Doing Business The Digital Way: How Capital One Fundamentally Disrupted the Financial Services Industry Capital One – Creating a Digital Bank

Here’s a quick exercise. What links these Capital One has fundamentally altered outperforming the CAGR of the top three different outfits: online bank ING Direct; traditional industry ways of working leading banks in the US (see Figure 1). Bankons, a mobile startup that creates through digital technology and has an geo-located offers; Bundle, a Citibank unflinching focus on digital. Chairman Despite this strong performance, the spin-off that specializes in analysis of and CEO Richard Fairbank has bank is not resting on its laurels and spend data; Sail, a mobile point-of-sale reiterated that philosophy in a number continues to innovate. In 2013, Capital card-swiping device1? Here’s a hint – all of statements, saying that “Digital is One introduced new digital enrollment of these companies were acquired to who we are and how we do business5.” and card activation experiences to bolster the digital services of a leading He is very clear that digital is not about migrate customers to digital services. It financial services organization. We are cost reduction, saying “I think it’s a bit also introduced pattern tracing, where talking about Capital One. Since its of a fool’s errand and really off the bull’s customers can trace a pattern on their founding as a credit card company in eye to chase digital for the sake of cost mobile phone instead of entering a 1988, Capital One Financial Corp. has reduction6”, and emphasizes how deep password. This makes it easier to use grown into a diversified bank with more digital goes at Capital One – “We need their mobile application8 and to shop than 65 million customer accounts to make digital how we do business not and buy with a mobile phone. The bank’s worldwide. It is not hard to see why only with our customers, but also how digital service culture is supported by Capital One is investing heavily in digital we operate the company7.” rapid prototyping capability, which technologies. It conducts over 80,000 helps deliver new tech-based features big data experiments a year2. Currently, faster, as well as real-time analytical 75% of customer interactions with tools. These digital capabilities are the Capital One are digital, and this number Digital is who we are deliberate result of a long-term strategy is only expected to grow3. In Q4 2013, and how we do business. that Capital One has had in play over a Capital One was one of the most visited number of years, and which we look at in websites, with 40 million unique online the following section. visitors4. - Richard Fairbank, CEO

This unrelenting focus on digital has I think it’s a bit of a Capital One conducts underpinned Capital One’s strong fool’s errand… to chase performance. Despite the global digital for the sake of over 80,000 big data recession, Capital One has maintained experiments a year. sector-leading growth and steady cost reduction. profits. For instance, from 2005 to 2013, Capital One achieved a CAGR in profit-before-tax of 10.78%, significantly - Richard Fairbank, CEO

Figure 1: Profit-Before-Tax and Comparative CAGR Analysis of Capital One and Peers

Capital One — Profit-Before-Tax Growth, billion USD, 2005-2013 Comparative CAGR of Profit-Before-Tax (2005-2013) Capital One vs Top 3 US Banks $6.4bn

$5bn 10.78% 9.80% $4.3bn $4.5bn $3.8bn $3.6bn

$2.8bn Bank of Citigroup America $1.3bn JP Morgan Capital One $582mn

-4.66% -5.05% 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Capital One, Citigroup, JP Morgan Annual Reports

2 Capital One’s “Information-Based Strategy” Drives Mass Customization

As early as the ‘90s, Capital One was Figure 2: Capital One’s Digital “Information-Based Strategy” quick to identify that there was little differentiation in the credit card industry, with its CIO, Robert M. Alexander, noting that “It was a one-size-fits-all pricing approach9.” This belief led to the creation of an “Information-Based Insourced IT Strategy”. The strategy combined the power of information, technology and testing to bring customized solutions to consumers and help deliver “the right product to the right customer, at the Digital “Information right time and at the right price.” As the Based Strategy” CIO explains, “Essentially, what we were doing in the ‘90s was leveraging the power of data to custom-tailor products Big Data/ Digital to our customers. We ran thousands Analytics Talent of tests to learn about what customers wanted10.”

