PRODUCTS SECRET; EDGE IS NO MYSTERY

No one enjoys a mystery more than Richard D. Fairbank and Nigel W. Morris.

The Capital One Financial Corp. executives have a penchant for keeping mum about the many products their company tests and which will eventually go to market.

Granted, most of the new products will be credit cards. The nation's ninth-largest bank card company has 3,000 offers out at any given time, and it runs thousands of tests for new ones each year.

But lately the Falls Church, Va., company, which has issued 7.8 million cards and manages $11.2 billion of balances, has been pushing into noncredit card, even nonconsumer, lending.

Capital One's competitors are scratching their heads as never before.

Mr. Fairbank, 45, chairman and chief executive officer, will say only that Capital One is "in advanced stages of testing," is planning for "selective rollout," and "you'll know it when you see it.

Mr. Fairbank and Mr. Morris are looking for the same kind of edge they gained when they used their now vaunted "information-based strategy" to put low-rate, balance-transfer offers on the market in 1991.

Essentially alone in that niche for a year, Capital One - then a part of Signet Banking Corp. - vaulted into the top echelon of credit card banks. It nibbled away at other top-20 issuers, going from a 0.7% market share in 1991 to 2.4% in 1995, according to Bear, Stearns & Co.

"The information-based strategy allows us at the margin to know what's happening to various solicitations and changes in account risk," said Mr. Morris, 38, president and chief operating officer. When combined with "off- the-shelf models you can buy, (the approach) allows us to see trends and anticipate them, and not to set our credit policy today based on what was happening 18 months ago."

Consultants and analysts can only speculate about what is brewing in Capital One's data cauldron. Frank Caruna, a consultant who formerly worked at Advanta Corp., said he has heard that Advanta and Capital One are separately working on mystery projects.

Such credit card specialists got to be as good as they are because they exploited a specific opportunity in a specific market, Mr. Caruna said.

"The opportunity was conducive for economic modeling and pricing decisions," he said. "The question they have to confront is, can that infrastructure go outside that specific opportunity?"

Michael L. Granger, an analyst at Fox-Pitt Kelton, who follows Capital One, said he has no clue what the secret projects could be, but he noted that Capital One has outlined its guiding criteria:

"They want a product or market that has a lot of information available, a high profit potential, an ongoing payment structure from an individual or corporation, in an area where there's not a lot of people delivering it efficiently."

Whatever the nonfinancial product may be, Mr. Granger concluded, Capital One won't be doing it in a big way because its core concern is credit cards. They have been generating double-digit, year-over-year growth - most recently, a 25% rate in the second quarter.

When the company was spun off from Signet in November 1994, it projected a sustained 20% return on equity and 20% growth in earnings per share, and it has achieved those goals, Mr. Fairbank said.

The revenue has enabled steady increases in Capital One's marketing budget. It spent $90 million in the first six months this year and at that clip would surpass the $147 million it dedicated to attracting new business in 1995. The 1994 total was $100 million.

Capital One recently shifted its energies and resources away from balance transfers to offerings that can generate fees. One reason is the increase in chargeoffs. Fox-Pitt Kelton estimates net chargeoffs will rise to 4.33% in 1997, from an estimated 4.19% this year. In 1993 through 1995, this ratio ranged between 1.48% and 2.25%.

Michael J. Freudenstein, a J.P. Morgan Securities Inc. analyst, estimated the issuer would boost fee income 34% in 1997, to $536 million.

Another new income source is cards secured with a deposit - a business the company carefully tested for five years. In one innovative and slightly controversial marketing technique, Capital One printed secured-card offers on the backs of postcards featuring photos of missing children.

Capital One has also dipped its toes into cobranding, issuing a Visa card for Gold's Gym International.

The company has cautiously begun to test card offers in the United Kingdom, where it is joining Household International, People's Bank, Advanta Corp., MBNA Corp., and Citicorp in trans-Atlantic ambitions. Capital One assigned its own marketer, Rob Habgood, to open a London office this summer, and it has hired former Europay International executive Patrick Nelson.

"We believe our long-run destiny is to be an international company," said Mr. Morris. However, he said, the United States is larger than all overseas markets combined, and international markets are not as sophisticated when it comes to information. "So there are limitations on how far we will be taking it."

For flexibility in offering other consumer products, the company started a thrift, Capital One FSB, this year.

"It allows us on a selective basis to market a series of thrift or banking products that are consistent with an information-based strategy," Mr. Fairbank said.

"I am a true believer in the philosophy they preach," said Mr. Granger of Fox-Pitt Kelton. "If you think about the way the population works, there are a lot of different types of individuals who behave differently, have different motivations, and different characteristics.

"Those characteristics change constantly. You have to have some mechanism for understanding the way they're changing. The way to do that is to get information. You have to test, gather your own information, then after you get it, use it."

It may sound easy, but Mr. Fairbank and Mr. Morris have been working at information-based strategy for 10 years, and they see no end in sight.

Mutual respect and admiration "set the tone for the extraordinary amount of teamwork that is necessary to make the sacrifices and changes that are inherent in a dynamic strategy like this," Mr. Fairbank said.

With more of a partnership than a subordinate-boss relationship, the two spend time discussing pivotal issues in great detail, Mr. Morris added.

The partnership idea "is very powerful in our company," he said. "That's how we want to work. We're going to be together for a long time."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER