Andrew has been with Capital One for 30 years and has served as CFO since 2021. He previously led Capital One's business line CFO teams and oversaw enterprise planning and budgeting. He also served as CFO of the company's national bank. Capital One has been one of our favorite stocks for the year. Unfortunately, lots of things have not gone right, but you guys have executed. I think fundamentally, everything's gone right. It's disappointing a little bit, but thank you for executing. Andrew, it's been five and a half years since you became CFO, and I know you were with the company for some time before in the role. When you reflect on your time at Capital One, how do you think the company's changed, both from a strategic and financial perspective?
Well, first, Sanjay, thanks so much for having me. Thanks to all of you for your interest, those in the room and those listening on the webcast. As you mentioned in your opening remarks, been with the company 30 years. It's amazing how quickly time flies. Maybe I'll start with the answer to your question of what's the same before I answer what's different.
Sure.
What's the same to me, even 30 years ago, we were always working back from, where do we think the world is going, and how do we see ourselves winning in that future. Bringing an analytical rigor, bringing a deep reverence for the customer in everything that we do, and that continues to this day. What I think is different over the last six years that I've been in the CFO seat is probably twofold. First, the pace of change in the world around us is unbelievable, and it's just accelerating every single day. I only half-jokingly tell the team that the pace of change will never be as slow as it is today, even as we feel like so much is going on at this point. The second thing is the breadth of opportunities that are there for us at this point.
Whether it's in our core businesses, whether it's in the adjacent businesses, payments, network, with the acquisitions of Discover and Brex, or even in some cases, things that are not in our core businesses as we're going into Capital One Shopping or travel or software. The opportunities abound at this point. If I put that all together, I would say how we operate is the same as it was 30 years ago, but the pace and the breadth of opportunities is just so much greater than even what it was six years ago.
Absolutely. When we think about the financial part of where you are today versus where you have been in the past, right? Obviously, you have moved the model towards a more bank-oriented model, shored up a lot of the funding side of the business. It seems like now you have got a network. Maybe you could just talk about financially how the business model has evolved over time.
Yeah. I would say the opportunities rooted in both the technology, and I'll be importantly create the distinction that it is not just the architecture of technology, but the data infrastructure, the sources of data, the ability to bring multiple sources of information together in real time to think about the entirety of the business. I can kind of go down the list of the P&L. It is almost easier to highlight where that technology transformation isn't changing what we are doing and isn't changing the P&L from the top, thinking about growth and the prospects there, ability to target customers in a way that we were not just a few short years ago. I just brought up the new businesses, whether s hopping, travel, software. There is a bunch of other sources that are just changing the vectors of growth that we have.
As you continue down the P&L, again, the technology and data just changes everything, whether it is credit and how we are able to use platforms and more micro-segment credit, whether it is the efficiency of how we operate, our software engineers being able to produce code at a level that is so much different than even it was a year ago. I also think things like the customer experience that we are able to produce for our customers, you might have seen, not that we run the company for awards, but six years in a row being J.D. Power's number one customer satisfaction for large banks. Ultimately, at the bottom of all of that is talent. Again, not that we are doing it for awards, but Evident Insights coming out with their AI list of big banks, Capital One being number one in both innovation and in talent.
Being able to have the talent that enables us to do, back to your question, so many different things on a base of tech and data that kind of the opportunities abound.
Yeah. I want to dig into that because I know you've invested heavily in modernizing the technology stack, well ahead of many peers. Maybe you could talk about the advantages it provides you guys, because I think it's kind of easy for it to get lost in the story a little bit.
Yeah. I think a lot of what I just highlighted kind of gets to how tech and data fundamentally changes. The world is moving at a pace that people are expecting real-time intelligent solutions being proactively kind of landing in their laps. Gone are the days of sort of the batch processing, and I go get one single financial product, and three years later, I go back and search for the next product. I think what people are expecting is their financial institution to really be ingrained in their daily lives and giving them customer experiences that delight them.
And that has become really the expectation. Our ability to consume and analyze data is really at the core of all of that.
Cool. I think you've mentioned also the credit outcomes are part of the tech transformation. Obviously, credit's been a successful. It's been a bright spot for Capital One and quite frankly, for the industry as well. Maybe you can articulate why Capital One has seen such stellar performance, and maybe just the overall health of the consumer too, because the consumer's been resilient through a lot.
