Capital One Attracts New Cardmembers With Unlimited Cash Back

by Trefis Team
Capital One
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In a move that is clearly aimed at attracting more bargain hunters in the extremely competitive credit card market, Capital One (NYSE:COF) announced the launch of a new cash-back credit card this Wednesday, June 26. [1] While there is no dearth of credit cards that reward customers a percentage of the purchase amount each time the card is swiped, Capital One is counting on the fact that the simplicity of its Quicksilver card will be a crowd pleaser. The new card features an unlimited 1.5% cash back and does away with several restrictions and complicated caveats which most of the existing cash-back cards come attached with.

Capital One has seen little organic growth in its credit card portfolio over recent quarters largely due to mixed signals about the country’s economic outlook resulting in credit card holders being wary about their expenditures. As Capital One’s credit card operations form a bulk of its earnings, unlike competitors like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) who benefit from an extremely diversified business model, it is all the more important for the banking group to stay one step ahead of the others in the credit card business.

We maintain a $58 price estimate for Capital One’s stock, which is about 5% below the current market price.

See our full analysis for Capital One

The importance of Capital One’s cards business in its business model becomes evident at once from the chart above which shows that nearly two-thirds of its total value comes from the cards business. It is hence no surprise that the bank continues to work hard on finding ways to rope in potential customers by providing them with cards that would appeal to them the most – a process the bank pioneered years ago by becoming the first company to make use of analytics to understand consumer spending patterns so that it can come up with products and offers best suited to the requirements of various consumer groups (see Capital One Buys Data Analytics Firm To Tap Spending Trends At Local Businesses).

But the economic uncertainty and growing competition in the industry haven’t helped its cause over the recent years with all credit card issuers seeing little, if any, growth in their card loan portfolio. However, Capital One bucked this trend to a great extent through the acquisitions of ING Direct (see Capital One Completes ING Direct Deal, But Still Has to Win Over Its Customers) and HSBC’s U.S. credit card business (see Capital One Rejigs Recently Acquired HSBC Card Unit).

The table below highlights the changes in Capital One’s average card loan balances for each quarter over the last two years and is based on information provided by the bank in its quarterly filings.

(in $ mil) Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013
Domestic 51,889 53,868 53,668 54,403 54,131 71,468 80,502 80,718 74,714
International 8,697 8,823 8,703 8,361 8,301 8,194 8,154 8,372 8,238
Total 60,586 62,691 62,371 62,764 62,432 79,662 88,656 89,090 82,952

The jump in card balances between Q1 2012 and Q3 2012 is thanks to the acquisitions while the decline in Q1 2013 despite the fact that the economy was largely supportive of the card business is because of Capital One’s decision to sell its Best Buy (NYSE:BBY) card portfolio to Citigroup (NYSE:C) (see Citi Snaps Up Capital One’s Best Buy Credit Card Portfolio).

Interestingly, in its review of the country’s various cash-back cards, CardHub adjudged Capital One’s existing cards to be among the best for customers with a fair-  or limited-credit history. [2] Capital One also finds mention as the best card provider for customers with a poor credit history. This highlights the bank’s focus on pushing more products towards customers with a relatively bad credit history, and the success it has achieved in the process. Targeting this market segment allows Capital One to generate higher interest rates on card loans, albeit at the risk of higher charge-offs.

And this is clearly where the new Quicksilver card comes in – as its simplicity and unlimited cash back feature would appeal the most to this customer segment. The card’s success would mean a decent growth rate in Capital One’s card loan portfolio in the future, as shown in the chart below.

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  1. Capital One’s New Quicksilver Card Responds to Consumer Demand for Easy Cash, Capital One Press Releases, Jun 26 2013 []
  2. Best Cash Back Credit Cards, CardHub []
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