True aim of a `low-risk revolver'

Britain could learn a lesson from Capital One, writes Roger Trapp
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The Independent Online
In many people's eyes, Nigel Morris is a typical British entrepreneur: he went to the United States to make his fortune. It is therefore fitting that the co-founder of the credit card company Capital One should have been in Britain last week collecting the London Business School's first alumnus award for entrepreneurialism - at a time of soul-searching about the conditions necessary for turning the country into a centre of enterprise to rival the US.

The day before Mr Morris was receiving his award, Stephen Byers, the Secretary of State for Trade and Industry, launched a consultation document on plans for a Small Business Service, which has been largely based on the experience of the US Small Business Administration.

The day after, the US Ambassador Philip Lader - himself a former head of the SBA - co-hosted with the Department of Trade and Industry and the Treasury a day-long conference at which successful US entrepreneurs and their advisers shared their experiences with UK counterparts and policymakers.

This Tuesday, Tony Blair is due to address an "entrepreneurs' summit" hosted by the British Venture Capital Association, which will be calling on the Government to introduce a flat rate of capital gains tax and provide more funds for priming businesses.

Mr Morris's view is that there are always hurdles for entrepreneurs. But, though he has said that he was drawn to the US in the 1980s because he was "instinctively attracted by the business-oriented culture", he points out: "I don't think those hurdles are insurmountable. People who are entrepreneurs do overcome them."

He is in a strong position to test the readiness of the UK to accept new ideas as his business is just launching itself on this side of the Atlantic. In the United States, the company that started as an arm of the little-known Signet Bank has grown to the point where it has 17 million customers and 10,000 staff. Since floating on the New York Stock Exchange in 1994, the share price has risen to the point where - by early this year - the firm had a stock market value of nearly $8bn (pounds 5bn).

At the heart of this story is what Mr Morris's partner, Rich Fairbank, calls a marketing revolution. As consultants with Strategic Planning Associates, the pair developed an approach to credit cards that was based on information. "The credit card issuers had a fabulously rich seam of information about their customers, which we were convinced could be segmented, analysed and used to far greater effect than was currently the case," says Mr Morris.

Yet, even in the US, the idea was slow to catch on. They pitched it to nearly all of the top 20 card issuers before Signet, a small Virginia- based bank, heard about it and asked them to make it work.

Doing that meant extensive work with software on developing a code that could target the ultimate credit card customer, "the low-risk revolver" - somebody who keeps a debt on the card without over-extending himself. To pick up such desirable customers, the company pioneered two notions - the teaser interest rate to lure customers with competitive rates, and the balance transfer that enables customers to swap cards, usually in return for lower interest rates.

But the company has not stopped there. Indeed, it sees the key to its continued growth as the creation of what Mr Fairbank calls "an innovation machine". It has created a culture in which employees keep coming up with ideas for making money for the company.

One of the most obvious manifestations of this is "mass customisation", by which Capital One devises credit limits and interest rates to suit individual customers. It has also invested heavily in computers so that its telephone operators know everything about the person calling as soon as he or she picks up the telephone.

And now European consumers are getting the Capital One treatment. Mr Morris will not say how many cards have been issued but notes that the UK accounts for a significant proportion of the $2bn of loans made overseas.

He is optimistic that the European Operations Centre opened in Nottingham last year, which now employs 1,200 people, will provide more business. He discounts the idea that British people are too conservative to accept his sort of offering in financial services by pointing to the success of Virgin and Prudential's Egg. "The British consumer will go to where value goes," he says.

He also sees a change at business school in attitudes towards start-up firms. The people he and his colleagues are looking to recruit from business schools are not looking at the likes of McKinsey and other consultancies. They are considering starting up their own businesses, he says. However, he adds: "I'm seeing more Brits in the United States and there seems to be a tendency for fewer to go back."