How Does Capital One Compete Against Larger, More Diversified Rivals?

From starting out as a monoline credit card company in 1994, Capital One (NYSE:COF) has grown substantially over the last two decades to become the ninth-largest bank in the U.S. in terms of total assets. ^[1] The card lending business remains the cornerstone of Capital One’s business model, but the company has also established a strong presence in the auto and commercial lending industries in recent years.

With its relatively straightforward business model, how has Capital One been able to drive growth and compete against its larger, more diversified rivals such as JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC)? Its primary differentiating factor has been its reliance on analytics, as well as its emphasis on innovation and acquisitions. Below we discuss these factors and how they will remain key to Capital One’s success in the future.

We maintain a $89 price estimate for Capital One’s stock, which is roughly 15% ahead of the current market price.

See our full analysis for Capital One

Use Of Analytics To Understand Consumer Spending Patterns

The largely saturated card lending market has led banks to seek ways to differentiate themselves, vying for the attention of consumers through an ever-growing list of card offerings. With most card lenders issuing cards with similar interest rates and offering similar bonuses and rewards, there are limited means through which these banks can gain a competitive advantage.

This is where Capital One has had a distinct edge over other players in the industry since the late 1990s. Capital One was an early mover in using analytics to understand consumer spending patterns, and introducing products and offers best suited to the requirements of various consumers. The effectiveness of Capital One’s use of analytics was discussed in a 2014 case study by Capgemini Consulting, which noted that the bank has successfully built its business around the data it collected and analyzed. ^[2] The bank conducts tens of thousands of data experiments each year, offering credit cards with different interest rates, incentives, and marketing techniques. The goal is to provide customized offers to customers to incentivize them to sign up while also managing repayment risk.

In short, Capital One’s use of analytics has allowed it to grow its customer base organically while keeping charge-off rates in check. Furthermore, given the level of customization provided by Capital One’s cards, customers are more likely to use them for purchases – which drives payment volumes for Capital One quite effectively. Considering the success Capital One has derived from its heavy data reliance, as well as the bank’s continuing focus on technology to stay ahead of rivals, this will likely remain the most important driver of growth going forward.

Organic Growth Complemented By Acquisitions

Another important aspect of Capital One’s remarkable growth story over the years has been its ability to make significant acquisitions fairly regularly. The bank has acquired several other lenders to boost its loan portfolio, as well as technology companies – such as Bundle and Adaptive Path – to improve its analytics and digital capabilities. Capital One has also done well to integrate acquired businesses effectively, which has helped unlock significant operational value. The trend began with Capital One’s foray into retail banking in 2005 with the acquisition of Hibernia National Bank. It then acquired North Fork Bank in 2006 and Chevy Chase Bank in late 2008. In 2012, Capital One acquired ING Direct – which made it the country’s largest direct bank – and HSBC’s U.S. card business, which made it the third-largest card lender in the U.S. after JPMorgan and Bank of America.

The chart above shows the nearly five-fold increase in Capital One’s loan portfolio over the last decade. Notably, the portfolio is much more diversified today, with card balances accounting for 41% of the $210 billion in loans Capital One reported at the end of Q2 2015. Commercial, auto and home loans account for 24%, 19%, and 14%, respectively, while the other 2% are classified as “other retail loans.”

As Capital One is now one of the country’s ten largest banks, it may become more difficult for it to acquire smaller lenders due to the increased scrutiny from regulators on “too-big-to-fail” banks. But if a suitable opportunity for a significant acquisition does present itself, be it a smaller lender or a technology company, Capital One is unlikely to shy away from it – as evidenced by its recent acquisition of healthcare loans from GE. ^[3]

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1. Large Commercial Banks, Federal Reserve Database [↩]
2. Doing Business The Digital Way: How Capital One Fundamentally Disrupted the Financial Services Industry, Capgemini Consulting, 2014 [↩]
3. GE to Sell Health-Care Lending Operations to Capital One for $9 Billion, The Wall Street Journal, Aug 11 2015 [↩]