Yeah, very much so. You've known me for long enough, Sanjay, that you know that I like to, I think and I talk in frameworks. Maybe I'll use this opportunity to kind of provide the framework about credit. To me, I'd say that there's three main sources of the credit performance, the drivers of credit. One is more macro, industry-wide, which is early in the pandemic, we all recall that credit was pristine, largely on the back of forbearance and stimulus and people not traveling. I think we coined the phrase of the delayed—
Yes.
—charge-offs phenomenon, and we saw those delayed charge-offs come in over the past couple of years. One tailwind we're experiencing now is just the gradual decline of those delayed charge-offs. Relatedly, there's also the back book of recoveries that comes from those elevated levels of losses. We're also benefiting from that. Those are really industry phenomenon that are working. The second category that I would say is the judgment that we apply to our decisioning. By that, I mean, we don't work back from growth targets, and that gives us the flexibility to make the decisions that we think are right at any point in time.
We have intervened over the last number of years, looking at things like credit score inflation, looking at consumers' balance sheets being propped up as a result of the effects that I described a moment ago, and looking at things like the role that fintechs played in giving people debt, much of which wasn't reported on bureaus for a while. We used the opportunity a few years ago, the fact that we don't have growth targets, to intervene into our decision-making and give up growth at the margin in the service of what we believed would result in better long-term credit outcomes. That's my second category.
Then the third one comes back to what we were just talking about, which is the technology and data, the modeling that we have, our ability to incorporate in a variety of sources of data, monitor in real time, and really leverage those more sophisticated models to better make selections upfront, but also to dial in at the margin. That's been aided, by the way, with the Discover acquisition, where we see things like the best of both worlds. We're seeing it in the recovery side with Discover and collections.
Discover's practices, we looked at what we did, and we looked at what they did, and bringing those insights to bear in addition to bringing the technology together is also proving to be a source of tailwind. I kind of put all of that together and say there's industry effects, there's judgment effects, and then there's just the technology and data capabilities that are now inherent in our company. All of those things are helping to drive really strong credit outcomes.
As we think about the health of the consumer, what are some of the things that you're looking out for to keep your finger on the pulse?
Well, let me start at the top of the funnel, as I'll call it, and I'll sort of walk—
Yeah.
—through those pieces. First, it really begins with employment, and it's fundamentally an issue of customers' ability to pay. The first variable being employment, and we've seen the prints over the third quarter, see last week's results where job creation is strong, the fires are relatively low and stable, and that is resulting in an unemployment rate, the most recent print of 4.1%. Interesting to note that we've now had, I think it's 62 months in a row of unemployment being under 5%. The employment picture has been strong and stable. The next category to me, beyond just who's employed, is looking at real wage growth, which is a function of both wages themselves juxtaposed against inflation. When you look at hourly wages, they've been reasonably strong.
If you horse race that against inflation over the last few months, there has actually been a little bit of a gapping out in favor of inflation. But one thing that I think is often overlooked when we look at hourly wages is it does not take into account hours worked. If you look at Fed data where it is weekly wages that incorporate hours, the horse race between inflation and weekly wages has basically drawn to a tie over the last number of months.
The combination of strong employment and real wages that have been stable then kind of leads you down into, okay, what are the decisions that consumers are making on a day-to-day basis? Debt servicing levels are stable, payment rates, spend behavior is healthy, as I am sure you have heard throughout this conference. But in addition to healthy spend levels, we have seen revolve rates that are stable and strong. You have seen payment rates that are actually improving a bit. You put all of those things together, and more at the bottom of this funnel, you see delinquencies have been stable. Delinquencies being the precursor to charge-offs, which also had improved for a number of quarters and find themselves to be stable to slightly better than stable over the last number of months.
All of that together, we are looking throughout that whole continuum, but really most upstream is the employment and wage picture, because that ultimately manifests itself in customer behaviors downstream.
Oh, that is really encouraging, and that is good to know. The consumer is hanging in there because it is two-thirds of the economy.
Yeah.
That's for sure. I think one of the big strategic moves that Capital One made was moving to the affluent marketplace. Obviously, it's a big investment area for you guys. Maybe you could articulate how this move upmarket impacts the story and strategic positioning.
Yeah. That's a quest that began in earnest for us in around 2010 with the launch of Venture. As we looked at the top of the market, there was so much to like about the economics and what it means financially, to your question. These are customers that have high levels of spend. If you look at the revenue components of this, you're generating fees from them. They have high levels of spend, and so therefore you have interchange. Of course, you still get some interest income from them, but it's all based in much lower levels of capital. They have very low losses, even in periods of stress. They have very low attrition rates. When you look at all of those things together, it's no surprise that it is an incredibly attractive portion of the market.
