Banking is a somewhat static business with few moving parts and little place for visible technological advancement, at least compared to the petroleum or computer industries. Not coincidentally, most of the largest banks in the United States are the ones that started early and have been around forever. Among the four biggest by market capitalization, Wells Fargo & Co. (WFC) was founded in 1852 and Citigroup Inc. (C) in 1812. JPMorgan Chase & Co. (JPM) can trace its origins all the way to 1799. Bank of America (BAC), the pup of the quartet, dates back only to 1904. So how did Capital One Financial Corp. (COF), founded in 1994, grow quickly enough to take its place alongside the established titans of the industry? (For more, see: The Banking System: Commercial Banking - Bank Crises and Panics.)

Child of the ‘90s

Spun off as the credit card operations of a larger bank, Capital One began its independent life just as the American penchant for instant gratification was coming into its own. If you think people in 2018 have trouble comprehending the concepts of “minimum payment” and “annual percentage rate,” you should have seen the landscape back when credit cards were really starting to proliferate. Some of the methods Capital One used to grab market share seemed extraneous then and hardly worth mentioning now, but they were critical. As simple a move as giving cardholders the ability to design their own cards, or include a logo of this football team or that college, gave said cardholders a sense of pride that translated into greater spending. That’s something that no card with just a MasterCard Inc. (MA) or Visa Inc. (V) logo could do. (For more, see: Capital One: Debt's in Your Wallet.)

Capital One has three reporting segments. In descending order of size, those are credit cards, consumer banking, and commercial banking. Capital One will indeed lend you money for a mortgage or a business, even though the company is known almost exclusively for extending consumer credit. (For more, see: JPMorgan Chase: Too Big (And Profitable) to Fail.)

In fiscal year 2017, total net revenue was up at $27.2 billion. That sounds impressive, and actually signals growth. Such revenue was $25.5 billion the previous year. The expenses Capital One committed to earn that interest is minimal. Non-interest expenses were less than $14.2 billion in 2017, which gives numerical reinforcement to the plain truth that credit cards are ridiculously, massively profitable. All the omnipresent promotion, advertising, and marketing that Capital One undertakes is nothing compared to how much money the company earns from those unassuming but powerful little cards. They make up 62.4% of company revenue and 60.9% of income. (For more, see: How Credit Cards Built a Plastic Empire.)

Not Just Plastic

Consumer banking remains an adjunct to Capital One’s credit card business, albeit a substantial one. The segment accounted for $2.26 billion in revenue last year, large in absolute terms. Like many big companies, and in particular banks, Capital One seems to be approaching or at least defining its limits. For that you can blame (or credit, as it were) the growing number of non-bank and other non-traditional financial firms, the PayPal Holdings Inc. (PYPL) generation of lenders. 

But Plastic Nonetheless

With Fed rates as low as they are, how does a credit card issuer make money? Well, Fed rates represent merely a baseline for lenders. Should Jerome Powell, the hawkish fed chairman who has raised rates twice since taking over in February 2018, increase rates by 100 basis points, an economist might expect Capital One and its competitors to follow suit. Powell, Fortunately for Capital One, its less educated customers don’t think that way. (For more, see: How Citigroup Makes its Money.)

The Bottom Line

If people saw credit cards for what they are – a convenient way to put off today’s purchases until the end of the month, instead of an albatross one tightens around one’s neck and then attaches weights to – Capital One would be a niche company, if that. Certainly not a $45 billion powerhouse. Fortunately for Capital One’s investors, revolving credit is so addictive. What continues to distinguish Capital One from most of its competitors is the company’s penchant for analyzed, personalized offers. The company sells low rates to people with good payment histories, and high rates (but still low relative to other credit card companies’) to people with lesser credit. Capital One would be the first to acknowledge that the company would be nothing without the mountains of demographic data at its disposal and the knowledge to use it. Capital One might appear to offer a commonplace product, but those cards are anything but. Each one is a delicate instrument, precisely tuned to get as much money out of each cardholder as possible. As long as the cardholders remain willing participants in this unilateral affair, Capital One should only continue to grow. (For more, see: How Wells Fargo Became the Biggest Bank in America.)

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