Capital One formulated its digital strategy on three key pillars – the use of Source: Capgemini Consulting analytics, investment in digital talent and restructuring the company’s IT workforce whom to notify and analyzed a range By using analytics to drive product to enable rapid development and of information about the person who is customization, Capital One has been deployment of new innovative services calling. The system even predicted what able to create several innovative service (see Figure 2). the caller might want to buy with greater offerings crafted to customer needs (see than 70% accuracy. All these steps Figure 3). For instance, the bank was the Using Analytics to Target happened in under 100 milliseconds11. first to introduce an innovative balance- Profitable Customers with transfer credit card. The card allows This pioneering approach to analytics was Personalized Offers customers of other banks to transfer one of the cornerstones of Capital One’s what they owed on higher-interest Analytics has always been the approach as it made strong inroads into cards to a Capital One card with a lower cornerstone of Capital One’s business. the market. The bank achieved growth introductory rate. Since its inception, the bank has been in both earnings per share and total using sophisticated data collection customers at a compounded annual rate Capital One also introduced a rewards methods to tailor products and services to of 28% in the period 1994-2003. From redemption program called “Purchase individual customer needs. In the 1990s, 2000 through 2003, Capital One’s share Eraser”. The program allowed when most of the credit card industry of the U.S. credit card market rose from consumers to repay the cost of previous was characterized by uniform pricing, 3.3% to 7.2%12. travel expenses using their reward miles. Capital One’s founders used statistical The “Purchase Eraser” offer could be models based on publicly available credit Capital One used analytics not just for redeemed across a variety of travel and demographic data. The objective predictive sales; it also used it effectively expenses that include flights, cruises, was to determine the best combination to drive an increase in the customer hotel stays and car rentals. The benefit of product, price and credit limit that retention rate and a reduction in cost of the program was that it allowed could be offered to its customers. For of customer acquisitions. For instance, customers to take advantage of deals not example, as early as 1999, Capital One the use of data on interest rates, rollover offered through in-house travel-booking received over a million calls per week incentives, special promotions and so channels. For example, customers have at its call centers. Before the call was on has helped Capital One increase its the dual benefit of combining discounts answered by an employee, high-speed customer retention by 87%. It has also offered through third-party websites computers, which contained information lowered the cost of acquiring a new while also redeeming their miles through on one in seven US households, swung customer by 83% over a period of 2-3 the “Purchase Eraser” program. Capital into action. The analytics system years13. One also offered digital coupons through reviewed over 50 options to determine a mobile app – “Mobile Deals” – which

3 could be accessed via a smartphone or These increased levels of collaboration organization that is able to deliver like email. The coupons provided targeted also foster the real-time problem solving a technology company, and not like a money-saving deals to card holders needed to rapidly innovate and deliver traditional bank17.” To equip itself with based on their spending habits. new digital capabilities for customers. this talent, the bank acquired several Such an approach has led to the banking technology start-ups while also development of the bank’s customer- recruiting new associates directly from Driving Partnership facing software for capitalone.com, college and graduate school. In 2012 between IT and Business with ongoing projects on smartphone it acquired Bankons, a mobile start-up to Deliver Products with and tablet apps for an online portal for that creates geo-located offers. The Increased Speed and commercial loan customers15. acquisition allowed the bank to offer tools Efficiency that reward users based on their geo- location and their purchase history. The Early on, Capital One realized that IT was Building a Digital Talent bank also acquired data aggregator firm a key determinant of success in a digital Base to Drive In-House Bundle Corp. The acquisition helped the world. Its CIO goes as far as to say, “For Development bank capitalize on Bundle’s proprietary financial services, our product is IT, in a analytics technology powered by data Its focus on analytics meant Capital way. It’s an intangible product that we from more than 20 million Visa and One needed to recruit analysts with deliver through IT solutions14.” However, MasterCard branded cards18. quantitative skills to assess complex in delivering this intangible product, the numbers and derive actionable insights. company understood that traditional While that skill set is scarce and difficult approaches to software development to find, securing it formed a key element could be a hindrance. In 2011, to achieve of the Capital One IBS strategy. As The bank beginning greater business engagement – and early as 2006 the bank was seeking to ensure their involvement with developers in 2011 started to hire three times as many analysts than through the lifecycle of the project – operations people16. move 70% to 75% the bank started to move 70% to 75% of outsourced IT development work of outsourced IT Moving development capabilities in- in-house. Having the business team development work house meant the bank needed to recruit involved with the IT development team more engineering talent equipped with in-house. allowed the bank to monitor a product mobile and software skills. As CIO Rob along several metrics that include Alexander said, “If digital is so central quality, delivery time, cost and meeting to our strategy, we really need an IT expectations on the first deployment. While acquisitions certainly helped Capital One gain access to digital talent, that was not its only route to Figure 3: Capital One’s Mobile App Offerings talent acquisition. Capital One has an 18-month Information Technology Capital One’s Digital Service Offerings Development Program that gives new associates the opportunity to work on global-scale technology projects. The exposure allows them to develop skills needed to build new Internet, social media and smartphone capabilities19.