The natural question is, well, why doesn't everybody go there? It's because it requires a sustained level of investment, because people who are at the top of the market are not just looking for APR or product terms. It requires experiences. It requires travel and lounges and dining and exclusive things that you can't get elsewhere, and that requires a commitment to invest for a long period of time to generate these great annuity streams. That also shows up in our P&L as we make the investments, particularly in marketing, to generate these customers. It just is an annuity that pays dividends for years and years to come. It also, by the way, provides something aspirational for the rest of the book to look up to.
We believe that it sort of helps lift the tide across the portfolio, where those customers are aspiring to improve standing and credit and take those things on, and we can help them improve their financial lives and then bring in other people who are new to credit and keep this virtuous cycle going.
No, it's very important. As we think about the investments that still need to be made, do you see that there is pressure on that because it's so competitive, or do you think it's a steady rate of investment that needs to be done over time? I'm just curious how these things ebb and flow through these competitive dynamics.
Yeah. I think that marketplace, for the reasons I just described, where it requires a meaningful amount of investment to generate the customers, it requires a brand that people trust. Those are very high barriers to entry, and so what we've seen is a small number of very formidable players in that space who continue to make the investments to compete for that pool of customers. But I would say those players are all very rational, and we see a highly competitive space, but we see a rational one, and the combination of those two things generally lead to things being, I'll call it more sustained as opposed to spiky times and then an ability—
Got it.
—to steal a bunch of share without making an investment. I just don't think that's plausible. I think what you need to do is have a long-term commitment with the ability to make those investments over time and just sustain that, and that's generally what we see in the marketplace.
Do you think owning a network makes it better or makes it easier to make those investments in that market? Do you get more efficiency out of it?
Well, with the market, especially the top of the market, those tend to be customers that travel internationally. As we have talked about, one of the things with the acquisition of Discover that we are incredibly excited about, the opportunities that it brings, it also comes with a near-term need to invest, and that is investing in acceptance. Because the last thing that you would want is to have somebody at the top of the market who is somewhere on international travel and the card not work. Over time, perhaps it could be a source of competitive advantage, but what we are focused on now with the network is really finding those places where our cardholders travel and ensure that there is a very high degree of acceptance so that the customer experience is up to the standard that we have set for ourselves there.
We need to make sure that international, in particular, has the acceptance where we would feel comfortable having the top of the market running on a network that just does not yet have parity with Visa and Mastercard. We have the flexibility and a great relationship with Visa and Mastercard to offer products that run on multiple rails, and we are continuing down that path to build out broader acceptance while at the same time maintaining the very strong partnership with what we have with those two companies.
Great. So maybe just sticking with marketing, obviously, Cap One has a history of leaning into marketing when the returns are attractive. Maybe you could just talk about the ROI framework that gives you the confidence of making the said marketing investments that you guys make.
Why don't I start with categories of marketing, because that may—
Absolutely.
—help with thinking about the ROI. So I'll bucket it into five broad categories, with the first being direct response or stimulus response, so targeting consumers and having ads that generate a new account, category 1. Category 2, adjacent to that, is brand. Category 3, we've talked quite a bit about as one of the benefits of the Discover transaction is in generating checking accounts and continuing to invest in our retail bank. So it goes just beyond checking. We don't have a branch on every corner, and so the way that we've also generated over $400 billion of savings products is through that marketing channel. So retail being a big category in and of itself. The fourth category is what we just talked about with premium.
All of those experiences that are necessary to compete in that space. And then fifth is a variety of other things, including things like Capital One Shopping. So getting back to your question, I think it's important to differentiate between those categories because the way that we approach the ROI differs for those. It's pretty easy for us to look at the direct marketing and be able to calculate an NPV of a solicitation. We can see what we spend, we can see the customers that we book, the response rates, what those customers look like over time. So that lends itself to sort of the hallmark of who Capital One is in terms of our analytics and the NPV framework that has been at the center of how the company's operated for over three decades.
There's another category of things, the premium space, that I would say doesn't quite lend itself to that same, at least stimulus response.
Right.
