Chairman and chief executive officer, Capital One Financial Corporation
Born: ca. 1950.
Education: Stanford University, BA, 1972; MBA.
Career: Strategic Planning Associates, 1985–1990, partner and consultant; Signet Banking Corporation, 1990–1994, eventually head of credit-card unit; Capital One Financial Corporation, 1994–, chairman and CEO.
Awards: Business Leader of the Year, Washingtonian ; Top 10 CEOs, Worth ; 50 Best CEOs, Worth ; Influential Personalities in Financial Services, Future Banker ; Entrepreneur of the Year, Credit Card Management ; Excellence in Technology Award, Gartner Group.
Address: Capital One Financial Corporation, PO Box 85015, Richmond, Virginia 23285-5015; http://www.capitalone.com.
■ Richard D. Fairbank, along with his former partner Nigel Morris, was the cofounder of Capital One Financial Corporation, the firm that redesigned the credit model and revolutionized the banking and lending industry in the United States during the 1990s. Fairbank and Morris were able to use the tools of the emerging information-technology industry to target different credit plans toward different customer groups. This database marketing approach to vending credit, known as the "information-based strategy," made Capital One a major player in the banking industry. In the first eight years of its existence the company that was spun off from Signet Banking in 1994 opened 48.6 million accounts worth a total of $53.2 billion. The company claimed that it created 10,000 new accounts daily in 2002 and that its credit cards were in use in about 12 percent of all American homes.
During his early years at the helm of Capital One, Fairbank became known for his loose management style, which was described by Jennifer Kingson Bloom in American Banker as "new age" (September 9, 1998). Employees were rewarded with stock options in addition to their salaries; senior management as well usually received the majority of their compensation in the form of stock options. Such a method of compensation gave employees on all levels a more vested interest in the success of the company. After federal regulators investigated the company's lending practices in 2003, the compensation policy was changed, bringing Capital One out of the entrepreneurial era and back in line with traditional banking practices.
The impetus for Fairbank's highly successful career was his understanding of information technology and the impact it could have on the lending industry. In 1987 he and his partner Nigel Morris came up with a radical idea that would permanently change the way credit cards were issued. Most creditcard issuers had been charging holders an annual fee for the privilege of drawing on the issuer's credit. The pair of consultants' idea was to drop the annual fee and instead target different credit cards to specific segments of the population. The problem they faced was how to compile the demographics and other statistics that would help them sort out and identify those segments.
Thus information technology came into the picture. Fair-bank and Morris met with representatives of Oracle Corporation and explained their requirements: they needed a flexible database into which data from a variety of sources—ranging from information compiled by credit-card bureaus to purchased lists of consumers—could be entered. That data would then be manipulated by database-management software in order to produce a variety of reports based on different scenarios. The reports would eventually be used to produce lists of potential customers, who were carefully selected to correspond to the terms the credit-card issuer wished to offer. Such targeted marketing would, the two consultants argued, lead to huge profits based on the large numbers of customers expected to sign up through the program.
Fairbank and Morris tried for a number of months to sell their targeted-marketing program to traditional banks but met with little success. A year and a half passed before Signet Bank, a smaller player with offices in central Virginia, took a chance on their system. The young consultants agreed to manage Signet's credit-card accounts, investing a portion of the profits they earned in the new database model. The basic information-system controls were in place by 1990, and the following year Signet launched its targeted-marketing campaign. Using models compiled over the previous several years as derived from the immense database, Signet was able to offer about three hundred different types of credit-card agreements to their customers, adjusting terms and interest rates to suit their customers' projected preferences.
The other major breakthrough that Fairbank and Morris made possible with their targeted-marketing database was the addition of the abilities to offer customers low introductory interest rates and to transfer balances from one card to another with a lower rate of interest. The introductory "teaser" rates–sometimes as low as zero percent—were meant to attract new customers and were wildly successful.
The risks that Fairbank and Morris's innovations posed met with resistance from executives trained in traditional banking practices. Top executives at Signet as well as at other banking firms doubted that the young men's system would prove profitable. In 1991 Signet's real-estate loan business went into a severe decline; in order to offset losses managers wanted to kill the credit-card program that Fairbank and Morris were in the process of refining. At that time, in order to save their plan, the pair conceived of the idea of the balance transfer. Customers could move debt from high-interest accounts to new Signet accounts that offered the very low "teaser" interest rates. Since many of the clientele who were attracted to these offers were low-risk borrowers—and leaped at the chance to lower their debt—the program proved enormously successful. Signet's credit-card business doubled in size during 1992, the first year in which the corporation used Fairbank and Morris's new financial models. Fairbank became the head of the credit-card division in 1993, when his former boss David K. Hunt left Signet. Around that time Signet revamped its entire management structure in order to improve efficiency.