A key element of getting the right talent was the hiring process itself. And here, as well, Capital One’s focus on analytics is clear. The company administers mathematical cases, a variety of behavioral and attitudinal tests, and multiple rounds of interviewing to ensure it gets the people with the right fit. And Purchase Eraser App Mobile Deals Program such an approach is followed across all levels, right up to senior vice presidents who head business functions20.

4 Creating a Differentiated Customer Experience Through Digital

Capital One’s digital leadership is not Creating Brand Awareness and digital channels and the bank is just confined to operations. It has also and Customer Engagement really looking at how to use mobile successfully utilized various digital as an interactive piece23”. To achieve platforms and technologies to transform Through Social Media this, Capital One is making a foray into the customer experience. Capital One is a strong proponent of mobile payments. It is testing new user using social media and video to engage experiences in the payments space, with its customers. For instance, in such as paying with rewards at the Coordinating Online/Offline 2012, the company sponsored the US point of sale. It is participating in multiple Offerings With Café Styled college football Capital One Bowl, with payments technology trials, such as Branches the promotional hashtag trending on the NFC pilot and the QR code pilot Twitter throughout the matchup. The programs. And it recently introduced a Starting in 2014, Capital One is initiative had around 120,000 people peer-to-peer payment service that allow experimenting with a café format for vote via Twitter in a contest to name the customers to exchange money with one its bank branches, designed primarily 2012 college Mascot of the Year22. It also another using a bank-owned platform, to drive services offered by their online launched a humour-driven web video ClearXchange24. bank - Capital One 360. Across the US, series to drive awareness for its mobile the bank has 9 café-styled branches that banking offering. Capital One has come a long way in provide high levels of customer intimacy its digital journey. The company has along with complimentary services21. As set several fundamental benchmarks well as providing access to financial and Focusing on the Mobile that its peers in the financial services digital tools, bank staff offer personalized Channel to Exploit Future industry are now compelled to meet. advice on saving and investing strategies And this journey has only just started, while also providing detailed information Opportunities as its CEO states, “I think there is a lot on Capital One 360 products. Capital One has progressively extended of work and a lot of challenging of our the capabilities of its mobile applications. own conventional wisdom to actually Its app, for example, allows customers truly now build a digital company25.” With to make check deposits using their its radical digital approach, Capital One smartphones. The bank’s digital brand is not just challenging its own wisdom, manager has said, “Mobile is really but that of the entire financial services blurring the lines between traditional industry.

Accelerating Innovation with Capital One Labs Launched in 2011, the objective of the Capital One Labs is to develop digital products in collaboration with venture capitalists, entrepreneurs and academics. The Labs launched a mobile card reader in 2013 called Spark Pay that lets merchants accept payments on mobile devices. The Spark Pay reader integrated with a mobile and web app and is designed to help business merchants execute tasks rapidly and access associated analytics. The platform’s current services include custom receipts, offers, inventory management tools and sales report analysis.

