Capital One Builds Entire Business on Savvy Use of IT

CAPITAL ONE FINANCIAL OF FALLS CHURCH, Va., has built an entire business on the savvy use of information technology. In the U.S. market, sophisticated software tools?many of them developed in-house?trawl terabytes of demographic data, looking for consumers to target with finely judged offers of credit, each offer complete with customized interest rates, conditions and fees. In contrast to the scattergun approach adopted by most of its competitors, Capital One has long trumpeted what it terms its "information-based strategy" to credit rating and product development.

Most recently, Capital One’s proprietary data-mining and credit-rating tools have been deployed to identify profitable borrowers, or "super prime" consumers, who are smart enough to see through the introductory teaser rates offered by other credit card issuers bombarding their mailboxes, yet still want a better deal than they were getting from their mainstream card issuer.

Enter Catherine Doran, CIO of London-based Capital One Bank Europe. Her mission: First, pull off the same locate-and-lure trick with European consumers and then repeat the performance on the global stage. It’s a peculiar challenge, she admits. Clearly, the European offshoot can’t stray too far from Capital One’s highly public commitment to its tried-and-tested information-based strategy without making investors nervous. But how do you go about applying an information-based strategy when, for example, the information you need either doesn’t exist or is protected by tough European data privacy laws?

"Cautiously," says Doran, with an Irish lilt that betrays her origin. Capital One took little risk by launching its first global foray in the United Kingdom in 1996. It was the European country closest to the United States in terms of credit card usage, availability of demographic data and good, consistent credit-rating information?with several credit bureaus (France, by contrast, doesn’t have any), credit data cross-referenced to the electoral roll (illegal in some countries), and both positive and negative data available (some countries allow only certain categories of data to be stored).

Initially, Doran says, the IT function was outsourced to the Bank of Scotland, a move that both reduced risks and setup costs, while speeding time-to-market.

That was always a short-term measure, though, because Capital One’s information-based strategy calls for a constant stream of new products to attract customers. "When you must respond quickly to changes in the marketplace and when you’ve outsourced that capability, you’re at the mercy of other people’s prioritization decisions," she says. "We needed to become masters of our own destiny."

Backed by the stream of new products tailored to U.K. consumers, Capital One’s soft approach to globalization has paid off. The U.K. business currently employs 2,400 people, split between London and an operations center in Nottingham, and boasts more than 2 million customers?not bad from a standing start.

Independent Operations

Doran and her senior subordinates remain in close touch with their counterparts at headquarters?particularly in areas where the American market is more mature. In the e-commerce arena, for example, Doran happily admits to "shamelessly exploiting the learning that the U.S. [operation] has made regarding design and middleware."

Despite this, the U.K. operation is definitely not a clone of what exists in the United States. "It’s easier to list the overlaps with the U.S. than the differences, because it is a completely independent infrastructure," she says. "We certainly didn’t take code from the U.S., stick it on a tape and implement it in Nottingham."

In part, the variations are attributable to the different financial and legislative environments. The detection of fraud, for example, is fundamentally different in the United States, and consequently a wholly new approach had to be taken for the United Kingdom.

Even in noncore areas of the U.K. venture, systems have been built from the ground up, rather than on U.S. foundations. Vendors, too, are not always standard between the countries. "Obviously, there will be areas where we use the same vendors, but it’s not a deciding factor in the selection decision," Doran states.

While conceding that commonality remains a long-term goal, Doran points to several reasons why aspiration thus far falls short of reality?support, for example. "Some of the [American] solutions have no support basis in Europe, and where they underpin business-critical processes, it’s unacceptable to wait several hours for an initial response," she says. Cost is another factor. "Many of the applications have been heavily customized for the U.S. market?in respect of currency, ZIP codes and so on?making them inappropriate for the U.K. market and often not economical to transform."

Channel Crossing

Once the U.K. operation was bedded and delivering, it was time for Doran to cast her eyes further afield. Following trials in France, Capital One recently launched operations there. Another couple of European countries should go live during 2002, she adds, with a further two or three going the following year. "As we’ve looked at Europe, we haven’t seen a single formula for how we should go into a country?it’s not a canteen menu but more of an ‡ la carte approach," she says.

It’s clear that Doran anticipates the European rollout with relish. That was the challenge that lured her from a top IT post with Natwest Bank, one of the United Kingdom’s banking giants. There, she had 1,500 employees and a budget of 110 million pounds?whereas at Capital One, it is just 300 staffers and a budget that, although undisclosed, is likely to be on a similarly reduced scale. "The [Natwest] numbers were huge," she says. "But the numbers for me were never the attraction: Instead, it was the excitement, the challenge and that butterflies in the tummy feeling as you did something new."

Another difference was the frustration stemming from the very nature of British retail banking. At Natwest, "we were taking processes that had evolved over 300 years and were attempting to apply modern technology to move things forward," she says. "Here, there’s much more of a blank sheet of paper."

A mixed blessing, perhaps. Not all continental Europeans have taken to credit cards to the extent that British and American consumers have?although they still borrow money. In Germany, auto loans are big business, while French consumers increasingly charge le shopping to store cards. Doran robustly rejects these facts as inauspicious. She characterizes the market as one of latent demand rather than no demand. "You might say there’s no demand?but look at the take-up of mobile telephones, which we all now can’t live without."

While the marketing folks tailor their pitches, Doran is wrestling with the IT practicalities of entering new national markets. Language complexity is a key consideration when it comes to call center location, for example. "Do you have one call center which covers all of mainland Europe? It might make sense from a business perspective, but if you do have one center, you’ve got to have fluent Dutch, German, French and Italian speakers in sufficient numbers and located in the same place?which is an interesting challenge," she says. The final decision? Geographically dispersed call centers, rather than a single one.

Countries of Origin

Other decisions are still being examined. In which country?or countries?should statements be mailed? Where should cards be embossed? And mailings sent from? "Coming in as an outsider, you can make a lot of mistakes," says Doran. One option under consideration is to partner with European companies in joint ventures?an admission indicative of the challenges. "We would bring our information-based strategy, and they would bring their local knowledge and access."

With a global?as opposed to purely European?presence for Capital One still firmly in top management’s sights, it’s clear that the next year or so will be a telling one for Capital One’s whole global strategy. Decisions that Doran make today will have consequences that reverberate for years. For a CIO who enjoys the sensation of intestinal butterflies, it’s just about the perfect job.

Divided We Stand

As Winston Churchill famously observed, Britain and America "were two countries divided by a common language." The folks at Capital One doubtlessly pondered those words as they set up shop in the United Kingdom. It’s not just the fact that there are different regularity authorities but also different reporting requirements and different laws. In the United Kingdom, the calculation of penalty charges for early loan termination needs to comply with the Rule of 78, an industry standard that’s not used in the United States. Add to that the differences in data availability and the stage at which companies are permitted to use it, usury laws and radically different personal bankruptcy laws, and you see what Churchill meant.

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