NPV, we have to look at premium in the context of the overall economics of that whole business. The marketing investments that we're making there, coupled with the direct marketing within that space, in aggregate to the overall economics of a premium customer. It's really hard to deconstruct that line item and say how much of a response rate is really driven by the fact that Sanjay can now get into a lounge in Dulles. But we test and learn as best we can, but the real value comes in looking at things on an integrated basis and ensuring that we really like those integrated economics and make our decisions that way, as opposed to just looking at each individual line item within marketing to determine should we go invest in another lounge.
I think another hallmark of Capital One through good times and bad is the flexibility of marketing spend, right? When things are bad, there's this room to take things down. Intuitively, it makes sense because you probably aren't growing as fast in a downturn as you are in a good part of the cycle. I guess with this move, the mix changes in marketing. Has your discretion over that line changed some so that it's not as flexible as it's been in the past? How should we think about that?
I'll go back to the categories because a number of those categories existed five, 10 years ago. When you look at overall marketing spend levels and marketing efficiency for us over the last few years, that has grown in large part because we've added some additional categories. What I would say is, in those things where there's a somewhat natural hedge in the broader economy, in direct marketing. For instance, the ability to pull back exists just as it did early in the pandemic. You saw us bring down our marketing spend by something like 25% in a single year. There is a lot of ability to pull back if conditions warrant.
But what I would also highlight is a number of the new categories are things that there is a higher bar, I will at least put it that way of whether or not we would pull back because the sustainable investment in upmarket that I just described, the economics that we see in deposit gathering and generating new checking accounts, there are things that regardless of the economic environment around us, we probably would continue to lean into a little bit harder, at least on a relative basis to the direct marketing spend. There is the same level of kind of dollar sort of percentage pushback, but on a percentage that itself is higher, if that math makes sense.
So, we continue to see those opportunities to pull back, but I would think that you would see the absolute dollars still be at a higher level than what they were historically because of the additional categories investment that are not as directly tied to the economy at any given moment.
I mean, is there a way to sort of talk about broadly expenses, like less marketing in some kind of framework? As we look ahead and think about leverageability and obviously the ability to flex up and down, is there any way to think about that, or is that still a work in process?
In terms of the magnitude?
Yeah, or just, and the path.
I think the path is quite simple, meaning, again, I think the best case that I would point to is early in the pandemic, being able to pull back very rapidly and not be as prevalent in the marketplace looking to generate new accounts, given that there is uncertainty.
We underwrite with an assumption of a recession. The path, depending on the scenario, even if we were to see some dark clouds in the broader economy, I would not make an assumption that that immediately means that we are going to bring down marketing expense by X percent, because if we continue to believe that through our underwriting that those are still NPV positive accounts—
Right.
—we may lean into it. It really works back from what do we see as the opportunity at any given time, and we have the ability to pull back if the situation warrants. We also, at least as we sit here today, we are firing all cylinders, really excited about what we see across all five of those categories, and you see us leaning in at this point.
Got it. Maybe we switch to capital management. Obviously, you guys are sitting at very high levels of capital, I mean, greater than 13%. Maybe you could talk about the path to bring it down towards your target through buybacks and others, and what's the timeframe to get to the 11% target?
Well, we look at our balance sheet and stress test it in a variety of ways to assess what level of capital do we believe we need. I am going to parse words here because I think it's important, which is 11% being a need versus a target. That is rooted in our analysis of our balance sheet. In terms of how we manage capital levels relative to that need, I start from a place of we have worked very hard to create a company that has high inherent earnings power. What that allows us to do is to invest for the future and to invest and support growth. Those are the two highest callings as we think about the P&L and ultimately capital.
Beyond that, on average over time, we likely would generate capital, and we understand the importance of returning capital to shareholders as part of our value proposition. You've seen us give back $10 billion of capital over the last four quarters, so I want to make sure that that is clear, that that is an important part of it. But after you take those things into account, there is some level of capital that remains. As we think about the level at any given time, we're going to take into account a variety of factors, which is growth prospects, which is AOCI, and stock price, and potential regulatory changes. Those also need to be considerations for us. That's kind of a window into how we think about capital levels.
But you and our investors should just assume that we see asymmetric value in capital, where for defensive purposes, in the event of the world turning very quickly, for offensive purposes, the best growth opportunities often tend to come when other companies are pulling back. So, we take all of those things into account as we think about managing our level of capital, and with the flexibility that we have under SCB to change our buyback pace for any given reason, we're going to take advantage of that flexibility.
And as we think about using that capital for offense, like inorganic growth, obviously you guys did Brex, you've done Discover. Are there more such cases, or do those just come up opportunistically and you want to be prepared for it?
