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.