Capital
Exploiting
different
One:
an Information-Based
testing
tive
Capital
approach
One has exploited
to targeted
customer
profitability
impressive
performance
issuer.
It is sustaining
investment
marketing,
constantly
through
a practice
Moreover,
it
is
on
and personnel,
improving
known
its
as
attempting
information-based
based
analysis,
to achieve
as a leading
credit card
its advantage
through
in infrastructure
through
an innova-
to
strategy
and
expertise
to other
its
industries.
After
soliciting
16 banks
for a radical
card businesses
by each, Rich
of their
credit
and after having been turned
Fairbank
and Nigel
Morris
down
now
enjoy
their
positions
as
Executive
and President
Officer
of Capital
profitable
rapid
credit
growth
One,
card
and
Chairman
/ Chief
/ Chief
Operating
one of the world’s
issuers.
most
As a result
its ability
to retain
of its
profitable
accounts,
Capital
One was named
credit
card
issuer of the year in 1995 by Credit Card Management [7].
One
$12.8 billion
over 500%
balances
the
value
of loans
has increased
from
and the customer
[6].
With
total
highest
in
the
by
to
base has grown
growth
of 880% between
managed
$1.7 billion
by
in outstanding
1992 and 1996, among
industrys,
and
bad
Sometimes
I think I’ll
working
in a woolen
wake
mill
up and find myself
near my family
in
Wales.”
that
time
to the right
and
business
its
IBS
at
the
matures
right
and
as
approach
will
provide
Indeed,
marketing
advantage.
and spending
to ventures
increasingly
outside
officers
believe
remain
loyal
●
Does
that
to any
Capital
are committed
traditional
We will seek to address
in this case study:
One
banking,
and
it is critical
industry.”
not
they
Their
key
in banking
the following
enjoy
a
the
that
or the
questions
competitive
advantage?
How
was competitive
Why
were
Signet
relative
under
/
the
advantage
opportunities
Capital
outsider
achieved?
identified
by
One first
exploited
— a small
regional
the guidance
Is the advantage
erode
of consultants
by a
bank
rather
than
lessons
Capital
banking
industry
can
number
of other
One’s
success
be extended
companies
to
in a wide
sustainable?
Can other
banks
the advantage?
What
are some
One’s
information-based
2.1.
other
applications
of Capital
strategy?
in
the
a large
range
of
industries.
The company
relies heavily
on what it terms its
h@nuztion-Based
Strategy
(IBS). The use of an
IBS allows
Capital
One to develop
new and
Newlv Vulnerable
Introduction
Markets
A large number
of industries
istics that change the relative
between
large
incumbents
exhibit
balance
and
characterof power
nimble
new
trants.
We use the term newly vulnerable
kets to characterize
those conditions
that
new
of
other
right
enabling
product
loan
chargeoffs
consistently
among the lowest in the
industry,
the stock’s price soared between
1991
and 1996.
Nigel
Morris
smiles when he adds,
“Sometimes
I pinch
myself.
I’ve been very
lucky...
helping
manage this fabulous
company.
The
an
bankers?
Since 1992, the dollar
Capital
define
customization,
right
card
Nigel
and
as the use of scientific
strengths
are in IBS, and
credit card industry.
in 1988 as consulting
transformation
credit
believes
senior
Introduction
clients
the
and
in
culture,
competition
increases, the company
is prepared
to
diversify
into a wide range of industries
where it
efforts
this
mass
“the
at
competitive
test-and-learn.
generalize
As
“not
1.
Rich
to deliver
customer,
price.”
corporate
strategy
to drive
them
fundamental
and its competitors
structure,
information-based
E. Thatcher2
exploiting
itself
use of information,
Eric K. Clemonsl
Abstract:
by
between
organizational
Strategy
Matt
strategies
differences
entrants
incumbents,
dominant
to threaten
even where
market
previously
those
dominant
incumbents
share and resulting
en-
marenable
enjoy
superior
cost
structures.
The following
markets:
Q Ease of entry
entrants
conditions
— It must
to enter
1060-3425/98 $10.00 (c) 1998 IEEE
generate
vulnerable
be possible
the market
and
attack
for
new
estab-
Iished
regulatory
associated
production
new
Attractive
are
between
—
and
segments
Difficult
or
to
ability
to defend
and
with
that
to
must
to
difference
serving
they
— There
those
can charge
to provide
must
be some
incumbents
from immedthe
strategies
of new
thus
time
the
be sufficient
obstacles that prevent
iately
duplicating
2. 2.
costs
entrants
where
will
profits.
their
the
New
the prices
favorable
sufficient
entry,
it will be profitable
for them to
is, they must believe
that there
the costs associated
entrants,
to
and
distribution
be low enough
with
segments
segments
●
attack
that
That
market
those
entrants
to
perceive
attack.
barriers
restrictions
with
acquiring
facilities,
must
provide
attack.
