What's in Capital One's Wallet?

Firm Rose Quickly By Opening Its Funds and Broadening Its Services

Richard D. Fairbank may be the person most responsible for the boom in consumer debt.

Teaser rates. Balance-transfer offers. Blizzards of direct-mail pitches. Credit terms tailored toward almost anyone, regardless of financial status. All those ideas, common now not only in the credit card business, but also in home mortgages and other forms of consumer lending, were first put to use at the company Fairbank co-founded, McLean-based Capital One Financial Corp.

Since it was spun out of a mid-size Virginia bank in 1995, Capital One has become the nation's second-largest independent credit card company, and the fifth-largest overall. Capital One's democratization of lending -- the idea that almost anyone can get an unsecured loan on some terms -- made it a prime mover in the rise of American consumer credit in the 1990s.

Credit card and auto-loan debt in the United States totals more than $2 trillion, a 24 percent increase in five years that has worried consumer advocates but bolstered the profits of companies like Capitol One.

It earned more than $1.5 billion last year, and more than $1 billion so far this year. And it has become a household name with the help of frequent television commercials featuring comedian David Spade and a horde of barbarians lampooning its competitors.

But Fairbank is only getting started. Driven in part by the tapped-out credit card market and tightening profit margins in that business, Capital One is on an ambitious and risky campaign to become a diversified, national financial services company.

College loans, small-business loans, mortgages, home equity loans, insurance, installment loans and auto lending figure prominently in Capital One's future. In about two weeks, Capital One expects to close on its purchase of Hibernia Corp., making it the only credit card company to purchase a major branch-banking operation.

"The leaders in any business make their moves before they have to, from a position of strength," Fairbank, Capitol One's chairman and chief executive, said in an interview Friday. "I guess my definition of bad leadership is when one is making moves when others are making you do it. That's why we made the decision years ago. When [stand-alone] credit card companies were a wildly successful business model, we made a conscious choice to be more than a credit card company."

Capital One's efforts to diversify reflect some unfavorable market realities, or, in Fairbank's words, "absolutely inexorable trends." Profitability has been squeezed by the tough competition for customers. At the same time, borrowing costs for credit card companies -- the money borrowed from the capital markets to fund their customers' credit card balances -- have inched up along with the rise in short-term interest rates.

Over the past 20 years, financial services companies had splintered into single-focus providers like Capitol One's credit card operation. Now, though, consumers are showing increasing interest in bundled financial services. As with cable, phone and Internet service, the holy grail in consumer banking today is the "relationship," in which one company can provide lending, deposit and even investment services under one roof.

While Capital One has been buying non-credit card businesses, its chief independent competitors have gone in the opposite direction: selling out. MBNA Corp., the largest independent credit card issuer, and Providian Financial Corp. this summer both agreed to multibillion-dollar buyouts by major banking companies.

MBNA Corp. is going to Bank of America Corp. for $35 billion, and Providian is going to Washington Mutual Inc. for $6.45 billion. A third large independent credit card company, Metris Companies Inc. , agreed this month to be bought by multinational bank HSBC Finance Corp. for $1.6 billion. The mergers are expected to close later this year or next, leaving Capital One alone among major credit card issuers that are not controlled by much-larger banks.