Capital One 2000 Annual Report Download - page 41

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established credit profiles, are characterized by higher credit lines,
lower yields and an expectation of lower delinquencies and credit
loss rates.On the other hand, certain other customized card prod-
ucts are characterized by lower credit lines, higher yields (including
fees) and in some cases, higher delinquencies and credit loss
rates.These products also involve higher operational costs but
exhibit better response rates, less adverse selection, less attrition
and a greater ability to reprice than traditional products. More impor-
tantly, as a whole, all of these customized products continue to have
less volatile returns than traditional products in recent market
conditions, based partly on our ability to diversify risk with cus-
tomization. Based in part on the success of this range of products
and growth in the superprime and prime markets, we expect strong
growth in our managed loan balances during 2001. We believe that
leveraging our customer relationships will be a key to our future
growth.
Capital One Auto Finance, Inc., our automobile finance sub-
sidiary, offers loans, secured by automobiles, through dealer
networks throughout the United States, and is our platform to apply
IBS to the automobile loan market. As of December 31, 2000, loans
outstanding for Capital One Auto Finance had tripled since we acquired
it in 1998. We anticipate this trend will continue through 2001.
Our internet services support our lending business and include
account decisioning, real-time account numbering, retail deposit-
taking and account servicing. In the fourth quarter of 2000, we
surpassed our previously stated goal of originating one million
accounts and servicing two million accounts online by the end of
2000. We expect continued growth in the internet services portion
of our business in 2001, provided that we can continue to limit fraud
and safeguard our customers’ privacy.
We have expanded our existing operations outside of the
United States and have experienced growth in the number of
accounts and loan balances in our international business. To date,
our principal operations outside of the United States have been in
the United Kingdom, with additional operations in Canada, South
Africa and France. To support the continued growth of our United
Kingdom business and any future business in Europe, in Sep-
tember 2000 we launched a bank in the United Kingdom with
authority to conduct full-service operations. We anticipate enter-
ing and doing business in additional countries from time to time
as opportunities arise.
Non-Lending
Our non-lending business consists primarily of our retail deposit-
taking business. In 2000, we launched the CapitalOnePlace where
we offer customers a variety of products available for purchase
online, some of which are offered in partnership with other
companies.
We will continue to apply our IBS in an effort to balance the mix
of credit card products with other financial and non-financial prod-
ucts and services to optimize profitability within the context of
acceptable risk. We continually test new product offerings and pric-
ing combinations, using IBS, to target different consumer groups.
The number of tests we conduct has increased each year since
1994 and we expect further increases in 2001. Our growth through
expansion and product diversification, however, will be affected by
our ability to build internally or acquire the necessary operational
and organizational infrastructure, recruit experienced personnel,
fund these new businesses and manage expenses. Although we
believe we have the personnel, financial resources and business
strategy necessary for continued success, there can be no assur-
ance that our results of operations and financial condition in the
future will reflect our historical financial performance.
Marketing Investment
We expect our 2001 marketing expenses to exceed 2000’s expense
level, as we continue to invest in various credit card products and
services, and other financial and non-financial products and services.
We are also developing a brand marketing, or "brand awareness,"
strategy with the intent of building a branded franchise to support
our IBS and mass customization strategies. We caution, however, that
an increase in marketing expenses does not necessarily equate to a
comparable increase in outstanding balances or accounts based on
historical results. As our portfolio continues to grow, generating bal-
ances and accounts to offset attrition requires increasing amounts
of marketing. Although we are one of the leading direct mail mar-
keters in the credit card industry, and our overall credit card response
rates remained fairly stable in 2000, increased mail volume through-
out the industry indicates that competition has been accelerating.
This intense competition in the credit card market has resulted in an
industry-wide reduction in both credit card response rates and the
productivity of marketing dollars invested in that line of business,
both of which may affect us more significantly in 2001. In addition,
the cost to acquire new accounts varies across product lines and is