The CEO and president, respectively, tell how they kept the credit-card issuer growing during the downturn
For Capital One Financial (COF
), 2001 delivered 10 million new customers, a 37% gain in net income, a long-awaited surge in consumer recognition of Capital One as a separate brand from the MasterCard and Visa credit cards it issues -- and a No. 47 ranking on Business Week's list of the 50 best-performing companies.
CEO Richard D. Fairbank and President Nigel W. Morris recently discussed the Falls Church (Va.) specialty finance company's prospects with BusinessWeek Senior Correspondent Mike McNamee. Edited excerpts from their conversation follow:.
Q: The downturn in the economy last year hit some credit-card issuers hard. How did Capital One avoid the damage?
Fairbank: You have to look very hard to see any sign of recession in Capital One's credit-card portfolio. As economists have noted, and as we've seen with our 43 million customers, the consumer was very resilient and kept charge volume up. But we also planned for a recession, with incredibly conservative risk-management. To the extent that it wasn't as bad as expected, we're clearly in a position to generate more growth.
Morris: We have been planning for this recession for the longest time -- planning for something much worse, in fact. Whenever one of our associates proposes a new product, the associate has to show that the product will meet our return targets, clear our hurdles, even in a recession. So we fear recession all the time. But we came through this one with flying colors.
Q: You also capitalized on the Federal Reserve's campaign to cut interest rates.
Fairbank: This last year was a wonderful window of opportunity to be aggressive about marketing very low rates. We cut our rate on our superprime card [for the best credit risks] from 9.9% fixed rate to 8.9%. If interest rates head back up, we will probably return to offering 9.9% fixed -- but the customers who got the 8.9% card will stay at 8.9%. Consistently, we have the lowest fixed rate in the country.
Q: Your customer base grew at both ends of the spectrum -- superprime and what you call the underserved: people with poor credit or no credit history at all. Was that deliberate?
Morris: We saw growth across the board. We had blistering growth in superprime. We had a clear cost advantage over the competition, and we started to enjoy the catalytic effect of our burgeoning brand recognition. That was prompting [potential customers] to open the envelope [containing a Capital One card offer] and respond.
Fairbank: We're almost outgrowing the categories of superprime and underserved. We're a very broad-based player in every segment of credit cards. Superprime is our largest and fastest-growing. It was a banner year for superprime. We've achieved very very low charge-off rates [on unpaid accounts], and that supports incredibly low pricing, 8.9% fixed rates.
With the underserved: Again, the key to our success is risk-management. We carefully and surgically identify customers who will have a prime-type performance, even though they're in the underserved category.
Q: Your charge-off rates are usually among the lowest in the industry, but they ticked up almost half a point, to 4.42%, in the fourth quarter. What happened?
Fairbank: That was the natural seasoning of our book of underserved business. It had grown rapidly in 2000 and 2001, and there's a natural increase in charge-offs after about a year. We had told Wall Street that the rate would rise to between 4.75% and 5%. In fact, it only went to 4.42%.
Q: Capital One's founding idea was that you would identify the customers you wanted and then go out and market to them with a targeted product. Now, you're relying more on advertising and the Web to bring customers to you, and you're focused on building up your brand. What's the importance of that?
Morris: We just got the results of an independent research study from February. Shoppers in malls were asked to name a credit-card company. For the first time ever, Capital One was the name that came up most often. [In the study by Cincinnati-based Directions Research, 31% of those questioned mentioned Capital One, followed by Citicorp (30%), Discover (23%), and Bank of America (20%).]
Thanks to our "What's in your wallet?" campaign, consumers are recognizing the Capital One brand. We do more than 20% of the credit-card mail volume in the U.S. So a small increase in the percentage who open the envelope and respond can have an exponential effect on our business.
Two years ago, we were No. 16 on the list of companies with the most identifiable customers -- customers we could identify by name, send a letter to. I looked at that list, and the companies ahead of us had great brands. Now we're No. 13 or 14 on that list, and we have a brand that can hold its own with those above us.
Q: You've long wanted to extend your marketing research and methods beyond the U.S. credit-card market to other products. Is that bearing fruit?
Morris: Overseas, we've had rapid growth in our card operations in Britain, in South Africa. And now we're extending into France, where credit use is very different. So we're finding that our methods are very exportable.
Fairbank: Our fastest growth is in automobile finance and installment loans. In installment loans, we have the lowest charge-offs in the nation. We acquired the leading Internet auto-finance company, PeopleFirst, which has a very intriguing business model.
PeopleFirst's customers are car shoppers who are researching on the Web, doing very thorough research before they buy a car. They see the PeopleFirst symbol, and they click on that. So they're really very good customers -- not just superprime, but super-duperprime.
MARCH 3, 2002
Edited by Beth Belton
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