Capital One Financial’s marketing spending is swelling, reflecting heightened competition among credit card issuers that want to capitalize on consumers’ renewed appetite for borrowing.
The competition for card customers is “intense,” Capital One Chairman and CEO Richard Fairbank told analysts Tuesday, though he also said the marketing investments have been fruitful and led to more business for the company.
Marketing costs at the McLean, Virginia-based lender jumped to nearly $1 billion in the fourth quarter, up from $751 million in the prior quarter, largely due to higher credit card-related spending. The $432 billion-asset company will continue to “lean into” marketing as long as doing so is productive, Fairbank said.
Capital One is closely monitoring whether increased competition across the card industry prompts a deterioration in competitors’ lending standards, Fairbank said. So far, he said, it is mostly leading to an marketing and card rewards battle rather than “sacrifices” in underwriting.
“There are windows of opportunity for growth, and you capitalize on those when you get them, or those windows pass,” Fairbank said, adding that the market is “still generating this opportunity resiliently.”
Other major credit card companies have also been spending more on marketing.
JPMorgan Chase recently estimated that its marketing costs will rise by 35% this year, largely due to its efforts to snag more credit card customers. American Express spent $1.6 billion on marketing last quarter, a $200 million increase from the third quarter of 2021.
And Discover Financial Services recorded $271 million in marketing expenditures last quarter, up from $159 million a year earlier, though President and CEO Roger Hochschild has downplayed the narrative of outsized competition.
“The card business is just always competitive,” Hochschild told analysts last week. “You have big players with good capabilities.”
Card issuers’ direct mail to consumers hit its highest level in years last month, with companies sending some 405 million mailings in December 2021, according to the data firm Mintel Comperemedia.
Card issuers have also been boosting their rewards programs as they seek to attract new customers — and drive more spending by existing cardholders.
Capital One, for example, absorbed a $92 million hit to non-interest income during the fourth quarter due to upgrades to a legacy rewards program.
Capital One has been “getting more aggressive” on rewards and marketing, according to Erik Budde, the founder of the card rewards tracking company GigaPoints. He pointed to the card issuer’s
Overall, Capital One’s net income during the fourth quarter slipped to $2.4 billion, down from $2.6 billion a year earlier.
The company said that higher marketing expenditures helped drive growth in its U.S. credit card business, with loans rising to $108.7 billion, up from $98.5 billion a year earlier. The increase was driven by a large jump in card purchases, more than offsetting the impact of customers who paid down their balances at unusually high rates, a trend that has lasted for much of the pandemic.
Investors appeared to respond negatively to Capital One’s higher expenses. The company’s stock slumped 3.60% to $146.68 on Wednesday afternoon.
Wolfe Research analyst Bill Carcache wrote in a research note that he remains “bullish” on the stock, arguing that Capital One’s “earnings power remains intact” and that its loan balances are set to rise further as repayment rates subside.
But Credit Suisse analyst Moshe Orenbuch wrote in a note to clients that he was more “cautious” due to the company’s expense commentary. He and other analysts tried without success to get more specific guidance about Capital One’s expense outlook.
Capital One will likely “continue to spend aggressively in 2022 and into 2023” due to both marketing costs and its efforts to attract technology talent, Orenbuch wrote.
“This led us to lower our estimates” for Capital One’s earnings over the next couple of years, he wrote, adding that “investors clearly would like to see more clarity on the level of spending.”
