Taking credit - Capital One Financial Chmn. and CEO Richard Fairbank

Chief Executive, The, April, 1997 by Jonathan Burton

Richard Fairbank knows where you live. He knows the stores you shop at, the restaurants you frequent, and the last credit card purchase you made. Understanding how people spend money - and how much they spend - is part of Fairbank's job as chairman and CEO of Capital One Financial Corp., one of the country's top-10 issuers of Visa and MasterCard credit cards. Ever opened the mail to find a card issuer promising a pre-approved credit line, a teasingly low annual interest rate, and the convenient transfer of balances from higher-cost cards? Under Fairbank, Capital One pioneered this now entrenched marketing trend.

Fairbank, a tall, athletic-looking 46-year-old, is the son of a physics professor and keenly aware that properties are in constant motion. Overlay that with his prior incarnation as a marketing consultant and the roots of Capital One's intense development methodology become clearer. Capital One is Fairbank's laboratory, where new ideas are constantly in various stages of conceptualization, testing, and implementation.

Being an innovator has its privileges. When introduced in the early 1990s, balance transfer foisted competition on a high-growth, high-margin business and snared Capital One many credit-worthy customers. Since its former parent, Virginia's Signet Banking Corp., took it public in 1994, the Falls Church, VA-based company has had 20 percent-plus annual gains in earnings-per-share and return on equity.

But the card business is tougher today. The balance transfer market is saturated, comprising 85 percent of the 3 billion credit card solicitations each year, and delinquency has risen along with consumer debt - an ironic result of the easy credit dangled by Capital One and others. Currently, 60 million U.S. households have credit cards, with an average credit line of $6,000. Consumer credit now represents about 21 percent of disposable personal income, up from roughly 17 percent three years ago. The question now is not only whether debt-strapped consumers will continue to spend, but will more of them fail to pay up?

Capital One is insulated to some extent; its average credit line on the $12.8 billion in consumer loans it manages is $3,600 - well below norm. Its net interest margin of 8.29 percent, a key ratio of profitability, is higher than rivals MBNA, Advanta, and First USA. But both net charge-off and delinquency rates increased sharply, negative developments that Fairbank is matter-of-fact about. "In many ways, this is the toughest time the credit card industry has ever gone through," he says. "Consumers are loaded up with debt. Issuers have flooded consumers with big credit lines. That adds up to a dramatically rising credit-loss picture that will make life difficult for all of us."

To manage Capital One through the rough patches, Fairbank - with his longtime partner, president Nigel Morris - is applying his scientific approach toward future growth. Every business decision, whether about products, pricing, credit policy, or account management, is subjected to a rigor more commonly found in a lab experiment. Together the two have imposed an almost militaristic discipline of testing everything, down to the color of the envelope mailed, before it reaches consumers.

Capital One is moving rapidly, but methodically, toward diversification. To Fairbank, the company is not just a credit card issuer. He sees his treasured databases providing limitless potential and linking Capital One via the Internet - "the ultimate direct channel," he proclaims - to shoppers for many services. "Our strategy has little to do with credit cards. This is an information business, much more than a banking business. It's about collecting information on 200 million people that you'll never meet or have extensive communication with."

David Berry, director of research at Keefe, Bruyette & Woods, which specializes in financial services firms, likes what he sees in Capital One. "It's not really banking," he says. "It's Richard Fairbank and Nigel Morris. It's a team. Capital One has been fairly forward in diversifying its approach to the credit card business. They've got a lot more going for them than the average bank."

Like a tech company, Capital One plans for obsolescence. "You prepare the next generation of innovation during the success phase of the previous one," Fair-bank explains. "By the time it becomes the rage, it's crested, and you should be managing out of that business."

He is tight-lipped about where the new avenues may lead, but mentions industries "where there's a lot of data potentially available and the products are flexible, so they can be sliced, diced, and customized," such as insurance and telephone services. In its third quarter filing, Capital One reported exploring non-card lending and the reselling of telecommunications services.

Beyond this, Fairbank envisions a new enterprise where Capital One lives up to its name and provides capital for information-based ventures from other companies. In the realm of ideas, Fairbank has found, there is no limit on creditworthy opportunities.