Capital One Looks to Adapt to Credit Card Laws

Leadership Sees Opportunities For 'Reinvention'

New government restrictions on credit card issuers may force Capital One Financial, which revolutionized the credit card industry through customized marketing and granular data research, to reinvent itself for a new age of regulation.

Capital One is not alone. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 will restrict many industry practices when it takes effect next year, and some companies could face a rough transition, analysts said.

The legislation, for instance, will require Capital One and other lenders to take new steps to ensure that customers know what fees they will pay if they exceed the limits on their credit cards. This could hurt Capital One's business, because it relies more than most other issuers on late fees for revenue. But the legislation could help Capital One by placing new limits on "teaser rates" and deals on balance transfers, which are used more widely by Capital One's competitors. The restrictions could help level the playing field for recruiting new customers.

Capital One Chairman Richard D. Fairbank told analysts recently that the new law could jolt the industry at a vulnerable time, particularly if the nation is still in a recession when it takes effect.

"We've driven industry reinvention before," Fairbank told analysts. "The transition will be rough, and we may face a particular sour spot beginning in the second quarter of 2010. But in the long run, I believe that we'll be in a very strong position to drive industry reinvention and thrive in the new credit card industry."

McLean-based Capital One, founded in 1988 by Fairbank and business partner Nigel Morris, helped drive a credit card boom over the past 20 years through innovations like direct-mail solicitation, using sophisticated computer programs to micro-target potential customer groups. The techniques, some of which reached people with poor credit, allowed Capital One to customize interest rates and card fees based on a cardholder's behavior rather than applying a one-size-fits-all approach.

Some of these practices may have to be scaled back under the new law.

"The CARD Act of 2009 will affect the whole credit card industry. And for Capital One in particular, some of the fees it charges are going to be changed," said Jason Arnold, a research analyst at RBC Capital Markets. "That's going to have a big effect, and it will change the way they do business."

One industry-wide effect may be a return to annual credit card fees, which have largely disappeared.

Capital One is the fifth-largest credit card issuer in the United States and has become a highflier in the financial world. The company earned billions over the past two decades, making Fairbank one of the most highly compensated executives in the Washington region.

In recent years, Capital One has moved increasingly into retail banking as it sought a new source of money -- customer deposits -- to fund loans. It purchased Hibernia National Bank in New Orleans in 2005, followed by North Fork Bancorp in 2006. This past February, the company closed on its $520 million acquisition of Chevy Chase Bank, whose branches will be absorbed into the Capital One brand starting next year.

But the boom that ended with the financial meltdown has taken its toll as mortgage losses, and now credit card losses, mount.