Lending and Credit

In the mid-1980s two consultants at Strategic Planning Associates, Richard Fairbank and Nigel Morris, noticed something odd about the American credit-card business. Almost every issuer charged almost every customer the same price, an APR of about 19.8% plus an annual fee of about $20, whatever their risk. To Fairbank and Morris this looked like an information problem. If a lender could test thousands of combinations of price, credit line and offer by mail, measure which customers responded and how they repaid, and price each segment for its own risk, it could take the best customers from the one-price banks and lend profitably to customers they refused. They pitched the idea to more than twenty banks (reported). Signet Bank of Richmond, Virginia, agreed in 1988.

They called it the information-based strategy, and it ran thousands of test cells a year. An early success, around 1991, was the balance-transfer card, which offered a low rate to customers carrying balances on other banks' cards. Signet spun the business off as Capital One in 1994–95. Thirty years later Capital One had bought ING Direct's US deposits, HSBC's US card portfolio and, on 18 May 2025, Discover Financial, combining one of the largest US card issuers with its own payment network. In the third quarter of 2026 it reported a net interest margin of 8.41%, more than double the banking industry's. This chapter explains how lenders make money, why their profits arrive years before their losses, and how the same tools that made Capital One became, at Countrywide, the means of a disaster.