●
Potential
firms.
including
that
allow
realize
the
new
entrants
benefits
from
Differing
Customer
industries
there are enormous
telecommunications,
customers
with
upon
their
distance
thus
the
of
their
in banking,
service
from
the
home
differences
service
costs
local
length
that connects
network.
of
will
to different
providing
often
depend
the central
office,
and
dedicated
local
loop
to the communications
some customers
use their credit
cards largely
as charge cards, paying
off their
balances
in full each month;
these customers
enjoy the free float, but provide
only limited
revenues
and even smaller
profits
for their
issuers.
yet,
nant
players
upon
prices
serving
●
●
their
Conditions
such
markets
historically,
have
strategy,
in many
continued
charging
industries
to follow
customers
domi-
a uniform
prices
based
average
costs, rather
than
differential
that
reflect
the costs associated
with
these individual
accounts:
all accounts
prices
profitability.
as those
attractive
described
above
make
new entrants to attack, as
for
they suggest
that some customers
are being
dramatically
over-charged
under
average
cost
pricing
strategies,
and that they
are in fact
subsidizing
Retail
other higher
banking
new entrant
acquire
many
cost customers.
provides
a clear example
can enter
profitable
a previously
an “attractive”
market
dominant
industries,
of how
market
firm
can distinguish
In
between
that account
for their
profits
and those customers
that repre-
sent loss making
accounts
(i.e., kill yous ). In
retail
banking,
for example,
the best 20’%0 of
consumers
may account for more than 100% of a
bank’s profits, while the bottom 201X0may account
retail
banks
presence
losses.
in 1988 charged
for banking
of significant
uniform
services
differences
prices
despite
the
in customer
costs (i.e., love ‘em and kill you accounts).
This
situation
provides
an opportunity
for competitors
to target the love ‘ems, charging
them less for the
provision
of banking
services
than
they
are
charged
still
by their
generate
targeted
current
profits
bank
for
marketing
and
but
the
at prices
attacker.
opportunistic
skimming
will
leave the incumbent
larger proportion
of higher
cost, kill
will
cause
and
profits
the incumbent’s
to fall.
average
In response,
that
Such
cream
serving
a
yous and
costs to rise
the incumbent
will be tempted
to raise its prices to compensate
for declining
profits,
resulting
in even more
customers
becoming
vulnerable
to the new entrants’
attack.
As the new entrant
continues
to
customers
incumbent,
being
overcharged
as the incumbent
prices
to compensate
entrant
continues
continues
by
the
to raise its
for its losses, and as the new
to acquire
profitable
market
share
at the expense
of the incumbent,
the
defender
may begin to enter “death
spiral”
[3].
That is, for the defender,
“the worse it gets the
worse
it gets!”
There is a literature
and supporting
theory
how
to perform
targeted
marketing
and
provide
differential
offerings
(e.g., [2] and
ities.
why
historically
analyses,
of
[3,4].
In telecommunications,
state regulators
largely
determine
prices
and typically
over-charge
customers
in cities and suburbs
in order
to
subsidize higher cost customers in rural commun-
And in banking,
most banks have
not performed
customer
profitability
a
and
share at the expense
incumbent
firms
those customers
(i.e., love ‘ems)
target
And
pricing
charged
reflect
across consumers
between the costs of providing
customers:
And
have
do not
Most
Costs and Uniform
Pricing
In
instead
for all the off-setting
entry.
In many
and
that
differential
pricing
there
that
this
Fairbank’s
was followed
and
Morris’s
1060-3425/98 $10.00 (c) 1998 IEEE
is very
is
However,
important
little
evidence
in
(e.~.,
on
to
on
[9]).
to suggest
banking
prior
implementation
to
of
targeted
marketing
business
of Signet
Competitors’
presence
set the
reliance
upon
of extreme
stage
based
strategies
for
strategy,
in the credit
card
uniform
differences
Rich
and
pricing
among
Nigel’s
and is no doubt
in the
customers
has led
against
to tremendous
information-
the most
traditional
one-size-fits
success
banking
all approach
and
impor-
competing
industry
with
to marketing.”
their
major
Once
its
Capital
3.1.
The
One and Competitive
Early
acquire
of their
profitable
competitive
ed,
advantage
At
that
this vision
Not all banking
able to serve
●
Banks
they
might
customers
who
who
could
marketing
many
has turned
(or
their
techniques,
consumers
targeted
profitable
are vulnerable
banks
low
products,
direct
like
than
to
cost,
credit
a local
marketing,
or
it will
be necessary to M
different
targeted offerings,
in order to learn the combination
of characteristics
that
make
customers
●
different
and profitable
products
desirable
for credit
to
be necessary to start with small tests, but when
learning
is complete
larger
rollouts
can be
made.
Nigel
also stresses
create
improving
easier
a new
that
because
product
or
the profitability
implementing
their
idea
it was not necessary
a new
brand
of a bank’s
—
that
to
is,
existing
MasterCard
or Visa portfolio
had far fewer entry
barriers than attempting
to create a new brand.
they
industry
solicited
to radically
the transition
of
large
character-
for scale
By
in the
increasing
of accounts, enabling
economies of scale.
