How Capital One Can Inspire Your Digital Efforts

While venture-backed fintech firms continue to garner attention for being “ahead of the times,” don’t sleep on the franchise being built by Capital One.

By Al Dominick // @aldominick

Should you look at the term “innovation” and disassociate it with the banking sector, you are forgiven.  But innovative is exactly the description I favor for Capital One Financial Corp. (NYSE: COF), especially as I define the term as an ability to monetize creative ideas, products and processes.  Indeed, the McLean, VA-based bank ranked first among the 20 publicly-traded banks with assets of more than $50 billion in Bank Director magazine’s annual Bank Performance Scorecard and is widely considered at the forefront of taking a technology-based, consumer-centric focus to banking.

As we see in their financial performance, Capital One managed to increase net income and benefited from the high profitability of a substantial credit card operation and the stable funding of a regional banking franchise.  As you can read, the company rated highly on traditional profitability metrics: they posted a return on average assets (ROAA) of 1.53, a return on average equity (ROAE) of 10.33 and a Tangible Common Equity ratio of 9.82.  So while various fintech companies make news for their valuations (*hello Stripe, which received major funding from Visa and other investors, valuing the startup at $5 billion) or loan volume (**hola Lending Club, which originated nearly $2 billion in loans during Q2), I’m paying attention to Capital One’s performance.

Nonetheless, their financial numbers don’t tell the whole story.

As our editor, Jack Milligan, writes in “How Young and Hungry Fintech Companies are Disrupting the Status Quo,” the digital financial services space “is exploding in activity as new technology companies push their way into markets and product lines that traditionally have been the banking industry’s turf.” To this point, many bank executives should take note of Capital One’s focus on technology and its business model.  Its CEO, Richard Fairbank, is focused on leading the digital transformation of banking and is not shy in stating that “the winners in banking will have the capabilities of a world-class software company.  Most of the leverage and most of our investment is in building the foundational underpinnings and talent model of a great digital company.  To succeed in a digital world (you) can’t just bolt digital capabilities onto the side of an analog business.”

Cases in point, Capital One acquired money management app Level Money earlier this year to help consumers keep track of their spendable cash and savings.  Prior to that, they acquired San Francisco-based design firm Adaptive Path “to further improve its user experience with digital.”  Over the past three years, the company has also added e-commerce platform AmeriCommerce, digital marketing agency Pushpoint, spending tracker Bundle and mobile startup BankOns.  Heck, just last summer, one of Google’s “Wildest Designers” left the tech giant to join the bank.

More and more banks are realizing that they have to fundamentally change to keep up with the industry’s digital transformation.  But shifting an organizational structure — and culture — to become more focused on what customers want and expect in an increasingly digital age is no simple task.  Not everyone can offer a broad spectrum of financial products and services to consumers, small businesses and commercial clients like Capital One does.  But all can certainly learn from the investments, partnerships and efforts being made by this standout institution.

In case you’re wondering…

Bank Director’s Bank Performance Scorecard uses five key metrics that measure profitability, capitalization and asset quality. ROAA and ROAE are used to gauge each bank’s profitability.  KeyCorp (NYSE: KEY), of Cleveland, ranked second, and rated highest for capital adequacy, with a TCE ratio of 9.87. In third place, U.S. Bancorp (NYSE: USB), of Minneapolis, topped the profitability metrics with a 1.55 ROAA and 13.53 ROAE. Wells Fargo & Co. (NYSE: WFC) and Comerica Inc. (NYSE: CMA) rounded out the top five.