In an article on BusinessWeek entitled, “Cap One’s Credit Trap”, Robert Berner explains how the profits from Capital One are generated through subprime lending and deriving advantage from high late and extremely high fees. The findings by Berner provide a creepy understanding into the credit card business of Capital One and also of the credit card business when taken as a whole. These cards are not as hilarious as their commercials on the television. In fact, the hassle free reward program appears to have been ironically bent given the fact that one particular family had to face a lot of hassles due to these credit cards. This family altogether received seven credit cards in a span of four years with credit limitations ranging between $200-$700. It is thus very easy to find out how an utterly simple mistake can result in a huge fee.
For instance, say that you posses a credit card with a limit of $200. You begin by spending a total of $140 on groceries and $40 for a gas tank. After a few weeks, you visit the gas station and spend $22 on filling your tank with gas. At this moment, you are the recipient of a higher late fee of $25. Now think about doing it seven times. This is what exactly happened to the family referred to in the BusinessWeek. Their balances went up and hence were not able to maintain the payments. This particular couple, at one stage, started paying fees that was over the limit and the late fees amounted to approximately $400 per month, which was more than the limitations on their cards.
What stands behind this credit card?
At present, Capital One is the eighth largest bank in the US. In 2012, their balance sheets touched approximately$286 bn. Also, it boasts of having one the largest number of customers in the postal service of the United States. The firm’s head office is located in Fairfax County Virginia the chairman at present is Richard Fairbank. He also happens to be the CEO and the President of the firm. It was founded by the present CEO in 1988 and is the fastest growing financial institution in the US. Capital One was also the receiver of a bail out in 2007 during the time of mortgage crisis. During this phase, the bank received a sum of $3.56 bn from the US Government in return for a total of 3,555,199 shares of the firm.
The company has a division of Auto Finance which forms a substantial portion. At present, there is an entity referred to as Capital One 360 and was originally known as ING Direct. This was built on the concept that a bank could carry out retail services based on an online model. This particular division does not have any other branches. It only has a physical presence which is in the form of a number of call centres and certain online facilities. The online model has achieved a huge amount of success because the lower overheads from staff and rent and resulted in a decreased cost to customers which has bettered the outcome.
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