If you feel like you’ve been seeing more advertisements for Capital One Financial Corp. (NYSE: COF) of late, you’d be right.
The McLean company spent a whopping $1 billion on marketing in the second quarter alone — 60% more than it spent in the same quarter last year — and close to $1 billion in each of the prior two quarters. The bulk of the spending went toward promoting its domestic credit cards, particularly those targeting big spenders, though it is also heavily marketing its national digital bank as it continues to shutter its traditional branches.
Much of the increased spending is aimed at attracting more higher-spending credit card customers and siphoning market share from such rivals as JPMorgan Chase and American Express, which have also increased their marketing budgets. Capital One also continues to spend money bringing on more retail partners. Earlier this month, it became the exclusive card issuer for outdoor retailer REI Co-op.
The marketing is not just traditional advertising but also comes in the form of rewards — in November, Capital One launched the Venture X rewards card, for which it currently provides hefty early-spend bonuses — and the rollout of its airport lounges, which offer dining stations, yoga and meditation studios and other amenities at no cost to some higher-end customers. It’s already opened its first lounge in Dallas-Forth Worth International Airport and plans to open lounges at Dulles International Airport and Denver International Airport next year.
The increased spending took a bite out of Capital One’s most recent earnings, with net income dropping to $2 billion from $3.5 billion during the same period last year. Still, the nation’s 8th-largest retail bank, with $440 billion of assets, believes it’s worth the investment if it means attracting consumers willing to pay the $395 annual fee for its Venture X card.
Capital One didn’t respond to the Washington Business Journal’s interview request for this story, but Chairman and CEO Richard Fairbank said on the company’s second-quarter earnings call that the credit card marketing efforts are paying off in the form of increased volume. Domestic card purchase volume climbed 18% in the second quarter from a year earlier.
“As a result of our marketing, we posted strong growth in heavy spender accounts and strong engagement and spend behaviors with new and existing customers,” Fairbank said on the July call. “We’re gaining share and building a long-term franchise with heavy spenders at the top of the market.”
One billion dollars is a lot of money to spend on marketing, but it’s justified, said Kevin Barker, a managing director at Piper Sandler who follows Capital One. “Capital One sees an opportunity to grow some of the highest value accounts today and therefore they’re pushing to market to those types of customers,” Barker said.
Over the past year and a half, the credit card industry in general has seen an increase in marketing, said fintech analyst Dominick Gabriele, an executive director at Oppenheimer & Co. Inc. who follows Capital One. While Capital One has been making a push to build its heavy spender franchise for a decade, it’s definitely “putting a little extra emphasis on it right now,” he said.
Its main competitors in the pursuit of heavy spenders are JPMorgan Chase & Co. (NYSE: JPM), with its Sapphire and Sapphire Reserve cards, and American Express (NYSE: AXP), which has the Platinum and Gold cards.
As a percentage of revenue, Gabriele expects Capital One’s marketing to stay high, at least in 2023. “Capital One is one of the masters of understanding the consumer and when to step on the gas pedal on marketing and when not to,” he said. “It does seem a little bit counterintuitive this time around, but they’ve historically been really good at knowing when to step on the gas pedal and when to put on the brakes for marketing in different economic cycle periods.”
Marketing was 12.2% as a percentage of revenue in the second quarter of 2022. For comparison, that number was 8.4% during the same period a year prior.
But Piper Sandler’s Barker said he expects Capital One to begin tapping the the brakes on advertising and marketing.
“The consumer broadly in the U.S. is starting to normalize,” Barker said, meaning that income relative to debt, and therefore consumers’ ability to take on more debt, is decreasing after a high-point driven by government stimulus payments and reduced spending due to coronavirus-induced lockdowns. “As that starts to revert back to pre-pandemic levels, the opportunity to focus on that type of customer diminishes — and I think marketing spend is going to slow as we go into next year,” he said.
Recent research confirms that consumers across all income levels are starting to feel squeezed. According to the J.D. Power 2022 U.S. Credit Card Satisfaction Study released this month, 57% of credit card customers are now “financially unhealthy,” a 4 percentage point increase from a year ago. The share of monthly spending that consumers are putting on a primary credit card has also shrunk from a year ago, the study found.
Capital One is spending in marketing other areas as well as it seeks to build its commercial banking business and its increasingly digitally focused national banking business.
The bank has been highly aggressive in closing physical branches, shuttering nearly two thirds of its branches between 2010 and 2021, according to Federal Deposit Insurance Corp. data. The company does not break out its marketing spending by business segment, but it’s hard to miss its television ads — featuring celebrities like NBA Hall of Famer Charles Barkley or Slash from Guns n’ Roses — touting its digital checking-account with features such as no overdraft fees, which it eliminated in late 2021.
The investments it is making in its digital bank are not yet translating into huge deposit gains, but they appear to be paying off in other ways. In a June report from J.D. Power that gauged consumers’ satisfaction with large banks’ digital tools, Capital One was ranked No. 1 for its mobile banking app.
© 2022 American City Business Journals. All rights reserved. Use of and/or registration on any portion of this site constitutes acceptance of our User Agreement (updated January 1, 2021) and Privacy Policy and Cookie Statement (updated July 1, 2022). The material on this site may not be reproduced, distributed, transmitted, cached or otherwise used, except with the prior written permission of American City Business Journals.
About Author