In addition,
this period
during
in uniform
attractive
their
were able to spread the high
with credit card operations
over a large number
lower prices through
engaged
and
card business
to consolidation
players.
customer base, banks
fixed costs associated
was
banks
the credit
pricing
opportunities
attack.
cost associated
in this competitive
banks
with
them
to
commonly
strategies,
for
creating
In addition,
acquiring
environment
new
(cost per
solicitation
divided
by hit rate) was quite high.
This too suggests
that incumbent
banks were
vulnerable
to an opportunistic
marketing
strategy
that improved
hit rates by selectively
offering
lower
annual
interest
rates to certain
potential
‘em” customers.
As Rich and Nigel
market
targeting
appear
note, while
vulnerable
strategies,
competitors
to
executing
in this
opportunistic
these
strategies
is
not easy, Or, as Nigel Morris has said, “Anyone
can find customers who want your money! Anyone
can find customers
who will take it and not pay
you back! The trick is to find customers
who will
take a lot of your money fast and pay you back
slowly.”
It was in this competitive
card issuers.
Since most combinations
of product
offerings
may be unprofitable
for most-customers,
it will
was made
made
hands
“love
at relatively
rather
to
them
allowing
some banking
using
most
profit-
of
at the time.
clients
among
share; as a result,
the average
articulated
are equally
identify
cards, into a national,
regional business.
When
target-
strategies
have
are, so these accounts
competitors
●
to
develop
developed,
card
by competition
accounts
do not know
accounts
solicit
marketing
time,
business,
and
as follows:
●
Direct
card
share
The Great
a radical
by implementing
information-based
IBS).
●
credit
market
an
the
clients
as consulting
by
of many
after the first 16 banks rejected their solicitations
that they found a home at Signet Bank.
had
In the late 1980s, Rich and Nigel
developed
idea, or a vision,
for radically
transforming
transformation
consulting
was
insights
businesses
transform
the credit card business by exploiting
However,
most banks were not
their insights.
interested
in what became known
as their information-based
strategy.
In fact, it was not until
market
Advantage
banks.
through
banking
banks
these
card
By 1988, the credit
[5]
Days
credit card businesses
within
Idea was to enable
a bank,
acquired
the insight
ized
3.
Nigel
the credit
numerous
tant reason
for Capital
One’s
success.
“This
strategy
of mass customization
represents
a
quantum
breakthrough
in marketing
effectiveness
and
Rich
observing
Bank in the late 1980s.
and
Nigel
attempted
Rich and Nigel
banks, including
environment
to
pitch
The
that
Great
Rich
Lieu.
began to shop their idea to major
New York and West Coast money
center banks and super-regionals.
Although
many
of the major banks were willing
to work
with
Rich and Nigel in other areas, their Great
Idea
was rejected
by five of the top six (Citibank,
Chase, Bank of America,
Bank of New York, and
Chemical
Banking)
and fourteen
of the top
twenty banks in the U. S.. Reactions were remarkably
similar
across institutions:
1060-3425/98 $10.00 (c) 1998 IEEE
●
“It can’t be done!”
— it’s too expensive,
data that you need
make
on individual
the strategy
succeed
and the
consumers
is simply
not avail-
able to the bank
●
“And
it!”
we don’t
need
your
help;
they
to
we already
do
enable
profitable
●
Then
you
running
more
Signet
Bank,
a small
bank
looking
for
opportunities
to grow, accepted
The Great Mea.
However,
Signet wanted Rich and Nigel to come
into
the company
aried
bank
not
as consultants
employees
with
but
as sal-
long-term
bank
stage
profits
where
are earned,
notes,
control
within
adjusted
for a split
“We
bottom
of the
Nigel
would
retain
significant
potential.
They believed
that
were
necessary
David
Hunt,
to allow
Executive
bank
Rich
and
profit-sharing
these conditions
their
IBS to flourish.
Vice
President
of Signet
is a significant
is
stock
price
hit
in 7/93).
in late
of $27 million
1989, forecast
profits
by late 1991.
The fall
in stock
real estate loans.
profits
actually
ideas,
firm.
and helped
As he stated,
IBS work?
3.2.
Initial
Nigel,
had
Rich
and
of
their
their
basic
to generate
buy-in
“You
that you can make
think
within
entailed
initial
stresses
that
commitment
to
building
databases,
management,
and
this
very
of
sending
sample
●
some
test
Determining
which
tests
the
out
strategy.”
test and learn
their
marketing
out a small,
yet
of direct marketing
“infra-
learning
figuring
difficult
out their
scale.
implementation
the first
IBS
based on a “test and learn” methodology.
test and learn consists of the following
Running
important,
continued
their
in
to zero
was a result
of course been far
never
of strategy
neither
focus
price
IBS began
however,
conception
the number
Nigel
a large
to implement
equally
Nigel,
card
produce
lost
faith
for
did
nearly
from
in
the bank;
David.
on testing,
of tests conducted
to
They
doubling
335 in 1989 to
617 in 1991.
