Capital One Financial

How Capital One's operating model enabled it to out last competitors and go from a monoline credit card issuer to one of the 10 largest diversified banks in the US by deposits.

Capital One Financial was founded in 1994 as a monoline credit card company and over the last two decades has grown into a diversified bank with more than 45 million customers [1]. Many pure play credit card issuers that competed with Capital One such as MBNA, Metris, and Providian were acquired in the early 2000’s amid solvency concerns [2]. While these competitors had the same basic business model as Capital One — acquire relatively low risk credit card customers in order to earn interest income and fee revenue — Capital One’s unique operating model is what allowed it to weather the financial crisis in 2009 and continue to grow strongly in the years since.

In a 2009 talk at the Stanford GSB Capital One’s CEO, Richard Fairbank, explained that credit card operating model was designed to leverage the firm’s two key assets: people and information [3]. The company’s talent is divided into four primary functions across several business units: data structure, business analysis, operations management, and strategy.The data structure function within the operating model is responsible for aggregating transaction data into query-able warehouses. The business analysis unit then uses that information to derive insights which can be operationalized to drive business performance. The operations team implements those insights and puts them into market. Once in market consumer behavior is observed and recorded in transaction data which flows back into the system through the data structure function creating an aligned feedback loop. This is the basis of Capital One’s Information Based Strategy which it uses to conduct over 80,000 big data experiments per year [4].

The strategy team functions outside this loop to assess new business opportunities such as partnerships, acquisitions, or additional lines of business. When a new strategy is determined a team of data, business, and operations specialists are staffed up against the initiative to bring it to market and the virtuous loop of information into insights begins to optimize the initial strategy.

The performance results driven by this operations model are undeniable. First Capital One became a leader in acquiring low risk customers by operationalizing “the balance transfer insight” — the realization that all other factors being equal (such as FICO score, income, etc) consumers who transferred credit card balances were less risky than those who didn’t. The company actively targeted these consumers through sophisticated direct mail campaigns and remain one of the heaviest users of the U.S. postal system today [5].

While most credit card companies focused almost entirely on acquiring credit card customers, Capital One placed equal emphasis on managing accounts once they had been opened. This manifested itself in programs such as proactive credit limit increase programs and fraud detection initiatives. The focus on customer management through information based strategies not only increased revenues by limiting losses and growing interest bearing balances, it also improved retention and kept customers happier. The constant analysis of the current customer portfolio alerted Capital One much earlier than its competitors that credit quality was deteriorating and allowed them to limit the damage and stay solvent by slowing down acquisitions, and reducing credit lines of customers who became more risky during the downturn [5].

In 2005 Capital One acquired Hibernia Bank and quickly followed with acquisitions of NorthPoint and Chevy Chase Banks in 2008 as well as ING Direct in 2012 and is now among the 10 largest banks in the U.S. based on deposits [5]. The strategy team realized that Capital One relied too heavily on the capital markets for funding and that if they ever went dry as they did in the financial crisis the company would need access to low cost liquidity. Capital One has applied innovative operating principles to banking by capitalizing on the emergence of technology and the decreasing reliance of customers on physical branch locations. They decided to operate with a small physical presence and focused on creating a strong online banking experience. By doing this Capital One maximized the utility of the few remaining centrally located “Capital One Cafe’s” which are less like traditional bank branches and more hang-out spots for customers to come and use free wireless internet, drink coffee and also take care of their banking needs if necessary.

Capital One’s well aligned operating and business model have combined to produce extraordinary results. The firm’s stock performance is indicative of this alignment with its value increasing nearly 900% since its low of $8 per share in 2009 [6]. Additionally Capital One ranks 91st on Forbes 100 best companies to work for [7].



  8. The author of this post was an Analyst at Capital One for two years from 2010-2012


ASOS: Leveraging Network Effects in High Street Fashion


Dollarama: How adding additional price points impacted operations

Student comments on Capital One Financial

  1. Thanks for such an insightful insider’s perspective, Stirling! I have always wondered how Capital One makes money off of my use of its fee-free 1.5% cash-back rewards card, especially overseas (with no fees, of course). I am an avid fan of Capital One, and view their operations as low-end disruption to the traditional complex, bureaucratic, inefficient brick-and-mortar banks. You seem to support that idea, highlighting their focus on internet technology designed to provide a high-quality experience to users at relatively low-cost with much fewer capital expenditures than their competitors. It was interesting to hear about Capital One’s early operational victories tied to preferences for customers who complete balance transfers. Furthermore, segmentation into four functional areas for its talented employee base seems like a lean, focused strategy. It seems like real operational innovation to me that Capital One was an outlier in its emphasizing serving, protecting, and enhancing the banking experiences of its existing customers in addition to new customer acquisition. Clearly, mitigating fraudulent activities and increasing spending limits on interest-bearing accounts spells all kinds of $$$. From my personal observations, from a cultural perspective, Capital One is seeking to position itself as a hip and cool alternative to the “boring” banks, thereby attracting even more young top talent and further differentiating itself from the seemingly archaic banking ecosystem in which it operates. Your describing their “hangout” Capital One Cafe’s that are uncannily relaxed and inclusive for banks seems to do exactly that. In fact, I notice that they’re just now opening one right across the bridge in Harvard Square. I think it’s time that I experience magic this magic myself 😀

Leave a comment