Richard D. Fairbank and Nigel W. Morris have plenty to boast about, considering Capital One Financial Corp.'s successful spinoff from Signet Banking Corp. But a fair amount of what's on their minds these days concerns copycat competitors.
The Capital One executives traveled to New York recently to brief analysts on what the future holds for the Falls Church, Va.-based credit card specialist. In an interview, however, their thoughts returned again and again to competitors with "deep pockets" who are "sailing without a rudder" by saturating the market with low-rate balance transfer offers.
Those issuers are creating disequilibrium, they contend, booking assets but not accounting for delinquencies, chargeoffs, and potential attrition down the road. Mr. Morris called this a dangerous strategy, saying many banks have entered the market "without the tools, the techniques, and the experience to really make the numbers work for them."
Mr. Fairbank and Mr. Morris are zealots when it comes to describing the company's reliance on an information-based strategy they instituted when they joined Signet in 1988. It's hard to argue with the dramatic numbers produced since then: Three years into the strategy, managed loans were at $1.4 billion, with 1.3 million accounts; by the end of last year, the company reported $7.4 billion and five million accounts.
Noting Signet's success, a number of competitors began deluging the market with similar offers. In fact, Mr. Fairbank and Mr. Morris believe some banks have copied Capital One solicitations down to the fine print.
"We have had large banks totally emulate our product copy," said Mr. Morris, president and chief operating officer of the new company. "I don't know if they're looking for something magical to occur."
And, his partner added, at least two consulting firms have been hired by competitors to engineer what Capital One is doing. "While competitors try to copy what they can see, which is what is in the mailbox, they can't see behind the scenes the algorithms and the policies and the techniques that match the product with the customer," said Mr. Fairbank, chairman and chief executive. "However, it certainly makes life more difficult."
Even if an issuer mimics a Capital One product, the executives say they have 1,999 other ones on the market at a given time, including cards with higher limits, no annual fees, preapproved cards, joint owner accounts, and affinity cards. Not leaving anything to chance, Capital One infused a record $41 million for marketing in the first quarter.
"What's amazing," said Thomas P. Facciola, an analyst with Salomon Brothers Inc., "is this is the 10th-largest issuer of MasterCard and Visa, and in 1994 they were the second-largest mailer. I think they're really out there looking for every nook and cranny of opportunity where the others aren't."
Moshe Orenbuch, an analyst with Sanford C. Bernstein & Co., estimates Capital One will conduct some 5,700 tests this year using its information- based strategy, and spend $130 million to acquire accounts. By contrast, six years earlier Signet had 335 tests, spending $15 million on new accounts.
True to form, Capital One is moving away from its bread-and-butter low- rate balance transfer products to other card offerings it has incubated for a number of years. "If we see that because of pricing pressure and competitive pressure there is not an opportunity to make above-hurdle rates of return, we will shut down," Mr. Fairbank said.
Capital One has set its sights on two new areas: secured cards and cards for college students, having tested both for five years. The secured card market is "a very different animal" from unsecured products, Mr. Fairbank said. "You can't take principles you learn in one and apply them in the other."
Mr. Facciola said it is an "interesting departure" for an issuer that specialized in finding people with good credit quality to now be looking for customers with little or no credit history. "Capital One is probably putting more resources into the secured market than possibly all the other players combined."
Meanwhile, the company has repriced of $4.4 billion of credit card receivables since the spinoff was announced in November. As a result, Capital One's margin jumped 105 basis points in the first quarter, Mr. Orenbuch said. He called it a watershed quarter for the issuer because its repriced cardholders didn't leave and new ones came bringing balances with them.
By April 1, introductory-rate receivables had fallen from a peak of 65% of balances to 44%, and fixed-rate receivables dipped from well over half of balances to 27%, Mr. Orenbuch reported.
"They've done a great job," said Ronald T. Urquhart, who heads the credit card program for People's Bank in Bridgeport, Conn. "They're very aggressive and use sophisticated credit models to target people. The only downside is they've grown so fast, where will the other shoe fall?"
Mr. Morris and Mr. Fairbank remain confident that credit losses will not come back to haunt them, as many have suggested. Mr. Orenbuch estimated the credit card loss rate will increase from 1.5% in 1994 to 2.5% this year and 3% in 1996. Looking ahead, the company said it expects delinquencies and chargeoffs to increase as the portfolio matures and growth slows.
However, Capital One said credit quality will continue to offer it a competitive advantage. Not surprisingly, Mr. Fairbank credited the company's information-based strategy for finding customers who are good credit risks.
"We are able to offer a lower price than typically offered because we have cost advantage and we pass the cost advantage on to the customer in the form of lower prices," he said.
As Mr. Fairbank talked, his partner sketched graphs and took notes in a ledger. He looked up when he had something to interject.
"We believe that a given product to a given segment has a given license," Mr. Morris said. "You identify an opportunity, you exploit it, then you leave it as other people come in.
"Without this dart-and-weave opportunistic strategy, the world would be looking very gray today."
In the first quarter, Capital One reported pro forma earnings of $25.1 million, or 38 cents per share, compared with the $26.5 million, or 40 cents per share, earned a year earlier by the Signet unit. By March 31, the company had 5.5 million credit cardholders and $7.9 billion in managed loans. The spinoff from Signet was completed Feb. 28.
Last year, the company took a $49 million charge to exit a data processing contract with Electronic Data Systems Corp., Plano, Tex. Since then it has incurred rising expenses as it began to process accounts at its Richmond, Va., site. But, Mr. Orenbuch estimated this could save the company more than $10 million a year.
"In a business where information management is our central nervous system, being able to vertically integrate that business so that it is responsive to the needs of the marketplace in a very fast moving, changing world doesn't lend itself to outsourcing," Mr. Morris said.
It allows Capital One to do something completely new - offer data processing, along with account management, customer service, retention, and recovery - to small and medium-size issuers.
Though the company does not have a name for the service, Mr. Morris suggested it would start looking for alliances with banks that have 100,000 to a million accounts this summer. Capital One said it will not help these issuers solicit new accounts.
"Our getting into this business and aligning with those players allows us to play in a way that is really not competitive with our customer base," said N. Andrew Cohen, senior business manager for Capital One. "We help them maximize profitability on accounts that we wouldn't get anyway."
Industry followers expect that Capital One will begin to offer noncard products eventually, such as home equity loans and auto loans. "We believe there is a macro trend sweeping business caused by technology," Mr. Fairbank said. "The credit card business is simply further advanced in that trend than other industries. What we want to do is take the information- based strategy and apply it to other industries where we can capture the kind of success we've enjoyed in the card business."