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Why Is Capital One a Leader in the Credit Card Business?

By Matthew Frankel, CFP® - Nov 21, 2020 at 7:17AM

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What is it doing right?

Capital One ( COF 1.81% ) is perhaps the most credit-card-focused large commercial bank in the United States. In fact, many Americans would be surprised to learn that Capital One does anything other than credit card lending. 

In this Fool Live video clip from our Nov. 16 "Industry Focus" show, host Jason Moser and Fool contributor Matt Frankel, CFP, discuss why Capital One's credit card business is so successful and why the company chooses to focus on it. 

Jason Moser: But to your point there, in regard to that leverage to credit cards. I mean, to take that even one step further, looking through their 10-K, one thing, you search the word mortgage and really the only reason mortgage exists in that 10-K, is in the form of how perhaps they have investment exposure in their assets regarding mortgage-backed securities and whatnot. I mean, this is not a mortgage banker. I was looking at just how they make their money in over the last year, it looked like credit cards were responsible for about 64 percent of that net revenues, with consumer banking making up about 26 percent, commercial banking making up about 10 percent. So to your point, yeah, I mean, extremely levered to that credit card business.

Matt Frankel: Yeah. Credit cards are not only a big portion of their loan portfolio, but they are higher income. I mean, anyone who has a credit card in their wallet knows that the interest rate on it's a lot more than you're paying on your auto loan, for example.

Jason Moser: Yeah.

Matt Frankel: I don't know if you have a Capital One credit card, but I have a couple of them.

Jason Moser: I don't, you know, I don't. I never have and I guess I never will. I try to limit the number of cards. It's nothing against them. I just it's not something I ever ended up with in my wallet. I mean, I've had to get the Amazon (NASDAQ: AMZN) Prime Visa (NYSE: V) and I've got an American Express (NYSE: AXP) card. Those two together take care of everything I need.

Matt Frankel: That's true. I'm technically a small business owner because I'm an independent contractor, so I have their business version of the credit card.

Jason Moser: Nice.

Matt Frankel: Now, the Spark businesses is a fantastic business card by the way. I've written about it, it's really good product. That's kind of the point. They've differentiated themselves through their credit card business. Not just, I mean, you don't get a $128 billion of credit card loans on your books at the end of last year without having a good product.

Jason Moser: Yeah.

Matt Frankel: So I think I'd say the venture is their flagship credit card. That has one of the best two percent flat reward rate, which is one of the best in the business. They have some really unique credit card products. They have one, I think it's a newer product that's geared toward eating out, where it's designed for people who dine out and pays really good rewards on that. Their business credit cards are excellent when you compare them to the perks and annual fees that the competition has. So they've really done a great job of differentiating their credit card business. Credit cards are a good and bad thing from an investor's point of view. I mentioned that they are very profitable, if things are going well. Just to kind of name a couple of statistics here. Capital One's net revenue margin on their credit card business is 15.8 percent.

Jason Moser: Wow.

Matt Frankel: That means when you take the rate they're getting off their credit card loans and subtract the cost of that capital through deposits, you get 15.8 percent. That's a big spread.

Jason Moser: It is.

Matt Frankel: Most banks are happy to get like four percent. So that's a big differentiating factor.

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