In August 1989 they rolled
solicitations
in significant
●
the
for Rich and Nigel
at Signet
1988 when they entered Signet
1991.
structure
build:
trade of account
The
and
potential
Performance
to December
how
the
Then go do it!”
The initial
period
ran from October
year
to Rich
bank
Had the credit
card
dropped
to zero the
tantly,
recognize
to Nigel,
From
for 1992 had dropped
fortunately,
the
at just this time.
listened
The
$20.00 in late
1991 (prices
in 1988 and $25 million
for the stock price would
to
and
of 1991
According
1991.”
results
David
and
realized
over
early
worse;
profits
vision
expen-
was in free fall!”
Bank, played a major role in the transition.
Rich
and Nigel also received
support
from Bob Freeman, then CEO of Signet.
Perhaps most importhe
and
“testing”
of the bank’s total portfolio
from 2.6%
1989 to 5.9~0 at the end of 1991. As Rich
“Signet
of bad
portfolio
in the
successful
price plummeted
from
to less than $5.00 in
profits
and more
In fact, by December
credit card marketing
and strategy, but only under
Rich and Nigel
were to be
certain
conditions:
given
real bank titles,
they were to have real
employees
of
Rich and Nigel’s
1989 solicitato 9.5~0, more than doubling
the
chargeoffs
in August
main-stream
basis
more
“learning”
contracts.
Surprised
by the offer, Rich and Nigel
agreed
to come into the company
as heads of
over systems, and they were to be accepted
Signet as line bankers.
However,
unlike
the
the stage of initial
chargeoffs
from
tions had soared
stock
1989
proved
there
sive lag between
the
determine
forward.
programs,
like the ones that
initial
test stage.
Unfortunately,
Finally,
to
tests going
was
In brief,
activities
money
The Middle
Period
Late
1991 began
a period
(e.g.,
and
which
ones do not; this takes some time, and
most of the tests will be unprofitable.
However, unprofitable
tests are not unsuccessful,
if
of triumph
Nigel,
and those associated
with
The Great Lieu, which
continued
spin-off
of Signet’s
credit
for
Rich,
implementing
through
the
card business
to Capital
One in 1994.
During
this period (1992-1994), growth
in receivables and in number of accounts soared [see Table
1], especially
when compared
to its competitors.
At the same time,
percentage
chargeoffs
improved and were consistently
better than industry
averages
carefully
selected,
solicitations)
make
3.3.
[see Figure
1].
Not
surprisingly,
the
stock price of Signet Bank surged,
allowing
the
bank to grow faster than 996 of the Fortune
1000!
In fact, Signet’s stock appreciated
January 1991 and the end of 1994.
5377. between
The credit card operation
at Signet was doomed
by its own success — it could not continue as part of
the bank. The credit card business came to account
1060-3425/98 $10.00 (c) 1998 IEEE
for roughly
2/3
of the profits
threatened
the
stability
nance,
when
additions
relatively
portion
Rich
and
of
business,
many
was clear
that
of
the
Nigel
action
Moreover,
as
new
of
lines
banking,
require
be
new
for such a
traditional
would
more
possible
it
within
card business
company,
not associated
The Current
as a wholly
with
the
independent
Signet.
Period
this period,
enjoy
Capital
considerable
One has continued
success.
success as measured
They
in terms
have
of growth
to
achieved
in number
of accounts and total outstandings
well as in low loan losses when
[see Table 1], as
compared
to its
competitors
addition,
[see Figure
performance
1].
In
stock
has been strong.
Clearly,
Capital
One has experienced
tremendous success. “By any measure, Capital One has
more than tripled
in the past three years.”
[5]
Capital
One continues
Based
Strategies
to
to rely
acquire
upon
Information-
profitable
market
It
One, as demonstrated
by the exponential
of its R&D efforts [see table 2].
Assessment
3.5.
is
clear
that
competitive
most
of market
quently,
Capital
doubled
forming
since
both
banking
sector.
4.
Capital
Capital
is little
One’s
advantage.
lieves that
Strategy
achieved
has been
of its competitors
share
and
One’s
stock price
of margins.
secret
Achieving
about
advantage
either
or the
in terms
Conse-
has more
its 1994 IPO, significantly
the market
as a whole
How
Steps towards
Advantage
There
One’s
One
has
The bank
advantage.
outperforming
both
of Capital
than
outperand the
Competitive
the
source
extent
of
of this
The entire
management
team bethe organization’s
success comes from
its Information-Based
upon implementation
strategy
strategy
Strategy
and its reliance
of IBS via Test and Learn.
of Capital
the
One has been
proprietary
the direct
information-based
that we have pursued
leverages
information
since
1988. The
technology,
scientific
testing and a highly
flexible
operating
infrastructure
to deliver
the right product,
to the
right customer,
at the right time and at the right
[5]
The
core
of
realization
this
that
strategy
is based
customers
profitability,
and
of sources
differ
that
upon
widely
the
in their
information
from
can be synthesized
a
to exploit
this
“customer
profitability
gradient.
