Back before Capital One, there were just two kinds of consumers: People who could afford credit cards and people who couldn't afford credit cards. The problem was that the people who could afford credit cards already had them, and the people who needed them were deadbeats.
The guy who started Capital One imagined a third kind of person -- someone who could almost afford a credit card. A virtual credit card holder. Something between a good risk and a social parasite. Someone who couldn't pay off the principal on a card -- only the interest.
That person -- that fluxoid -- is actually a better customer than someone who can really afford a card. Because interest and penalties are where the money is.
If you have enough data -- if you can find the exact right people -- you can make higher profits lending money to someone who can't pay you back than someone who can. As long as they can virtually pay you. In 2001 -- not the movie, the year -- more than one-quarter of the lowest income families spent over 40% of their income on debt repayment.
- But why is my mail always from one company- - Capital One?
Because the machine feeds on information. Capital One knows that data is power. Even when you don't respond, you're still telling them something. You're telling them what doesn't work. They invented the teaser rate, and honed it through trial and error. They did another test, dealing with customers who threatened to switch cards, and offering them computer-generated random new rates -- or nothing at all. They conducted 14,000 different tests in 1997. In 2000, they conducted 45,000.
- You're pulling this out of your butt.
And my Stanford alumni magazine.