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Capital One: The American Credit Card Companys Growth Strategies Capital One is established in 1995 as a local bank card issuer and quickly rose to the top of the U.S. credit card industry. It has a current customer base of 47.4 million and it managed loans totaling $59.7 billion. Through their pioneering information technology efforts, they are in a prime position to lead the financial services marketplace. Their success comes from the extensive use of advanced information technology for customer acquisition and retention. By using information they have gathered by the product tests, they tailored the products to individual customer needs and provided services in a very efficient manner. They continue to apply their micro-segmentation strategies to expand their business and continue to capitalize on promising markets other than their primary credit business such as auto finance and patient finance. Now, Capital One has been recognized for innovation, customer service, information technology, and financial management. Capital One was founded as a new credit card division of Signet Bank. Two people, Richard Fairbank and Nigel Morris, were hired to lead the division. Fairbank and Morris saw that traditional banking and financial services lacked a focus on the individual customer and Information Technology could accurately guide business and credit decisions. Their solution was known as the Information-Based Strategy (IBS), which brought marketing, credit, risk, operations, and Information Technology into a flexible decision-making structure. Its purpose was to enable them to offer financial solutions tailored to an individual customer's needs and it was referred as "micro-segmentation." Therefore, information on customers was analyzed using statistical analysis to determine what kind of offer could be given to what kind of customer and how the customer would respond.

The strategy consisted of identifying a typical customer based on the credit worthiness and by applying various tests to the right sample of the population. They also used an advanced risk management model to decrease the risk of default payments. Mass customization and direct marketing was used for building the lending business and they used innovative methods to analyze market behavior. Being the number one entry to the industry resulted in the firms success. In order of Capital One to become successful, they have to follow these strategies: A customer loyalty strategy is one that is used to cater to those clients that are deemed most loyal. For instance, most banking institutions in the 1980's did not have the technology or the resources available to them to determine which of their customers were most profitable, and hence tried utilizing tactics such as the decrease of overall prices to retain and maintain as much of their customer base as possible. This, is turn, is thought to keep the company profitable. A customer profitability strategy, in contrast, lends itself to a much more targeted approach- it is used identify and acquire customers that are most profitable. The retention of such customers also is thought to increase company profits. The latter, as proven by Capital One, appears to be a much more effective strategy. The customer profitability gradient can be described as the differential in the profitability of customers and is essential to profitability based strategies. Different customers produce different profits this knowledge is used to effectively formulate strategies that are utilized to target different customers for different products and services based on their profitability hence the term profitability based strategy. Adaptation seems to be the best feasible solution to opportunistic pick off. For instance, although they were not actively pinpointing customers with high profitability, banks could target

a sector of their credit card customers in which based on such factors as spending limits and APR'S would be assumed to earn the banks the most profits. The banks could study the spending habits of these customers to use in analyses of consumers in the general population. In this way, they can target obtain more customers like them. In other words, they replicate and adapt to the attacker's strategies out of competitive necessity. Most industries have certain practices and protocols on which its businesses rely. Banks have typically used average cost pricing strategies to charge their clients, and often wind up overcharging to compensate for higher cost customers. Because they did not use customer profitability to determine prices, they did not see the need to analyze individual customer accounts, and so most banks did not have the technology or the resources for customer profitability analysis. Because of this, a new competitor such as Capital One is able to come in and even use approximated analyses of customer profitability gradients to develop new strategies to attract its customers. In this case, it was technology that was a barrier to entry for the defender. Also, time may make it difficult for duplication. A defender may be able to replicate an attacker's strategies, but it will take to long for it to make a difference. Some other barriers to entry for credit cards include establishing faith in a name, and getting places that will make the credit card available to customers to use. Capital One will be able to maintain its competitive advantage if and only if it continues to use its information based strategies to manufacture products that are different from those of the competitors, but obviously useful to its customers. One opportunity that is available to Capital One is in educational loans. Capital One currently offers loans for major milestone purchases in life, such as those for automobile, house, and health and medical transactions. Why not include the purchase of a college education within these because the name Capital One is

already established among college students as a result of the aggressive push of Capital One credit cards on campuses. The college loans would subsidize the educations of these same students. Those students that obtain a loan through Capital One could be offered a special rate on a new credit card. Capital One could even offer to consolidate the credit card and educational loan for lower interest rates, thus causing the students to pay off their credit card bill even slower. This is making their Capital One's most desirable customers.