It's not just their initial skepticism about the Internet that prompted colleagues to dub the co-chiefs of Capital One Financial Corp. "Mr. Gloom and Mr. Doom."
Richard D. Fairbank, chairman and chief executive officer of the giant credit card company, and Nigel W. Morris, its president and chief operating officer, delight in the nicknames, which to them connote temperance, caution, and an unwillingness to simply throw money at a channel - the Web - that has drained so many dollars from their rivals.
Capital One has fast become the seventh-largest bank card issuer but has been chided as an Internet laggard. It hasn't done much product advertising on the Net, nor has it rushed to sign deals with Internet search engines or other dot-coms.
Now, Mr. Morris, 41, and Mr. Fairbank, 49, say they are finally ready. And it's about time.
The two executives have been playing Hamlet for some time - and not just about their commitment to the Internet. A wireless telephone venture they said would thrive under their strategic tutelage turned into a money drain. It is too early to tell if a new auto lending unit will replicate the prosperity of the credit card business.
The partners shrug at their critics. Both men say they are intensely risk-averse, perpetually convinced that a recession is just around the corner, and smugly validated by the stumbles of online credit card leaders like First USA.
"Most activities going on in financial services online have not yet seen their dams break," Mr. Fairbank said in a recent interview. "A lot of dot-com companies are pioneering very interesting new models and forms of digital payments but are losing very large amounts of money pioneering new channels."
Mr. Fairbank said Capital One lives to learn by others' mistakes. "It is our goal to leverage, to ride on the back on some of their money-losing," he said.
Now the company, headquartered in Falls Church, Va., says it is ready to come forward with an aggressive Internet strategy of its own. Though competitors like NextCard Inc. and Providian Financial Corp. have a head start, Capital One's leaders said credit card origination online has not yet "exploded." They say not being first may work to their advantage.
Mr. Morris and Mr. Fairbank would not give details of their plans but said that, in a broad sense, they aim to take the "information-based strategy" that has been their company's hallmark and apply it to the World Wide Web. In the physical world, this strategy involves exhaustive testing of products, price points, and consumer credit thresholds, all aimed at getting the right cards in the hands of the right customers.
Capital One plans to use the Web to sell not only credit cards but also ancillary products like telephone service, and insurance.
Mr. Morris and Mr. Fairbank have long maintained that their "information-based strategy," which they honed as executives in the former Signet Bank's credit card business, can be applied to many products. It is a dream they pursue with the intellectual purity of a laboratory experiment, but it hasn't always panned out.
One disappointing venture was a wireless phone service offered through a subsidiary called America One Communications. Capital One's lackluster performance outside credit cards has analysts questioning how well its techniques can be applied to other industries.
Mr. Fairbank said Capital One is enthusiastic about telecom and "revamping our strategy to accommodate the severe price wars in that industry." But again, caution and fiscal prudence are the watchwords.
"We just do not have the appetite to build up huge losses in order to pursue the telecom dream," Mr. Fairbank said. "We are crafting much more financially, more protected ways to grow the business."
Last year Capital One bought an automobile lender, Summit Acceptance Corp. of Dallas. This month, after what the company said was a year of product testing, Capital One is launching a Web site to offer auto financing through Summit. In other lines of business, Capital One says it has $4 billion in certificates of deposit and money market accounts, $1.5 billion of which was acquired online.
"Our goal is to be a primary financial services site for our customers," Mr. Fairbank said. "Over time, it will involve offering a much broader set of financial products.
We need a platform of banking products from which we can also build and market a variety of Internet, e-banking, and e-financial products."
During its "testing" phase on the Internet, Capital One managed to pick up 350,000 customers online, make a partnership agreement with the advertising firm Doubleclick, and be one of the first to offer online decision-making and instant account numbering (NextCard and Chase Manhattan Corp. also offer instant account numbering). Capital One aims to have originated one million accounts online by yearend and expects that in the next few years 20% of its new customers will come from the Internet.
International growth is another goal. Capital One has $1.9 billion of loans in the United Kingdom and Canada, and it recently began a joint venture with Netcore, a large financial institution in South Africa, to issue credit cards there.
Capital One said it has begun working to move its customers to the Web for account servicing. It currently serves about 370,000 accounts online, and projects that more than two million of its 25 million customers will receive and pay their bills online by yearend. By comparison, MBNA Corp. has said it expects to serve 1.1 million of its customers online by yearend.
Mr. Morris said some of his competitors have mistakenly treated the Internet as simply "another distribution channel."
"The technology you developed through direct mail or telemarketing can't be wholesale ported into the Internet space," he said. "It's very clear that the Internet is an adversely selected population on a giant scale, so unless you actually do some tests and figure out how to manage those customers, either by giving them specific products or not approving them, you can get yourself in an almighty mess."
Capital One considers risk management its strong suit. Mr. Morris and Mr. Fairbank instruct managers to allow for the likelihood of an economic downturn in every model they build. That way, Capital One can feel comfortable lending money to consumers across the credit-risk spectrum, they said. Mr. Morris and Mr. Fairbank say it is this approach that has helped their company attain the lowest chargeoff rates in the credit card industry.
Gary Gordon, a managing director at PaineWebber Inc., said Capital One was right to enter the online space late. "In many cases, there is a first-mover disadvantage," he said. "You may have added a lot of new customers that can be swapped away from better ideas."
But Kenneth A. Posner, a principal at Morgan Stanley Dean Witter in New York, said Capital One may be taking a chance by offering cheap deals, like a 9.9% fixed-rate credit card. As interest rates rise, this product may need to be repriced, he said.
"The challenge for Capital One is to make sure it is crafting a value proposition for consumers besides the ability to offer a cut-rate price," Mr. Posner said. "They're generally doing that, but without a powerful brand of their own and an array of affinity partners, they have to build every product from the ground up."
Capital One recognizes that risk, Mr. Morris said, and realizes that every product has a life cycle.
"Yes, it gets more difficult when your cost of funds rises," Mr. Morris said. The 9.9% product "will continue to be a growth business for us, but we'll have to manage it carefully, and perhaps it won't be as big as it would have been if interest rates had remained flat."
Mr. Morris and Mr. Fairbank pride themselves on product innovation. Capital One was not only the first to offer the 9.9% fixed-rate card but also the initiator of the balance-transfer craze that has swept the industry. It is also known as a foremost data-mining specialist.
"They're one of the handful of best-run companies in the card business," said Mr. Gordon of PaineWebber. Mr. Morris and Mr. Fairbank have "turned this business into a science, instead of saying, 'We think this-or-that will work.' "
Though Capital One has ignited many trends, it is a stranger to most consumers. The company said branding would be a major focus in the next couple of years.
On the Internet, "brand plays a much more important role than it does in the physical world," Mr. Fairbank said. "It's very important that we develop and reinforce a brand which lets customers and noncustomers know who Capital One is, what we stand for, and where we're going. Right now I don't think customers have a very clear view of that."
Mr. Fairbank said consumers will see more television advertising from Capital One in the next year. But "the biggest focus in our company is to ensure that every one of our customer interactions is a very powerful one," he said.
Mr. Morris studied experimental psychology before going to business school. "A lot of our information-based strategy stuff comes from the notion of empirically measuring consumer behavior and how it works," he said.
Capital One conducted 36,000 product tests last year. An example of this experimentation would be to try two ways to collecting on delinquencies: One group of people would be called as soon as their accounts were past due and another group after 15 days.
"What allows us to have a competitive advantage in the market," Mr. Fairbank said, "is not the product we're mailing out today - it's the ability to be doing millions of different things at the same time, all based on test-based algorithms."