Fairbank has demonstrated how information-based technology can be used to create new business opportunities, which in turn generate new banking jobs. The conversion of data on customers to valuable information for designing new products that match customer preferences and needs requires people with new skill sets. IT professionals and expert statisticians possess the skills to analyze this kind of data.
Before 1991, credit cards were not available to a large number of Americans, as banks turned down all clients who did not fit their criteria. Banks were not interested in finding ways to accommodate these clients and offer them credit products.
In 1987, Fairbank and fellow Englishman Nigel Morris were studying the credit card operations of a New York bank. They both realized the bank could use the huge volume of data it had on its potential customers to design credit products for all kinds of customers. The bank rejected about half of its potential customers because they did not fit its single-yardstick approach. However, the bank did not buy Fairbank’s and Morris’s proposal out of fear of what would happen if their customers found out they were paying differential rates.
Fairbank and Morris continued to pitch their idea to other credit card companies and banks. They found no takers. After almost a year, Signet Bank gave them a chance to test their idea. After some experimentation, they came up with a model that seemed acceptable. Their new credit card offered potential customers a low initial interest rate when they consolidated debt from other accounts. This brought in huge interest payments after the initial low-interest period expired. By using data on existing customers and their credit profiles, a new credit product, the balance-transfer card, evolved. Fairbank broke the price barrier of a $20 fee and a 19.8% interest rate with the introduction of this product.
Through Capital One, Fairbank has revolutionized the credit industry with customized credit products. After October 1991, credit card companies became highly competitive, offering various combinations of rates, credit lines, fees, rewards, and services.
The credit card, according to Fairbank, is the key to an information machine containing data related to the cardholder’s identity, the people among whom the cardholder lives, and the cardholder’s level of comfort with credit, transactions, purchases, etc. All of this information can generate further information on the buying behavior and preferences of the consumer.
Capital One also uses information-based technology to deal with card hoppers. Fairbank ordered a test to identify which card hoppers were serious. When a customer was informed about a better deal offered by another bank and expressed his or her desire to switch, the computer was told to randomly match the claimed offer, split the difference, or refuse the customer. In the process, a large number of accounts were either closed or upgraded based on random advice from computers. Data on the customers who left, the customers who stayed, and how they behaved was gathered. This data is used to this day to determine responses to card hopper. The computer calculates the probability that the customer actually has a better offer and the loss to the company if he or she opts out. Based on this, the computer derives the best response to be given to the customer.
Reliance on information technology has created IT jobs and large-scale data-processing jobs in the banking industry.