”
IBS
represents the commitment
to exploit this customer profitability
gradient,
and test and learn is
the mechanism
for doing so.
4.1.
Implementation
Rich
Fairbank
when
he and
bankers
of Test and Learn
explains
Nigel
that
were
“black
box”
credit
used
to determine
in
strategy,
scoring
whether
account to an applicant.
were usually
procured
the
late
attempting
in a test and learn
upon
banks
models
or not
to offer
could
designed
be updated
ably
be offered
and
Nigel
based
to be tuned,
These models
to learn
which
could
para-
on experience,
algorithms
could
were definitely
customers
accounts
thus
an
These black box models
from a vendor,
and were
meters
not be changed.
relied
that were
in the sense that the algorithms
be examined
nor altered.
While
the models
1980s,
to interest
“sealed”
neither
allowing
share and continues
to rely upon Test and Learn
methodology
for developing
and implementing
Indeed,
testing
continues
at
those strategies.
Capital
growth
of
variety
The current
period
can be considered
the time
from the spin-off
in 1994 through
the present.
During
success
price.”
freedom
of Signet. As a solution,
Signet CEO Bob
made the audacious
decision to spin off
the credit
3.4.
profits.
“The
result
gover-
and relatively
to envision
would
This
bank’s
accounting
bank’s
outside
than
structure
Freeman
were
began
they
the
young
to the bank
large
of the bank.
of
at different
advocated
could
not
profit-
rates.
turning
the
Rich
credit
scoring models off for test offerings,
and developing and tuning
their own models
to determine
which combination
of product,
price, and credit
limit could be profitably
offered to customers who
could
be characterized
ly available
a lengthy
credit
incubation
to determine
rollout
these
by a wide
period,
which
it would
tests were
large profitable
smaller
range
and demographic
profitable
offerings
of public-
data.
After
be possible
profitable,
and to
corresponding
to
tests.
The structure
of this process explains
the initial
period of extremely
unprofitable
operations
after
the introduction
of test and learn.
The degree of
trust needed to turn off the banks’ credit scoring
models
likewise
probably
explains
a great deal
of the resistance
when
IBS
they
that Rich and Nigel
attempted
to create
encountered
interest
in their
approach.
4.2.
The Balance
The
first
Transfer
breakthrough
1060-3425/98 $10.00 (c) 1998 IEEE
Product
offering
discovered
through
this
“balance
transfer”
customers
transfer
process
a lower
their
of test
product.
initial
balances
and
learn
This
was
product
APR for applicants
from
the
offers
who
a competitor’s
credit
card. It turns out that this transfer of balances by
customers ftom higher APR credit cards to a lower
one provides
the card
issuer
with
an important
5.
Sustaining
Why
did
Competitive
so many
strategic
powerful
banks
recommendations
offered
reject
the
by Rich
and
were they not understood
Nigel?
Why
adopted
by the banks
their
Advantage
strategies,
even
and
used
before
and
as the basis
of
The Great Idea?
signal.
Customers
that do not carry balances find
no value in a lower APR and will not take the
time and effort to switch cards. More importantly, the customers
that
the balance
transfer
Unlike
other examples
of our newly
vulnerable
markets paradigm,
there was no rapid change in
product
steady decrease in cost of computing
for analysis,
and of costs of storage and classification
for the
will
attract
have
a balance
which
they
Therefore,
will
they
Clearly,
are
they
payoff
meet
“we
more,
but
Nigel
hit
People
approach
Morris’s
their
cards, tend to be riskier.
age
of
loans
more
than
plotted
against
percentage
clearly
illustrates
this
who
the borrowing
60
days
trend.
ers who accepted
the balance
exhibit
much
more
attractive
profiles, as shown in Figure 2.
line utilized,
ment
in
transfer
an
invested
annuity.
results
$2.25 in the first
close
in
the
product
Each
year,
and
Capital
credit
Other
Products
One offers
consumers,
to applicants
fact, presently
expense
of more than
year,
more
than
over
$1.00
thereafter.
Nigel
summarizes
the graph
“We found the sweet spot”.
4.3.
an investof
stream
diffor
year, close to $4.00 in the second,
to $2.50 in the third
fourth
dollar
in an annuity
simply
by
$1.50
saying
and Services
a whole
including
range
of products
offers to students
without
previous
credit history.
there are over 3,000 price points
to
and
In
in
Capital One’s current offerings.
Capital One has
everything”.
On
the ability
to “customize
account acquisition,
they can customize on customer segmentation,
market
channels,
products,
pricing,
credit lines, and credit approval
policies.
