Fraud was rampant and no provision for collections had been made. Yet after issuing around 2 million cards, delinquencies rocketed to 22%. The bank behind it – Bank of America – had predicted that delinquencies would average 4%. When the first credit card was launched in Fresno, California in 1958, it was a disaster. The pair agreed and in October 1989 joined Signet to refashion its credit card business. The only catch: its management wanted Fairbank and Morris to come over and run the project. One CEO even threatened to “throw Fairbank out of the window if he ever again recommended a business with charge-off rates over one percent.”Įventually, one bank warmed to the idea: Signet Bank of Richmond, Virginia (now part of Wells Fargo). Profitability in the category was already good enough for most and they didn’t want to disturb it. He and Morris toured the country, meeting over twenty heads of credit card divisions and CEOs to sell them on the idea. “The industry lends itself to massive scientific testing because it has millions of customers and a very flexible product where the terms and nature of the product can be individualised,” he told students at Stanford University. As the son of two successful physicists, he saw potential to inject scientific rigour into the business. He identified a steep gradient of customer profitability underneath the average return and spied an opportunity to boost both growth and profitability by introducing more granular pricing. This resulted in a portfolio of customers priced as if they had very similar probabilities of default.įairbank thought the business could be run better. If an applicant could pass the risk threshold set by the issuer, they would receive a card if their credit behaviour was deemed too risky, their application was rejected. Card issuers generally had one or two card products (e.g., a classic card and/or a gold card) each of which charged a uniform annual percentage rate of around 18%. The credit card business hadn’t changed much since its emergence thirty years earlier. “It was growing at 20 and 30 percent a year, and it was making 30 to 40 percent on equity,” Nigel Morris recounted. Consistently, one business line stood out: credit cards.
Working out of the Watergate Building in Washington, DC, he and colleague Nigel Morris would delve into bank balance sheets to see where clients were making their money. In the mid-1980s, Fairbank was a consultant to the financial services industry. Second is Richard Fairbank, chairman and CEO of Capital One. Warren Buffett is the longest serving chairman and CEO of a financial company in America. To try and understand what Buffett sees in Capital One, let’s take a quick look at where the company came from, and where it stands today.
When Buffett opened his current position in Amex in 1991, Capital One had not yet even been formed. But unlike Amex, Capital One has morphed into a full-fledged bank and it has done so relatively quickly. American Express is one of his longest held names. To make room, he sold out of another banking stock – US Bancorp, a top ten holding for ten years until the middle of last year.īuffett is no stranger to credit card businesses like Capital One. This week, regulatory disclosures revealed that Buffett bought $1 billion worth of Capital One in the first quarter. So when he buys a new banking stock, it’s worth paying attention. “We feel it’s something…that falls within our circle of competence to evaluate… We don’t think it’s beyond us to understand the banking business,” he told attendees at his annual general meeting in 1995. His portfolio has long been stocked with them and if it wasn’t for a 1970 amendment to the Bank Holding Company Act, he would likely have owned them outright, too, as he does in insurance. Warren Buffett knows a thing or two about banks.
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