When Capital One Financial Corp. went public a little more than five years ago, it had 5 million credit card customers. Today it has 25 million customers, not just for credit cards but for car loans, consumer installment loans, insurance, deposit accounts and even wireless phone service. Not all of those product extensions have been completely successful. Its America One cell-phone service, with about 300,000 accounts, experienced very high churn rates in the beginning, and Capital One has stopped actively marketing it outside the company's existing customer base.Yet despite its occasional missteps along the way, Falls Church, VA-based Capital One has logged an exceptional record of returns. In each of the past five years, it returned more than 20% on equity, and earnings per share have grown by more than 20% annually-performance the company claims has been matched by only 10 of the nation's 10,000 publicly held companies.Analyst Moshe Orenbuch of Donaldson, Lufkin & Jenrette attributes Capital One's success both to the general profitability of credit cards and to Capital One's database management and marketing skills. The company uses technology not just to target new customers, but to control risks and tailor products to sharply defined customer segments."Historically, cross-selling in credit card land wasn't as successful as everyone thought it should be," Orenbuch says.Not so at Capital One, where last year 57% of new customers bought at least one other product. Orenbuch thinks one reason may be its customer demographics. "Almost 60% of its customers are nonprime and subprime," Orenbuch says. He notes that such consumers seem much more willing than prime customers to buy other financial products from their credit card issuer, possibly because they tend to be ignored by other financial services firms.Yet Capital One has managed to escape the harsh publicity garnered by other subprime issuers as Providian Corp. "They tend to have slightly lower late fees and over-limit fees," Orenbuch explains. - M.L.In addition to subprime, it also targets a segment the company calls "superprime," and lavishes attention on such customer segments as "sports fans, music lovers, newlyweds, new parents and hundreds of other lifestyle and lifestage groups," according to its annual report. And it's been expanding rapidly overseas, especially in the United Kingdom.Capital One also has one of the lowest delinquency rates in the credit card industry. Says the analyst, "They're very afraid of credit risk, so they at every level of the business they put controls over credit." The company attributes its success to its use of information technology, and to the huge investment it makes in marketing research and product development. Such investment amounted to $732 million in 1999, 127% of its pretax earnings, the company says. According to its annual report, in 1999 it "tested 36,114 new ideas, 25% more than in 1998."

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