This will effectively mark the arrival of a second closed-loop network.
I do not want to come across as hyperbolic, though. The point is not that Capital One’s new fully vertically integrated card business gives it immediate advantages over American Express. Instead, it gives Capital One-Discover the means to compete more directly; and competition is always worth watching.
The only clear edge for Capital One–Discover is the price it can quote merchants; not the mechanics of the fee itself. Discover rails cost merchants roughly 1.7–2.1 percent. This is well below Amex’s 2.5–3.5 percent premium. That delta could give big retailers leverage in negotiations with Amex. You may recall eBay’s 2024 decision to drop Amex over fees.
So, the real battleground is whether Capital One can shift enough affluent spending onto those cheaper rails to pressure Amex’s premium margin. I do not want to overlook the obvious, though. To draw those affluent spenders, Capital-One will need to create incentives. Should Capital One funnel its new fee income into richer airline lounges and rewards, the merchant charge would likely need to rise, shrinking the gap between the two companies.
Scale is another acquired benefit. At about $475 billion in projected purchase volume, the merged network will gain leverage it never had. For context, Amex moved $1.55 trillion in 2024. Still, this leverage will matter at the margin. Capital One–Discover will be able to talk to merchants about a proprietary, lower‑cost network, potentially causing problems for Amex.
That said, customer mix may prove the ultimate moat defender. Amex remains laser‑focused on premium consumers, corporate travelers, and SMEs that value travel perks and working‑capital flexibility. This more credit worthy consumer equips Amex with lower credit risk as demonstrated by lower charge-offs (~2%) compared to Capital-One’s 5.5% charge-off rate. Capital One higher charge-offs can be attributed to its mainstream and sub‑prime borrowers, which will likely remain the case even after absorbing Discover. These consumers generally chase cash‑back value. Thus far, the only foray into a more affluent consumer product being with the Venture X card.
That difference shapes the crux of our introductory question: Can the Capital One–Discover combination threaten Amex’s premium moat?
Amex’s Moat: Near‑Term Reality
In the near-term, my bet is that Amex’s moat proves durable:
Integration Headwinds > Competitive Shock
The first order of business for Capital One is to merge compliance systems, align fraud tools, and convince merchants to activate Discover routing. That takes time and capital. Meanwhile Amex’s Platinum and Delta Reserve users are unlikely to trade airport lounge access and hotel upgrades for two‑percent cash‑back. Even Chase’s Sapphire Reserve, which arguably offers the best travel rewards card to the mass market, has not materially dented Platinum renewal rates.
Based on this reasoning, I would argue that the real risk lies not with Amex, but with Visa/Mastercard, who could lose meaningful purchase volume as Capital One migrates transactions to its own rails.
Amex’s Moat: Medium‑Term Is the Real Test
Clearly, American Express’s competitive advantage is not going to disappear overnight. The real test starts after Capital One fully absorbs Discover and begins using its new tools. Investors should watch these four warning signs to see whether Amex’s moat could face pressure in the medium-term:
1. Merchant‑fee pushback. If big retailers use Discover’s 1.7–2.1 percent fee as leverage and Amex’s combined merchant-discount yield slips even moderately, this will be cause for concern. In this case, we can really begin to question whether the moat is holding.
2. Global acceptance gains. Keep an eye out for Discover card terminals as well as traction for tap-to-pay acceptance in Europe and Japan. Amex’s long‑standing claim that “your card works everywhere you travel” could diminish its value.
3. Rewards escalation. If Capital One launches a premium card with rewards rivaling Amex Gold while maintaining Discover’s low fees, it could attract aspirational spenders. This could be especially true for young, affluent customers that favor simpler rewards. That shift would chip away at the middle tier segment that underpins much of Amex’s future growth.
4. Lounge footprint. Expanding Venture X or Diners Club lounges beyond their current three hubs would signal encroachment on Amex’s experiential moat.
Counter‑Moves at American Express
Amex is not planning to watch its moat erode from the sidelines. Management has telegraphed three priority initiatives to stay ahead of competitors. And each one strikes directly at the value propositions Capital One‑Discover would need to copy.
- Lifestyle‑centric perks. Amex is adding square footage to Centurion Lounges in New York–JFK, LAX, and Heathrow, while also rolling out Centurion Studio “mini‑lounges” in secondary airports. Beyond the airport, the company has introduced Members‑Only dining pop‑ups and curated events (think Art Basel and Wimbledon hospitality). These experiences potentially translate the annual card fees into tangible status.
- B2B payments push. Through its Global Commercial Services unit, Amex is investing in virtual‑card rails for accounts‑payable automation and offering 30–60‑day working‑capital lines that ride on the charge‑card float. The company has also partnered with ERP providers like SAP Concur to embed Amex tokens directly in expense workflows creating customer stickiness.
- Flexible merchant pricing. Thanks to many years of detailed spending data, Amex can tailor its swipe fee instead of quoting a single, take‑it‑or‑leave‑it rate. A small corner café might pay less than a luxury boutique; a lunchtime transaction might cost less than a late‑night bar tab. This keeps Amex’s average fee steady while easing retailer complaints.
Final Thought
The Capital One–Discover deal does not immediately threaten American Express’s moat. Amex still owns the richest cardholder base, the widest premium acceptance, and most importantly, is the only network that can command a 2.5 – 3.5 percent merchant‑discount fee. What the merger does create, however, is the first fully integrated rival that could challenge that pricing power.
If merchants start shifting volume to the cheaper closed‑loop alternative, even modest pressure on Amex’s feeds could have meaningful impacts on earnings.
For now, though, we just need to be aware of the risks and keep an eye out for the warning signs should they ever emerge.
Disclosure: The author holds a long equity position in American Express (AXP). The author holds no positions in Capital One (COF), Discover (DFS), Visa (V), or Mastercard (MA).
