Is Capital One Next? What Impact Will a Takeover Have On Collection Agencies?

In the wake of Bank of America's $35 billion takeover of MBNA, only a few large companies remain whose main business is marketing and issuing credit cards. Washington Mutual Inc. already agreed to acquire credit card issuer Providian Financial Corp. in a $6.45 billion deal. Will Capital One be taken over next? If the answer proves to be yes, it will have a dramatic impact on collection agencies.

I contend that it is only a matter of time before Capital One is acquired by a larger financial institution. It could take a couple of years, but it will inevitably happen. Capital One’s 7.5% market share, focus on consumer accounts and proven marketing strategy are very attractive additions to larger US banks such as Wachovia, J.P. Morgan Chase and even Citi that are looking to beef up their consumer lending operations, as well as foreign banks such as HSBC looking to expand their position in the US.

Yes, Capital One has been positioning itself to survive as a stand alone, diversifying into conventional banking, auto loans and even overseas consumer lending. Also, some naysayers will point out that a sizable portion of Capital One’s business is in the subprime market, an area that is less attractive to some high profile banks because of its lower credit quality and higher risk of defaults. The odds are stacked against Capital One remaining as a stand-alone because larger institutions can offer even lower rates and easier credit terms, and in a competitive market with thinning margins, the strong will need to combine forces to prevail.

When a sale of Capital One is consummated – and it is really only a matter of time before it is – it will dramatically impact the debt collection industry. We estimate that dozens of collection agencies service Capital One's various credit card products. For many of these agencies, Capital One comprises a large percentage of their fee income.

At this point, you probably think I am going to tell you that the sale of Capital One will result in a tremendous loss of business for its agency vendors. Typically, when a credit grantor sells, the collection agencies that are servicing the selling entity lose business to the agencies that are servicing the buyer. However, nothing will be typical about the sale of Capital One.

I expect quite the opposite will happen; those agencies servicing Capital One at the time of its sale will actually receive more business. Consider that Capital One has honed its collection practices to a point where it is envied by many larger financial institutions and has even been replicated by some. As a result, Capital One knows how to work with its collection agency vendors to maximize collection efforts. When acquisitions occur, the surviving entity strives to adopt best practices and in this case, Capital One’s collection network should prevail. This will result in a windfall of new placements from the acquiring company to those agencies already proven to Capital One. In addition, by utilizing Capital One's marketing power and the buyer’s ability to offer more competitive rates, the surviving entity's market share will increase. The result will be even more business to its collection agencies years after the deal is consummated.

So, if you are in good standing with Capital One, good news is coming your way.

Editor's Note: What impact do you think a Capital One buyout will have on the industry? Do you agree with Mike? What about the impact of the MBNA and Providian deals? We'd like to hear your opinions. Email us at editor@collectionindustry.com.

Mike Ginsberg is President and CEO of Kaulkin Ginsberg Company, which, since 1989, has provided owners, investors and executives with the advice, expertise and information needed to grow or sell their companies. Kaulkin Ginsberg is the most recognized source of M&A, research and consulting services for the Debt Collection and Accounts Receivable Management industries. The Kaulkin Media division publishes the leading credit and collections website, insideARM.com, as well as several popular electronic newsletters. And the Kaulkin Partners division is the industry's first and only "manufacturer's rep" organization, providing a valuable and timesaving resource for recovery managers.

Mike has served as chair and keynote speaker at numerous association meetings and industry conventions. He is a member of the board of the Institute of Merger and Acquisition Professionals (IMAP), a member of the Association for Corporate Growth (ACG), and a member of the American Collectors Association (ACA) and Debt Buyer's Association (DBA). He also serves as an expert witness, and sits on the advisory boards of several industry associations and publications. Mike can be reached at (301) 907-0840 or at mike@kaulkin.com.