Capital One Sees Increase in Credit Card Customers

Case Type: improve profitability.
Consulting Firm: Capital One first round full time job interview.
Industry Coverage: financial services; credit cards.

Case Interview Question #00860: Capital One Financial Corporation (NYSE: COF) is an American bank holding company specializing in credit cards, home loans, auto loans, banking and savings products. When measured in terms of total assets and deposits, Capital One is the eighth-largest bank holding company in the United States. The company helped pioneer the mass marketing of credit cards in the 1990s. Its corporate headquarter is located in Tysons Corner, Virginia.

Our client is the head of credit card division of Capital One Financial. In spite of the recent increase in customers over the last 3 years, the credit card division’s profits are not showing a significant growth. What do you think is happening? What course of actions can be taken to improve Capital One credit card division’s profitability?

Possible Answer:

Candidate: Are we targeting a different customer base than we used to target earlier?

Interviewer: Yes. In order to be a bigger player, we are looking at expanding our customer base. We have included younger age group (age 20-30) and lower middle income group people to boost our revenues.

Candidate: Has the default ratios increased? Possibly due to inclusion of lower middle income group and younger section of the society, number of people defaulting has increased. These are the people who generally don’t have stable source of income to repay their credit card debts.

Interviewer: Yes, you are right. However, the company expected this. Therefore in order to cover these losses, we have been charging higher interest rates from these people. Also in order to lower the default ratios, we have increased our credit period from 2 months to 4 months.

Candidate: Increase in credit period puts the strain on the requirements of the working capital of the company. The company’s borrowing costs increases to service this increase in working capital requirements. Has the increase in credit period resulted in significant reduction in default rates?

Interviewer: To some extent yes. What else do you think would be happening from the operations side?

Candidate: Due to the increase in number of customers, the company had to expand its operations. It had to open more branch outlets and hire more employees. However, since the billing amounts are significantly less for the newer customer base as compared to the previous ones, processing costs have increased as a share of overall revenues. Also since the number of defaults has increased, the company might have to pay higher litigation costs in order to recover the loans.

Interviewer: Very well done. You have explored most of the areas. However, I would like you to pinpoint some further issues that might be affecting the company.

Candidate: Have we seen any changes in the competitive scenario?

Interviewer: A number of small players have entered the markets who offer attractive discounts at certain merchandises to boost their market share.

Candidate: We know that the number of customers have increased. However, this might not have led to increase in share of customer’s wallet. Due to more competitors, customers might be tempted to keep more credit cards. Hence our share in billings would have actually declined.

Interviewer: Very good, thank you!