In the Know - Customer Relationship Management at Capital One

In the beginning, all credit cards were the same. Same interest rates, same annual fee, same processes for deciding who to lend to and how much to lend. Then, as in all industries, an innovator came along and determined that a one-size-fits-all approach left room for improvement. In this Case Study by Professor Werner J. Reinartz and Ulrike Wiehr, Capital One is the innovator and CRM is the innovation.

by Werner Reinartz, Ulrike Wieh
Last Updated: 23 Jul 2013

When consultants Richard Fairbank and Nigel Morris came up with an inspired new view of the credit card industry in the late 1980s, they were slightly ahead of their time. Until then, the credit card industry subscribed to a one-size-fits-all approach – same interest rates, same annual fee, same processes for deciding who to lend to and how much to lend. The duo’s idea of using information (this is before Customer Relationship Management joined the business vernacular) to customize products and services was greeted with a resounding yawn. After shopping their Information Based Strategy to countless banks, they finally found a taker in Virginia-based Signet Bank. Quick converts, Signet immediately set out to build what would ultimately become the world’s largest Oracle database, allowing the company to understand its customers and to develop mass-customized products to suit their needs and risk profiles.

By 1994, the growth of its credit card division was so large Signet spun it off to create Capital One Financial Group. How the company grew to become a giant in the credit card industry, ask Ulrike Wiehr, the Boston Consulting Group MBA Fellow, and Werner J. Reinartz, Assistant Professor of Marketing, and how it will fair as competitors begin playing catch up, are two key features of this Case Study.

According to the authors, CRM quickly became the backbone of Capital One. With their vast database, Capital One was able to manage risk better, understanding who to extend credit to and who to target balance-building programs to. Beyond risk analysis, Capital One used CRM to help with revenue generation. An innovative cross-selling model suggests products to the sales rep on the basis of expected net present value profits from that customer. Another feature is its intelligent call routing system, which segments incoming calls according to the caller’s propensity to buy certain products, routes the highest opportunity calls to the best sales associates, and routes basic service calls to service specialists or automated help functions. Finally, the company practices a scientific approach to marketing called “test and learn”. Before any marketing action is rolled out it is tested on a sample of customers and then refined if necessary. In total Capital One performs about 40,000 tests yearly. As a result of its customer centric approach, the company posted for six years in a row record earnings, while its percentage of outstanding bad debt, a key performance measure in the credit card business, was significantly lower than the industry standard.

Not willing to rest on their success, Capital One managers began considering the sustainability of this model, particularly in the face of competitors who were quickly catching on and catching up.

After a review of the credit card industry and a look at Capital One’s business model, its Information Based Strategy, and its corporate culture, which is well-known for valuing and investing in employees, the authors ask us to look ahead and ponder some of the challenges facing the company. These challenges include how they can build a deeper understanding of the drivers of customer profitability, how they can manage their high cost basis better, and how they should go about coordinating the proliferating channel landscape.

This Case is best used in courses on Marketing Strategy, Customer Relationship Management and Database and Direct Marketing, both with MBA students and with Executives.

INSEAD 2003

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