Early this year, when Capital One Financial Corp. began running national television commercials during prime time, it became clear that the eighth-largest credit card issuer was trying to start emphasizing its brand name - but it was not clear what the company was trying to say about itself.
For the last few months, the message has remained somewhat murky, with the company's two top executives repeatedly alluding to their branding effort but stopping short of explaining it.
Some clues were offered Monday when Richard D. Fairbank, chairman and chief executive officer, said in a speech that he intends the Capital One name to appeal to "superprime" customers who will be attracted by value.
Mr. Fairbank said Capital One's brand strategy will concentrate on its fixed 9.9% annual percentage rate, and its rewards programs for airline travel. "Basically we want to communicate what a good deal Capital One is," he told analysts gathered at the 2001 Global Financial Services Conference sponsored by UBS Warburg at the Pierre Hotel in New York. "Other issuers have copied our rate and then copped out."
Until recently, Capital One has used the Visa and MasterCard names as its primary calling cards. When it was spun off from Signet Banking Corp. six years ago, it did not have the size or clout to play up its brand. But now that it has $31.6 billion in managed loans outstanding, the situation is quite different.
"Historically we had absolutely no brand," Mr. Fairbank said. "If you talked to a Cap One customer, they would think they had a Visa or a MasterCard."
And, until now, "it's been good for us to piggybank off those brands," he said. But as Capital One expands into other product lines - as it has already attempted to do - it will have to wean itself from its dependence on the Visa and MasterCard brands.
The founding theory behind Capital One was that the "mass customization" approach it took to credit cards could be applied to other types of businesses as well. But, so far the company's only big success has been in the credit card business; forays into cellular telephones and vehicle loans have been far less successful.
But Mr. Fairbank said that efforts to expand into other product lines, such as automobile financing and installment loans, and into new international markets, will continue, and will require the company to forge an identity for itself that is separate from the card associations.
Capital One is now large enough to popularize its own name, he said. With a $1 billion marketing budget and 36 million customers - up 44% from one year ago - Capital One "now has the scale to afford to get branded," Mr. Fairbank said.
The company seemed to make this statement on New Year's Day, when a Capital One executive stood on a football field and tossed the coin that opened the Capital One Florida Citrus Bowl.
Capital One is not the only credit card specialist that has begun highlighting its brand - Providian Financial Corp. is in the same situation - but some analysts are skeptical about these strategies.
Moshe Orenbuch, an analyst at Credit Suisse First Boston Corp., said that Capital One "has positioned itself as a consumer advocate". "For shorthand they call that 'brand,' but that's not what they're really doing."
Mr. Orenbuch, who rates Capital One a "strong buy," said that Capital One has succeeded in offering "the value-proposition that's important in this business" and that piggy-backing on the associations is what credit card issuers are supposed to do. Issuers should not be in the business of brand-building, he said. "You can see how that backfired for Citi."
Mr. Fairbank said that as part of its new marketing effort it will try to appeal more to consumers at the higher end of the credit spectrum, who might, among other things, be attracted by a cobranding relationship with Mercedes-Benz. "It's easier to sound-byte messages directed to the superprime," he said.
While Capital One prides itself on its ability to craft products for people from every income group, it has been veering away from the subprime and toward the superprime, he said, and will begin to concentrate more on growing its receivables than on acquiring new accounts.
"Historically, we've seen less asset growth than growth of accounts, but recently, that has changed," Mr. Fairbank said.
Mr. Fairbank boasted of the volume of card offers Capital One mailed to American homes last year. In 2000, he said, Capital One mailed about 30% of the industry's total solicitations, which BAIGlobal Inc. of Tarrytown, N.Y., said amounted to 3.5 billion pieces of mail.
"So when you go to your mailbox and think, 'God, I have to get a bigger box for all these offers,' 30% of the resizing you'll need is thanks to Capital One," Mr. Fairbank said. Even a small increase in responses from new card solicitations and a slight reduction in attrition rates from current cardholders would make a brand campaign worth the effort, he said.
Also noteworthy, Mr. Fairbank said, is the continuation of Capital One's low rates of charged-off accounts, which have been rising in the rest of the credit cards industry as consumers get pinched by the economic slowdown. This month Fitch IBCA, Duff & Phelps posted its overall chargeoff index at 5.55%, the largest one-month increase since April 1997, according to its industry report.
Capital One has a delinquency rate of 4.72%, Mr. Fairbank said, and its chargeoff rate has edged below 4% for nine straight quarters. The rate even fell 23 basis points in the first quarter of this year to 3.75%, while delinquencies dropped 51 basis points.
"For an issuer with 30% of its portfolio in the subprime, to have loss rates under 4%, particularly in this economic climate is remarkable," said Mr. Orenbuch of Credit Suisse First Boston.