On account management,
they can customize
on
repricing
and retention,
credit line increases and
decreases,
cross-selling.
collections
and recoveries
policies,
well
The principal
before
problems
ing to opportunities
lists,
and
and
had
made
pricing
strate-
1988.
faced by banks in respond-
in the market
include
their:
2,) information
skill set; and 4.)
culture.
5.1.
Bank Structure
Most
competitors
cards.
transfer
product
risk-utilization
represents
gies possible
separate
custom-
The graph in Figure
2 can be summarized
ferently
by noting
that marketing
expenses
the balance
of
of percent-
However,
mailing
marketing
organizational
borrow
delinquent,
of credit
targeted
discontinuity
that
pricing
possible.
A
1.) organizational
structure;
infrastructure;
3.) organizational
limits
A graph
of
regulatory
differential
information-based
more flamboyantly
low-risk
revolver”
the jackpot!”
and who
or
made
creation
slowly.
APR.
of great accounts:
They borrow
pay it off, and they pay it off
slowly.
Or, as Rich Fairbank
says, “We found
the elusive
and
who
payoff
the lower
customers
characterization
money,
they
customers
presently
eventually
care about
these
those
cannot
technology
suddenly
have, or used to have,
organizations
responsible
The marketing
department
two very
for
credit
is responsible
for selling;
it is their responsibility
to maximize
the number of cards issued and the total balances
In contrast,
there is also a credit
outstanding.
department,
and it is their
responsibility
to
minimize
exposure to bad loan losses, by limiting
who
has access to cards
are allowed.
tension,
These
but
they
groups
or not integrated
Rich
and
balances
they
are in constant
are frequently
nated
Nigel
and what
two
poorly
coordi-
at all.
employed
an
integrated,
risk
managed,
approach
to sales and marketing
that
attempted
to compute
the expected
NPV
or
annuity value of each new account, providing
first
Signet
Bank, and now Capital
One, with
the
ability
to respond
appropriately
to situations
like that described
above.
5.2.
Information
To support
Infrastructure
its IBS, Rich
and Nigel
believed
that
they
had
to invest
heavily
in information
technology.
At Signet they developed
what was
considered
at the time to be the largest
Oracle
database
in the world.
The database
not only
contained
detailed
data on customers
(i.e., their
demographics,
purchases,
activities,
etc.), but
also supported
regressions
and other analytics,
and stored the results.
The generation,
storage
and
analysis
1060-3425/98 $10.00 (c) 1998 IEEE
of
such
data
enabled
Signet
to
identify
profitable
systems
marketing
continue
opportunities;
to support
Capital
the
One’s market-
ing efforts.
after
through
This
you’ve
put
your
planning
department
a guillotine!”
view
that
is shared
where
it is widely
flexibility
provides
throughout
the
believed
cannot
that
be achieved
Skill
would
not
to do so in order to
for the new compa-
Set, Culture,
and
and
achieve
information
advantage
infrastructure
without
Capital
their
the
One,
more
right
complex
with
students;
we’re
Above
banks...
success
successful
has
to hire
implementation
strategy
begins with
According
to Nigel,
people.
compete
McKinsey
for
the best
of
hiring
“We
graduate
not competing
with commercial
all, we know that the key to our
been
and
will
continue
to be our
commitment
to hiring
and developing
incredibly
This
talented
and
motivated
associates. ”
appears
in the Letter
to Stockholders,
in the
company’s
Annual
thoughts
annual
Report
are unlikely
reports
of
for 1995 [5], and similar
to be seen in any form
more
traditional
in the
banking
companies.
In addition,
the success experienced
at Signet
and
Capital One requires
commitment
to a long term
strategy
of identifying
and solving
problems.
Nigel
claims
that “if none of your initial
tests
lose money, you’re probably
too conservative
for
us. If you can’t figure out why they lose money
and solve the problems,
you’re also probably
not
right for us; we need people
with tenacity
and
superb
problem
summary,
solving
skills.”
Capital
structure,
Future
That
what
changes
competitors
One
senior
management
information,
skills,
culture,
and
Nigel
also notes
that “We truly believe that we have put in place
Duplication
of the strategy
a better
mousetrap.
Opportunities
said,
it will
senior
become
management
more
also believes
and more
difficult
that
to sustain
this advantage.
As other banks begin to follow
similar
strategies
and as competition
increases it
will become more difficult
to maintain
margins.
Therefore,
it will be necessary for Capital
One to
continue
to refine
When
AT&T
service
and
Signet
the skill
set to exploit
them and the commitment
and train the right people.
At
In
points.
structure
would
believes
that their advantage
has been sustainable because it is based on a complex combination
6.
in organizations
Commitment
Bank
be clear
and
organization,
the necessary
ny [1].
Organizational
it may
difficult,
investment.”
commitment.
critical
that outsource
their data processing.
Indeed, in
1994, the year of the spin-off,
Capital
One was
willing
to incur
the expense
of $49 million
to
break its long term outsourcing
contract with EDS,
since it was seen as necessary
achieve maximum
flexibility
is very
years of patient
need to make to respond to Capital One, it is also
clear how very difficult
it is for most organizations to accommodate
such profound
change.
of
infrastructure
value
5.3.
take them
While
of
This is in sharp
contrast
with
the actions
competitors,
some of whom have outsourced
all
non-branch
customer contact, and do not maintain
their own databases or do their own servicing.
