The way Richard D. Fairbank tells it, his company, Capital One Financial Corp., dropped a bomb and is now walking away from the field.

It was Capital One that invented the "teaser rate," a low - or nonexistent - introductory interest rate that prompts consumers to apply for a credit card. (It also takes credit for the concept of transferring other cards' balances to the new accounts.)

Now that teaser rates are a standard industry practice, Capital One - which has used them to become one of the largest and most prosperous U.S. credit card issuers - is backing off.

Mr. Fairbank, the company's chairman and chief executive officer, said that teaser rates have largely outlived their usefulness and have created a culture of rate-hoppers. Capital One has begun offering more cards with fixed rates, including ones that charge 9.9%, which he said no other issuer offers so consistently.

"Teaser-rate marketing is a very tricky business," he said. "They're an insidious thing because not only have you got an attrition problem but you can also have a change in risk if marketers are going after your best customers."

Mr. Fairbank, who usually delegates the task of talking to the press to his business partner, Nigel Morris, met with American Banker for a rare interview Monday and offered some interesting candor about the rate situation and about his company's plans to diversify.

Capital One linked Mr. Fairbank's increased availability to the hiring of a new communications executive who favors granting access to the media, though the motivation may also have been to touch up the company's reputation as a darling of Wall Street.

The three largest card monolines, Capital One, MBNA Corp., and Providian Financial Corp., have all enjoyed pet status with the analysts whose opinions move their stock prices. But with saturation in the credit card market and rising chargeoff rates in the industry, executives at several of the companies - Providian's chief executive, Shailesh Mehta, also toured New York this week - have been sitting down with investors and reporters to talk about how they are navigating the current environment.

Moshe A. Orenbuch, an analyst at Credit Suisse First Boston in New York, said Capital One was "reclusive in the past because they have traded off the idea that they sustain their competitive advantage by keeping a low profile." However, "nobody believes you can grow 30% forever," he said. "They need to let us know how they will continue to grow."

He also pointed out that Mr. Fairbank and Mr. Morris, Capital One's president and chief operating officer, get the bulk of their income in the form of stock options, which grow in value only if the stock price continues to rise.

"Getting the stock price up is always an incentive," Mr. Orenbuch said. On the other hand, "they have a lot to be proud of; they have an amazing track record, maybe the best growth rate and the best loss rate of the major players."

It remains to be seen how serious Mr. Fairbank is about phasing out teasers and how well the company would do without them.

On Tuesday, a day after the interview, the home page of his company's Web site was still touting a Visa card with a 0% introductory rate, and one of the reporters got a similar offer in her mailbox.

Capital One's tactics may bear a disproportionate responsibility for making consumers as rate-savvy as they are today. Of the three billion credit card offers that were sent in the mail last year, one-third came from Capital One. Other issuers have continually tried to underprice Capital One's teaser rate, and with the 0% offers prevailing today, issuers have run out of bargaining room.

Mr. Fairbank said this was to be expected. "When we created the teaser rate back in 1991, we did believe that at some point it would be tough to manage for credit card companies. What we did was create it and then, by the time it became a mass phenomenon in the credit card business, we pulled out."

The adjustment from teasers to fixed rates indicates Capital One's shifting focus from prime to superprime, he said. Though he still called it a "full spectrum lender," he said that in terms of credit quality, the company is now targeting the higher end of the scale, much as Providian has done.

"We do some teaser rate stuff ourselves now, but we've learned how to model out the teaser hoppers," he said.

A spokeswoman for the company said Capital One still offers teaser rates when tests show them to be effective but relies on them much less than formerly.

Ditto for balance transfers, she said. "We were the first ones out of the box with the balance transfer. We were probably known as 'the balance transfer company,' but that is not the case anymore. We're not relying completely on the balance transfer."

Michael R. Hughes, an analyst at Merrill Lynch & Co. in San Francisco who rates Capital One's stock a "near-term buy," said the company has been known to season its fixed-rate offers with teasers and the like and then mix up the offers in the next round.