The bank also holds regular meetings and competitions for young designers to encourage the creation of new products in less than 24 hours. For example, in 2012, the bank held MoDevUX Hackathon, a competition for developers of mobile banking applications.

There are three innovation labs, operating out of three tech hubs of New York, Washington D.C. and San Francisco. The labs are intended to allow its team of developers to test new ideas without hampering other ongoing projects. In order to encourage innovation across the wider enterprise, Capital One rotates developers through thelabs.

The labs use an integrated set-up with teams of three people consisting of a business analyst, an engineer and a designer. This combination is designed to ensure that concepts become tangible and real in about two to three weeks. As CTO Monique Shivanandan says, “We combine technology people, data analysts, marketing people, brand managers and product managers in the labs to be sure we’re focused not just on cool technology but innovative products and services to delight the customer.”

Source: Computer World, “How enterprise IT gets creative”, June 2013

5 References

1 American Banker, “On Capital One’s Drawing Board: Data Tools for Small Businesses”, February 2014 2 Sogeti, “Your Big Data Potential”, 2013 3 Capital One Annual Report, 2013 4 Capital One, “2014 Annual Stockholder Meeting”, May 2014 5 Bank Innovation, “Capital One CEO: ‘Digital Is Who We Are and How We Do Business’”, December 2013 6 Seeking Alpha transcript of Capital One Q4 2013 earnings call 7 Seeking Alpha transcript of Capital One Q4 2013 earnings call 8 Mobile Commerce Daily, “Capital One introduces pattern tracing to simplify mobile banking log-ins”, November 2013 9 UVA Today, “Capital One CIO Talks Big Data, Innovation Ahead of Tonight’s Information Session”, January 2014 10 UVA Today, “Capital One CIO Talks Big Data, Innovation Ahead of Tonight’s Information Session”, January 2014 11 Fast Company, “This is a Marketing Revolution”, April 1999 12 The Motley Fool, “Capital One Rolls With the Punches”, March 2005 13 Thomas H. Davenport and Jeanne G. Harris, “Competing on Analytics: The New Science of Winning”, 2007 14 Computerworld, “The Grill: Capital One’s CIO discusses business strategies for tough financial times”, November 2008 15 Information Week, “Capital One Digital Strategy Drives IT Overhaul”, March 2014 16 Harvard Business Review, “Competing on Analytics”, 2006 17 Information Week, “Capital One IT Overhaul Powers Digital Strategy”, April 2014 18 Forbes, “Capital One Buys Data Analytics Firm To Tap Spending Trends At Local Businesses”, June 2012 19 UVA Today, “Capital One CIO Talks Big Data, Innovation Ahead of Tonight’s Information Session”, January 2014 20 Thomas H. Davenport, Jeanne G. Harris, “Competing on Analytics: The New Science of Winning”, 2007 accessed through Google Books 21 Company website, accessed in May 2014 22 Socialnomics, “5 Companies on Top of Social Media”, August 2013 23 Mobile Marketer, “Capital One exec: Mobile is interactive piece that bridges traditional, digital channels”, December 2012 24 The Paypers, “Capital One to enable peer-to-peer money transfers via e-mail, mobile devices”, March2014 25 Seeking Alpha transcript of Capital One CEO’s presentation at Goldman Sachs Financial Services Conference, December 2013

6 Authors

Jerome Buvat Subrahmanyam KVJ Digital Transformation Head of Digital Transformation Manager, Digital Transformation Research Institute Research Institute Research Institute [email protected] [email protected] [email protected]

The authors would also like to acknowledge the contributions of Aparna Gajanan from the Digital Transformation Research Institute.

For more information contact

Didier Bonnet Jerome Buvat [email protected] [email protected]

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