Well, almost definitionally, acquisitions don't come with a preset timetable. We of course put an incredibly high bar on acquisitions. We look for things that strategically are aligned with where we see the world going and that provide some clear value to us getting to that destination, whether it is augmenting existing capabilities, whether it is getting us into something that we don't currently have, like the network, for instance, in Discover. We just need to look at the opportunities as they arise and put them through a very rigorous filter, strategically and financially.
And like we do with basically all of our investments, have an eye towards what is the long-term value creation of making an investment, whether it is investment in technology, whether it is investment in acquiring another company, kind of using the same philosophy there and being opportunistic as we see those strategic and financial forces align.
Got it. At this conference, we've talked extensively about agentic commerce. It's a big topic of the future in terms of how consumers will consume everything, it seems. Maybe you could talk about what the Cap One sort of house view is and what you guys are doing to take advantage of the opportunity or risks.
Well, I haven't yet had the advantage of listening to what others have said, but I imagine it is some form of agentic commerce is going to fundamentally change how the world works.
How we live and play and travel. That's exactly where I was going to go.
Yeah.
Making sure the transcript picks it up, but timing uncertain. We're keeping a close eye on that in these early days. I'll start by saying we feel very well-equipped given the technology foundation that we've built, the capabilities, the talent that we have to adjust. We also have a relentless focus on the customer experience, knowing that it builds loyalty. We're very focused on ensuring that we create the ability for consumers to operate in the way that they prefer, with one important caveat, that is, in these early days especially, we want to make sure that our consumers are safe. Thinking about fraud or data loss or other risks to the consumers in what is a very nascent technology, we're also going to at least unleash new capabilities and prevent customers from operating in our ecosystem from now.
We've blocked agents from working within Capital One because we want to make sure that those loose ends are tied up so that we can ensure, again, that we can protect customers as these capabilities very quickly evolve. But the way that we're mostly thinking about it is then to prepare for any eventuality and have the capabilities for whatever the future may bring.
Do you see it more as an opportunity or a risk? Or is it both? I am curious, do you think it adds to Capital One?
I think there are multiple dimensions to it. I imagine you have also had people talking about either does it change customer spending behaviors, does it change—
Right.
First in wallet, does it change deposit—
Deposit.
—costs and behaviors. The way we have always operated Capital One is to create incredibly compelling products that we believe are attractive to customers. Having that on a foundation of 150 million customers, the brand that we have established over multiple decades, creates the opportunity again for us to pivot and meet the customer where they are. I would like to think that particularly that optionality rooted in the foundation that I just described on balance is a positive. We also need to, again, make sure that we are ensuring that our customers, their money, their data is safe as we go down this path. So, we are going to operate cautiously outwardly, but be working as hard as our little legs can carry us internally to be developing the capabilities as we see where the market is going.
Okay. Last question, Brex. I think Brex was a really good deal because it added another leg to the stool. Maybe you could just talk about initial observations on Brex and how you see the growth path manifesting itself over the next several years, and when we will start seeing some progress being made and it affecting the numbers.
Well, just as a quick reminder for the audience, because I think the why is an important starting point. The payment space is a true $2 trillion marketplace, about $1 trillion business payments, about $1 trillion that is personal liability, where we were already firmly entrenched. Another $1 trillion or so that is commercial liability, where our business was nascent. As we were thinking internally about the future of where that marketplace goes, we were convinced that it isn't just about cards. It was about the intersection of cards, AP, accounts payable, expense management, procurement, and bringing all of those things together in real time for the office of the CFO to be able to optimize the spend in these, everything from VC-backed startups all the way to large enterprises.
We saw that Brex was down that path with incredibly talented people building from the bottom of the tech stack up, and that is what drew us to them. What we brought to them or bring to them is a balance sheet, funding, lower-cost funding model, the wherewithal to make investments for the long term, a brand, a client base, and leads that we were convinced would just aid them on their journey and help them sort of ascend to where they and we were both looking to go. Early days, still only a handful of months in, integration is going well.
We are making sure that the regulatory needs, the cyber, all of the risk management pieces, that we are doing what is necessary, but we are also making sure that they have the flexibility to take advantage of all the things that Capital One brings, but continue on that path and accelerate their journey. We are just as excited today, strategically and financially, about what Brex brings to the table, and that the integration is going really well.
All right. Well, we're out of time. Andrew, thank you so much for giving us a little time here at the conference.
Great. Thanks so much, Sanjay. Appreciate it.