"They usually have several different irons in the fire," he said. "Usually, one or two get more emphasis than the others, and very rarely do they stay with any one for longer than six or nine months. You won't see teaser rates disappear, but you'll see them de-emphasized relative to other offers.

"One thing the company has always said is that after six months response rates tend to get cut in half. The 9.9% rate has been around seven or eight months, although how many other 9.9%'s do you know about?"

Capital One says one of its most successful superprime products is its airline reward card, Miles One. With a fixed 9.9% APR and a $19 annual fee, the card, which does not impose its own blackout dates or seat restrictions, costs a lot less than most air-mile cards, and it plugs in to the loyalty programs of all major U.S. airlines.

Miles One card members get bonus miles only when they transfer balances from other cards (one mile for every dollar transferred up to 5,000). Other issuers, such as Citibank, automatically credit bonus miles with the cardholder's first purchase (in Citi's case, 7,500 for platinum cardholders and 5,000 for gold).

Capital One is also courting superprime customers with its cobranding relationship with Mercedes-Benz. On the other hand, it also has some less high-brow cobrand deals, including ones with the World Wrestling Federation and Kmart Corp. The Kmart MasterCard, introduced in September, attracted 1.2 million new accounts in the fourth quarter alone.

Mr. Fairbank reiterated Monday that there is more to life than credit cards for Capital One. Though he and Mr. Morris have used card products to build a business with 36 million customers and $30 billion of receivables, they have perennially said that their database-driven marketing and risk-assessment program - what they call their "information-based strategy" - could be used to sell all kinds of products.

So far, the company's forays outside of credit cards have had mixed results. In March it discontinued an arrangement with Sprint PCS to acquire wireless telephone accounts. That deal fizzled when telecommunications stock prices dropped and left companies like Sprint with less money for new ventures, Mr. Fairbank said.

The 1998 purchase of Summit Auto Finance has been more successful. "We bought it, injected information-based strategy, and it grew 100% in one year," Mr. Fairbank said. According to one analyst, by the end of last year Summit's loans had tripled from the time of the purchase, to $1.2 billion.

Next, Capital One will try the same tactics with AmeriFee Corp., a lender for elective surgeries, such as plastic surgery and other popular procedures that are not typically covered by insurance. AmeriFee, which was a private company until Capital One bought it last month for $81.5 million, has 160 employees and is based in Southborough, Mass.

"The consumer lending business is so fragmented," Mr. Fairbank said. "There are lots of mom-and-pop businesses. There will be a dramatic consolidation" in coming years.

This year Capital One also began a venture with Carnival Cruise Lines to help vacationers finance their cruises.

Analysts say they like the direction Capital One is taking.

"As bizarre as it seems, financing of elective surgery is a variation on the theme of credit card lending," said Kenneth A. Posner of Morgan Stanley Dean Witter & Co. "Success requires the same skills in terms of underwriting and segmentation and working with partners." Also, AmeriFee's lending is unsecured, he said.

Mr. Fairbank said the auto and medical lending business are part of his company's "larger plan" to diversify. "Lending is a natural first extension. We will focus on simple transactional products, financial products that lend themselves to going direct."

For that reason, Capital One will stay away from insurance products, which usually require personal contact to make a sale, he said.

In order to continue growing, Mr. Fairbank said Capital One will enlarge on its strategy of cross-selling other financial products to current customers - "New products that are not Visas or MasterCards."

To help implement that strategy, Capital One has brought its brand name front and center in an effort to build recognition of the name among consumers. In the past the company shunned name brand advertising. Now, a good portion of its $1 billion annual marketing budget goes towards quirky television advertising and sports event sponsorships.

Analysts agree that Capital One is a credit card issuer that has done extremely well during tough economic times, and its diversification into other consumer loans should continue to pay off.

"There are a lot of built-in safeguards that other lenders don't have," said Bruce W. Harting, an analyst at Lehman Brothers. "There is a natural hedge in the credit card business. As the economy slows, the Fed eases" interest rates, "and it works to the advantage of net margins in these businesses."

Merrill's Mr. Hughes said: "It's a hard stock not to like."


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