As
to do planNigel has said, “This is like trying
ning
by the competition
offered
the same
When
had
its offerings.
all
price,
accounts
Signet
AT&T
had
over
300.
Now
that
over
the
had
20 price
AT&T
same
23 price
points,
has over
300 price points,
Capital
One has over 4,000.
Indeed,
a senior officer
at AT&T
UCS believes
that all competitors
will
be forced
to adopt
similar
strategies,noting
that “When
one of your
competitors
begins down this slippery
slope, you
have no alternative
but to follow.”
Scott Barton, Director
of New Business
ment
(or the Growth
Opportunities
DevelopTeam),
believes
that ultimately,
all accounts
priced
efficiently
to reflect
their risk
will
be
adjusted
expected return, a complex
way of saying that in
credit card issuing, as it is presently
structured,
it
will become increasingly
difficult
to be profitable
for any issuer,s
However,
profitable
opportunities
are likely
to
continue
as long as competitors
are less able than
the bank
to assess the profitability
of their
accounts.
Capital One employs
retention
specialists, whose job is to keep customers
who call to
cancel their accounts.
Retention
specialists
are
supported
by screens and computer
models that
indicate
the effects on profitability
of changing
a
customer’s
APR.
While they are empowered
to
lower a customer’s
APR down to just above the
break-even
level,
their
compensation
system
rewards
them not only for retaining
profitable
accounts,
possible
but
APR.
1060-3425/98 $10.00 (c) 1998 IEEE
for
retaining
them
at the highest
Further
fact
evidence
that
of increased
the balance
is the
legal
has come
tise,
competition
transfer
product
operating
develop
entity,
gain
systems
new
and
industry
operating
exper-
infrastruc-
under assault.
According
to Nigel, “The balance
transfer product,
which we pioneered
in 1991, has
ture, create their tests, allow
them to incubate
and then tune their models, all before profitable
enjoyed such spectacular
has become increasingly
rollout can be attempted.
team
also believes
that
opportunities
to exploit
will
continue
to pursue
opportunities,
wave
profitable
we have begun
of market-tested
The Growth
from
success that the market
competitive.
While we
credit
Opportunities
the belief
balance
to roll
out the next
originates
management
that
the
skill set, personnel,
culture,
and infrastructure
of
Capital
One can be used in other settings,
to
develop
and market
different
products
in different, perhaps
unrelated
run, we see our destiny
company,
industries.
not merely
“In the long
as a credit card
but as an information-based
company
offering
a variety
[5].
industries.”
tion-rich
follows,
“We
have never
a credit
card
company.
markets
outside
senior
there
similar
management
are enormous
strategies
in
the U.S.
card innovations.”
(GO) Team
of senior
transfer
The
marketing
of products in informaRich augments
this as
viewed
ourselves
We’re
as just
7.
Conclusions
It appears
that
the history
of Capital
One
erosion
of profitability
however
suggests
that
without
fundamental
differences
in resources,
innovations
like differential
pricing
and effective market
segmentation
will become strategic
necessities
rather than continuing
as sources of
If the skills
competitive
advantage.
information-based
strategies
are
difficult
an information-
clear
and Signet Bank provides
considerable
support
for our theory of newly vulnerable
markets.
The
to acquire,
and
if they
required
for
sufficiently
are sufficiently
based marketing
company.
The credit card just
happens
to be a product
which
has been trans-
general
should
formed
exploiting
a sequence of opportunities
in newly
vulnerable
markets
in other industries.
Rich
believes
that this, indeed,
will be the long term
by the information
There
hence
are other newly
other opportunities
revolution.”
vulnerable
markets,
for a new entrant
and
like
Capital
One to use information-based
strategies
to target
an established
competitors’
most
profitable
customers.
the core team
Capital
One wants
on areas where
Capital
to focus
One’s
strengths
can provide
advantage,
and
avoid having too focused or too restrictive
of
what
these
strengths
Schnall, Vice President
ment, says, “We want
not being too narrow
nities.
might
for
As
Peter
of New Business Developto make certain that we are
in our view
Is our core strength
strategies
be.
core
yet to
a view
test and
of future
opportu-
in information-based
learn
targeting
of profit-
able new accounts
or in the use of information
more generally
for relationship
management?”
source
rather
in their applicability,
then Capital
One
enjoy a prolonged
period of profitability,
of Capital
One’s competitive
than its positioning
in any
duct, industry,
or market
advantage,
specific
pro-
segment:
“Capital
One’s competitive
the entire company
is built
advantage
is that
around the informa-
tion-based
strategy
— the people,
tional structure,
systems, operations,
organizaaccounting
systems,
and,
human
importantly,
machine
resources,
the
that
and
speed.
those
While
in
We
can identify
infrastructure,
work
policies,
culture.
parallel
most
are building
opportunities,
roll
out
products
opportunities
to plan
obsolescence.
