The Capital One Story

How the Upstart Financial Institution Charged Toward Market Leadership

Mary Curran Hackett

• Publisher: HarperCollins Leadership
• Year: 2020
• ISBN:
  9781400218721
• Topic: Business
• Subtopic: Business History
• Index: Business

What can you learn from the most successful companies in the world? The Capital One Story will help you understand and adopt the competitive strategies, workplace culture, and daily business practices that enabled an unlikely credit card startup to revolutionize the credit industry.

After twenty-five years in the credit card business, Capital One has earned its place in wallets across the world. When the company's two young founders set out to individualize credit, the financial world thought they were crazy…until it was clear that they weren't.

Working in the banking industry, Richard Fairbank and Nigel Morris saw that the one-size-fits all standard that the credit card companies employed was leaving big money on the table. They cracked the code and figured out how to customize the credit card experience by offering personalized designs, credit limits, and rewards, revolutionizing the way the credit card industry operated.

Known for their ubiquitous advertising campaigns with A-list talent such as Jennifer Garner and Samuel L. Jackson, the youngest bank in the business was once turned down by every one of their competitors but has since grown to dominate the industry.

Through the story of Capital One, you'll learn:

• How to recognize underserved sections of a market.
• How rejection by every company in the business doesn't mean it's time to quit.
• How to determine what people want and how to get it to them.
• How to employ marketing campaigns that will change the way people live.

Discover how this iconic organization got it right and created a successful long-lasting business, and how you can do the same for your company.

CHAPTER ONE

THE FOUNDERS’ STORY

Nigel Morris and Richard Fairbank

Sitting on a stage with a young entrepreneur at Startup Grind in Washington, DC, Nigel Morris is relaxed and settles into the chair.² He’s been asked to talk to a room full of entrepreneurs, business leaders, and CEO hopefuls about how he and his cofounder, Richard Fairbank, built a new kind of bank, based on data, information-based strategy (IBS), and technology, and why he eventually left Capital One to help fund finance and tech (FinTech) startups. The M.C. introduces Morris as the “Tooth Fairy” of the FinTech industry. He gives a lot of money away, but no one ever sees him. The room laughs. They get the joke. However, Morris looks bemused if not a bit confused. Though a private person, he frequently keynotes at industry-leading conferences, including Money2020, LendIt, Finance Disrupted, and the Bernstein Annual Financials Summit. As the founder and CEO of QED Investors, an investment firm located in Alexandria, Virginia, Morris is not shy and is as accessible as one can be for being one of the world’s leading venture capitalists. It is his long-time friend and Capital One founder Richard Fairbank, the current CEO of Capital One who enjoys keeping the low profile. Tatiana Stead, a spokeswoman for Capital One, says, “Rich has never been interested in developing a public profile. He has always been singularly focused on the company and his vision for Capital One.”³ That is not to say, Morris isn’t “singularly focused.” He’s just no longer working for Capital One. Outside of public lectures and forums, the two rarely give interviews. So the room is dying to hear just how Morris and Fairbank were able to do what no other banker had done up until 1994—pioneer an IBS that transformed the consumer lending industry and what we all have come to understand to be “modern banking.”

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Morris is not shy and is as accessible as one can be for being one of the world’s leading venture capitalists.

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What No Other Banker Had Done Up Until 1994

With an unpretentious air and subtle English accent, Morris begins by explaining he was born in the UK and went to eleven different schools while growing up. He does not come from a long line of polished blue bloods or a wealthy banking pedigree, he assures the crowd. His father was in the army, and he spent his childhood moving around quite a lot. His mother was Welsh and spoke it as well. English was her second language. Despite all the moving, he spent his young adulthood like many young English boys playing rugby. He didn’t have much of an eye on the future of banking, let alone business in general. In fact, if you had asked him as a teenager what he was going to be when he grew up, traditional banking wouldn’t have made the short list. Rather, he was interested in human psychology. Originally, he went to university to become a clinical psychologist, but he came out the program a self-proclaimed “raving empiricist” saying that “if it can’t be measured it doesn’t exist.”