Capital One Financial Corporation was created in 1994 when Signet spun off its credit-card business into a subsidiary company; during the following year Capital One outpaced its parent corporation in sales and services. In an interview with Bloom in American Banker , Morris explained that Signet had moved from being a bank that owned a credit-card issuing company to being "a credit-card business that had a regional bank attached to it" (September 9, 1998). Capital One broke away from Signet entirely in 1995; when Signet was later taken over by First Union Corporation, the credit-card issuer maintained its independence. By mid-1995 Capital One had entered the ranks of the top-ten credit-card issuers in the United States, with $8.9 billion in receivable income—an increase of 25 percent over the company's 1994 net earnings. Earnings forecasters predicted further growth of 20 percent during 1996, the company's third year of existence.
Capital One's main strength lay in the fact that it was not merely a credit-card issuing company but was in fact an information-gathering company that issued credit cards. The database of customer information, painstakingly compiled through years of work at Signet, allowed Capital One to identify the ideal credit-card customers—those that paid parts of their outstanding balances but kept some revolving credit. Such customers were charged interest rates ranging from 13 to 17 percent throughout the industry; Capital One sought these customers out and offered better deals in the hopes of drawing them away from their current card companies.
Capital One's success in identifying prize customers and coaxing them to transfer their accounts was imitated by several other major card-issuing bank houses, including Advanta Corporation, First USA, and MBNA Corporation. Those businesses quickly began to make the same types of customer offers that Capital One had pioneered: reduced introductory interest rates, account-balance transfers, and other special deals. The new competitors spent huge amounts on mass-mailing solicitations; but none had the one advantage that made Capital One such a high-growth performer: the complex customer database and the algorithms that turned the information therein into real market-based strategies.
As an information-technology–centered corporation one of Capital One's first challenges was to deal with the mixed IT legacy that it had inherited from Signet. In 1990, in an effort to control IT costs, Signet shipped most of its information-technology functions out to EDS. Fairbank and Morris had felt that Capital One could manage its own IT functions more efficiently than EDS, so the two had set out to incorporate those functions into the new company's structure. They brought in an IT specialist, the CIO Jim Donehey, to meet Capital One's needs.
Donehey recognized the strengths of Fairbank and Morris's databases, which were built on the framework designed by Oracle Corporation. However, the material portions of the new company's IT was in a shambles. An earlier occupant had sandwiched the mainframe system between the building's kitchen and its restrooms, leaving the data vulnerable to both fire and flood. If Capital One intended to bring major business functions, such as general-ledger accounting, purchasing, payroll, and personnel, safely back to the company from EDS, it needed new equipment, new training for IT staff, and new security measures to protect the information. Fairbank, Morris, and Donehey also created new management structures in order to integrate IT more thoroughly into the company's business processes. IT representatives participated in the daily management of Capital One, unlike at other corporations, where information technology was treated as a support function for marketing and other traditionally organized business departments.
Fairbank and Morris further utilized their customer databases by diversifying from the credit-card business into other areas. One of their first such ventures was into the field of cellular-telephone services; the subsidiary America One Communications was launched in 1995. Rather than investing large sums in basic infrastructure, America One bought dead airtime from existing companies, repackaged it in the form of special deals, and then used its enormous databases to communicate those special deals to those most likely to be interested. America One thrived for five years before Capital One sold its assets off to other telecommunications companies, with the majority of the accounts—representing about 72,000 customers—going to Sprint PCS on September 30, 2000.
The success of America One Communications proved that Fairbank and Morris's information-based strategy could be applied to businesses outside the credit-card field. Fairbank went as far as to claim that the advent of modern electronic databases prefigured a marketing revolution that would rival the technology revolution that had been made possible by the modern microcomputer. He claimed that Capital One had the capacity to customize its products to satisfy the requirements of individual customers even when the company was adding 10,000 new customers each day and offering about 12,000 different variations on its credit products. All this, Fairbank implied, was the result of the targeted marketing he and Morris had pioneered.