This company
We’re built for change.”
for
their
can turn
a
adapt
at full
grow,
we
eventual
on a dime.
The GO Team is presently
assessing opportunities
in a wide range of industries.
The company
is
making
increasing
investments
in non-card
targeted
marketing;
expenditures
in 1997 are
estimated
to be split
among
balance
transfer,
While
in hindsight
test and learn
strategies
applied
to newly vulnerable
markets may appear
to be obvious,
clearly at the time they were not.
The Capital
One team sums up their beliefs
in
other
the sources
card products,
GO and other
equal
balance
and
and non-card
card products
both
transfer
expenditures
substantially
product
products,
roughly
greater
expenditures.
with
than
The team
is, however,
all too aware
that unfortunately
there
will
once again
be a considerable
lag
between
initial
tests and profitable
rollouts,
especially
in areas where they must first create a
of their
advantage:
“Our
growth
is the result
of opportunistic
origination
and account
management.
The
strategy
was
the
was
the
challen~e!
easy
We
part.
also
Making
continue
application
of information-based
other products,
both financial
cial, with positive
results.”
1060-3425/98 $10.00 (c) 1998 IEEE
it work
to
test
the
strategy
to
and non-finan-
8.
References
1.
Anthes,
off”,
2.
Acknowledgements
G.H.
“Customer
ComputerWorld,
Blattberg,
active
R.C.
and
3.
Fall
mining’
Sloan
The
pays
J.
the
“InterAge of
Management
Re-
Strategies”,
Information
Journal
Systems,
Clemens,
Dominance
Underperformance:
and
the Advantages
Journal of Management
Fall,
Capital
6.
Gartner
One Annual
Group,
Excellence
October
7.
Lucas,
Credit
8.
9.
in
8,1996
P.
2. College
Vice President
is gratefully
of the Reginald
Industry
Structure
likewise
is acknow-
of Pennsylvania
of Business Administration,
University
of
owed by card holders.
It is generally
considered
desirable to have high outstanding balances, since this
Group
represents money that cardholders have borrowed from
issuers, and on which issuers are generally paid a high
Announces
Award
annual rate of interest.
Winner,”
In previous work, we have explored these conditions
4.
on Credit
August
of New
acknowH. Jones
repre3. Outstandings,
or outstanding
balances,
sent the amount of money that a credit card issuer is
Entrants”,
Systems,
press release.
Card Management,
of
Develop-
Arizona
1995.
Technology
“Capitalizing
Business
End Notes
and B.W. Weber,
Report,
“Gartner
Development,
The support
11,
as a Precursor
of Firms’
Emerging
Technologies
of New
Information
and
of Rich
of
Vol.
1996.
5.
of New
1. The Wharton School, University
E.K., D.C. Croson
“Market
One,
and Chief Executive,
Director
Center, Project on Information
and Competitive
Strategy
ledged.
No. 2, Fall 1994, pp. 9-36.
4.
President
of Capital
and of Peter Schnall,
Business
ledged.
Clemens,
E.K. and B.W. Weber, “Segmentation,
Differentiation,
and Flexible
Pricing:
Experiences
with Information
Technology
and
Management
Morris,
Officer
Chairman
Scott Barton,
ment,
of Nigel
Operating
Fairbank,
1991, pp. 5-14.
Segment-Tailored
assistance
Chief
15,1995,
Deighton,
Exploiting
Marketing:
Addressability”,
view,
‘data
May
and their application
Cards”,
1995.
Unfortunately
5.
to a wider range of industries
for banking
as an industry,
[4].
there is
Steiner,
T.D. and D.B. Teixeira,
Technology
in Banking:
Creating
Value and Destroying
considerable evidence to support this concern.
The
assessment of technology in bankhg suggests that even
Profits,
1990.
as it creates value for customers it increases competition
and the efficiency
of pricing, destroying profits for
Tirole,
tion,
Dow
Jones-Irwin,
J. The Theory
MIT
Homewood,
of Industrial
financial intermediaries
Organiza-
1992
I
1,672
1994
1993
$1,452,742
Loans
$3,265,565
[
3,118
YEAR
of Tests
1989
335
of Accounts
1990
370
I
and Amount
1996
$12,804,000
$9,089,278
5,049
I
6,149
\
8,565
1:
of Receivables
for Capital
One
1991
1992
1993
1994
1995
617
1,130
1,850
4,355
6,199
Table
Number
1995
$6,197,423
Table
Number
Number
[8].
Press, 1988.
(000s)
Accounts
IL,
2:
of Tests run by Capital
One
1060-3425/98 $10.00 (c) 1998 IEEE
letitors
Figure
Risk-Utilization
Profiles,
Illustrating
2
Balance-Transfer
1060-3425/98 $10.00 (c) 1998 IEEE
Product