Seduced by data, numbers, and all things that can be proven and measured, Morris attended the London Business School where he graduated with an MBA with distinction and eventually moved onto the Wharton School of Business at the University of Pennsylvania in Philadelphia. When Morris left Wharton, Richard Fairbank hired him for a consultancy position at Strategic Planning Associates (SPA) located in the historic Watergate Building in Washington, DC. It was a unique consultancy for its time and was, what Morris calls, “a data-rich place.” Unlike other well-known consultancy firms in the eighties, SPA focused more on business strategy than management. Though fresh-faced and plucked straight from business school, Morris found himself sitting beside Fairbank who was leading strategy for major US financial institutions.

Fairbank’s Parents

While Morris is a self-professed raving empiricist, Fairbank was by all means a man steeped in the scientific method himself. By and large, he had little choice in the matter. Fairbank’s father, Professor William Fairbank, was a highly regarded and awarded American physicist known for his work on liquid helium and quarks. One of his most famous experiments resulted in the Gravity Probe B that launched in 2004, which took place some twenty-five years after his death. It was a satellite-based mission that tested two unverified predictions of Einstein’s theory of relativity. The elder Fairbank was, by all means, a genius and dreamer, daring to ask questions few others thought to and seeing far into the future where others could not.

Richard’s mother, Jane Davenport, was also a successful physicist in her own right. After the outbreak of World War II, both Jane and William were invited to leave graduate school and join the war project to develop shipborne radar at the MIT Radiation Laboratory. Today, she is renowned as a pioneer for women in physics and only the second female graduate student in physics at the University of Washington and the second woman scientist employed at the MIT Radiation Laboratory. Following the war, she retired from physics to raise her family. Despite all her professional accomplishments and achievements, till the end she maintained that her “sons were her greatest accomplishment.”⁴

Richard grew up with two brothers, in a loving, active, and cerebral home, near Stanford University, where his father served as a professor. It was there he watched firsthand the power of forming experiments and collecting data. More importantly, it’s where he learned to dare to ask questions others didn’t think to ask. Fairbank’s father was a deeply thoughtful and inquisitive man. In Dr. Fairbank’s New York Times obituary, Francis Everitt, one of Dr. Fairbank’s colleagues at Stanford, said that Dr. Fairbank devoted much of his career to “doing experiments nobody believed could be done.”⁵

Every bit as analytical and scientific-thinking, Richard Fairbank had no intention of following in his father’s footsteps. Though he attended Stanford University, he was not, in his own words a “typical student.” He had enjoyed working with children and was recruited to work as a manager for a recreation agency. While working with children, he also became passionate about his studies in economics. Eventually, he went back to school and earned his MBA from Stanford University, graduating the first in his class. After graduation he went into consulting. By the time Fairbank hired Morris at SPA in Washington, DC, Fairbank’s father’s experiential mind and willingness to do what others thought can’t be done began to reveal itself even more in his own. Like father, like son. After all, Fairbank was an experiential scientist at heart. He thought of ideas and hypotheses, created experiments, tested them, evaluated the data, and based his conclusions on the results.

To this day, as the CEO and Chairman of Capital One, he is every bit the scientist—and deliberate strategist—who isn’t afraid to do what others won’t or say can’t be done. Known as a bit of a “contrarian” by those he has worked with, he is comfortable pushing people out of their comfort zones and is always willing to try new things. “He likes to be zigging when the world is zagging,” said Gary Perlin, who retired in 2014 as chief financial officer. “He likes to be a contrarian because that’s where he sees the greatest opportunities. And he’s willing to change his mind.”⁶ Especially when the data calls for it. Tom Brown, CEO of hedge fund Second Curve Capital, an adviser and investor in Capital One when it went public says, “They had a completely different way of doing business, a testing and learning approach that was completely innovative. Rich [Fairbank] is so nontraditionally thoughtful. He’s able to see into the future of where he needs to be and work backward, even when no one else agrees.”⁷

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To this day, as the CEO and Chairman of Capital One, he is every bit the scientist—and deliberate strategist—who isn’t afraid to do what others won’t or say can’t be done.