Another area in which Fairbank was a pioneer was executive compensation. Unlike other chief executives who received salaries and rewards whether their companies performed well or not, Fairbank and Morris chose to receive most of their compensation in the form of stock options. In 1998 Fairbank received no pay at all—nor any retirement plan contributions or bonuses—despite the fact that Capital One's earnings had doubled in the previous two years. Analysts noted that Fair-bank and Morris essentially bet their executive salaries on the performance of Capital One's stock. As long as the stock continued to rise, they made money; if it faltered, on the other hand, they lost their incomes. This system as instituted by the two young executives proved enormously popular with investors jaded by the huge salaries taken by many other corporation heads.
Although the systems that Fairbank and Morris created worked well for Capital One, by 2002 their gung-ho tactics and looser-than-ususal management style had attracted the attention of federal and state banking regulators. The regulators questioned the managers' methods of assessing and managing risk—that is, the algorithms at the very base of Capital One's success. Those algorithms helped Capital One identify customers who were good credit risks, and the company used its huge portfolio of credit options to woo those customers away from their original banks. Despite the fact that Capital One had achieved an average 30 percent annual return on investments through the use of those algorithms, the threat of federal investigation drove investors away. In addition Capital One's CFO David M. Willey was notified by the Securities and Exchange Commission that he was being investigated for insider trading, and he resigned soon afterwards. Although the federal investigators ultimately found nothing wrong with Capital One's model of risk assessment, company stock prices plummeted during the early months of 2003 to about half their value of the previous year.
Stock prices rebounded following the successful conclusion of the federal investigation. However, Fairbank and Morris saw this investigation as a sign that Capital One had finally matured and should leave the ranks of brash start-up companies and institute practices closer to those of older banks. They adjusted by revamping Capital One's decision-making structure; in February 2004 the pair announced that the company would be run by a team of executive decision makers led by Fairbank rather than according to policies brainstormed by Fairbank and Morris on long car trips. Morris himself announced that he would leave the company on April 30, 2004, bringing to a close a partnership that had stretched back almost two decades.
See also entry on Captial One Financial Corporation in International Directory of Company Histories .
Asbrand, D., "Case: Combining Operation and IT for Profitability at Capital One," Datamation, September 1997, http://www.wiley.com/college/turban2e/pdf/part4.pdf .
Bloom, Jennifer Kingson, "Capital One Says It's Riding a Tech Revolution," American Banker , September 9, 1998, p. 6A.
——, "Top Duo Agree to Disagree on Impact of Net," American Banker , March 23, 1999, p. 13.
Brooks, Rick, "Capital One Chairman, President Agree to Lucrative Performance-Based Deals," Wall Street Journal , May 3, 1999.
Byrnes, Nanette, "Coming of Age at Capital One: After a Regulatory Scare, Management Realizes That the Start-Up Era Is Over," BusinessWeek , February 16, 2004, p. 81.
"Capital One, Sprint PCS Sign Marketing Agreement," Los Angeles Newsroom, Wireless NewsFactor, October 12, 2000, http://wireless.newsfactor.com/perl/story?id=5254 .
Kleege, Stephen, "Signet Revamps Consumers Units in Wake of Card Chief's Departure," American Banker , June 11, 1993, p. 6.
Kuykendall, Lavonne, "Capital One Proposes New Stock Plan," American Banker , April 14, 2004, p. 6.
Kuykendall, Lavonne, and W. A. Lee, "Capital One Backing Away from Teasers It Invented," American Banker , June 14, 2001, p. 1.
Lee, W. A., "In Brief: Capital One CEO Buys 150,000 Shares," American Banker , July 22, 2002, p. 20.
——, "In Brief: Capital One CEO Leads MasterCard U.S. Board," American Banker , March 14, 2002, p. 20.
——, "As Morris Steps Aside, Questions on Capital One," American Banker , April 23, 2003, p. 1.
Meece, Mickey, "Balance-Transfer Pioneers Racing the Copycats," American Banker , May 25, 1995, p. 14.
——, "Products Secret: Edge Is No Mystery," American Banker , September 25, 1996, p. 6A.
"Richard D. Fairbank, Chairman and Chief Executive Officer," Capital One http://www.capitalone.com/about/corpinfo/officers.shtml .
Smith, Geoffrey, "The Bill Comes Due for Capital One: It Loaded Up on Subprime Accounts; Then the Economy Tanked," BusinessWeek , November 4, 2002, p. 47.
"Who Earned the Pay—and Who Didn't," BusinessWeek , April 19, 1999, p. 75.
—Kenneth R. Shepherd