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From the beginning, Fairbank was willing to do things in a way no one else had done before. In a 1996 annual report he wrote, “Capital One began with a strategic vision: clear, dynamic, inexorable. We saw that the technology and information revolution had transformed the credit card business into an information business. One that is extraordinarily data-rich, allowing the capture of information on every customer interaction and transaction. With this information, we can conduct scientific tests; build actuarially based models of consumer behavior; and tailor products, pricing, credit lines, and account management to meet the individual needs and wants of each customer. By exploiting this insight, we have transformed the one-size-fits-all credit card industry and created one of the fastest-growing companies in America. Because our strategy is information-based, not product-based, we are in an excellent position to ride the macro trend of the information revolution and apply our strategy to other industries as they too are reshaped by information.”⁸

This revolutionary idea to use IBS when creating products and services became the foundation on which Fairbank built the company.

The Big Idea

One could argue both Morris and Fairbank are wired to test and look for results, but it also came out of sheer necessity early in their careers. While working at SPA, Fairbank became increasingly interested in how information and technology were changing the world of consumer marketing. They were also keenly aware of the need for smart problem-solving to optimize performance at companies. As a consultant, Fairbank began to see “patterns across different industries” and began to generate a few deeply held beliefs that would ultimately shape his thinking. The first belief was that the industry structure was the key determining factor in the success of a company. The second belief was as he says, “when the world changes, often the last people to know are the ones most deeply involved in the old way.”⁹

The advantage he had as a consultant with an outsider’s perspective was what he also credits to the success of Capital One. “The story of Capital One is the power of an objective ignorant view of the world from someone who really didn’t know anything about the credit card business,” Fairbank explains.¹⁰ Neither young man had experience as bank executives themselves, and suddenly they found themselves sitting before Big Bank execs and consulting them. They had to rely on asking probing questions, listening, and observing before jumping to conclusions.

In some ways not having worked inside banks had its advantages as well. Rather than coming from a place of expertise or “this is how it’s always been done” Fairbank and Morris could look at the issues banks were facing with a completely new and outside perspective. “I think that sometimes when the world is ripe for change, the less you know, the less you have to separate conventional wisdom from real wisdom,”¹¹ Fairbank adds. It would also mean he would have to rely on data—not anecdotes—to draw conclusions and make strategic suggestions.

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The story of Capital One is the power of an objective ignorant view of the world from someone who really didn’t know anything about the credit card business.”

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The two men spent a lot of time together and got to know each other, and quickly realized they were both passionate about the same thing. They loved working together to tackle big questions and issues the Big Banks in New York were facing. Their primary job was looking at the entire bank conglomerate and figuring out where the biggest returns on investment were. Explaining how they did that to the crowd of entrepreneurs before him, Morris explains, “You busted a bank up into its constituent parts and divided up the amount of equity and you figured out where the bank was making a great amount of money.”

It was there in that data that Morris says the seeds were being planted in Fairbank’s mind for a new way to think about banking. Morris recalls, “We found time after time there was this business called the credit card business. It was growing at twenty and thirty percent a year. And, it was making thirty to forty percent on equity. And candidly, it wasn’t being managed by the superstar of the bank. The superstars were working on investment banking.”

Fairbank had several additional observations he shared in an interview with Stanford University business students: “First, the fact that everyone had the same price (same APR and annual fees) for credit cards in a risk-based business was strange. It was clear that credit cards would be a very profitable business if people actually paid you back. Underlying the strong probability in the business was a massively steep gradient of customer profitability. And, if you could de-average that underlying profitability gradient (because you could lose your shirt when people don’t pay you back), you could build a profitable business. Secondly, credit cards were a profoundly rich information business because, with the information revolution, there was a huge amount of information that could be acquired about the customers externally. Finally, the industry lends itself to massive scientific testing because it has millions of customers and a very flexible product where the terms and nature of the product can be individualized and the channel of marketing was direct marketing where literally a unique offer could be made to every single customer.”¹²

Intrigued by these findings, it was clear to Fairbank what strategic direction banks should be taking. He recruited Morris to help lau...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Capital One Timeline
• Introduction
• 1. The Founders’ Story
• 2. Rapid Expansion and Market Domination
• 3. From Startup Era to Recession to Too Big to Fail
• 4. Changing Technology
• 5. Capital One Today
• Conclusion
• Business Lessons and Opportunities
• Endnotes
• Index
• Introduction from The Sephora Story