Capital One's Credit-Card Settlement In Context
The federal government's new consumer protection bureau notched its first major enforcement action today. Capital One Financial has agreed to shell out $210 million to settle allegations that it tricked credit card customers into buying unwanted services — mostly credit insurance and similar products — while activating credit cards.
The allegations come from the Consumer Financial Protection Bureau, which was created by the sweeping Dodd-Frank financial regulation bill, and also the Office of the Comptroller of the Currency, which is Capital One's primary banking regulator. You can read separate press releases on the settlement from the CFPB and the OCC.
Settlements with big companies always sound big: $210 million is serious money for most of us.
But it's worth keeping in mind that the big banks are really big. When Goldman Sachs agreed to pay $550 million almost exactly two years ago to settle charges that it misled investors over complex mortgage investment, some critics argued it amounted to a slap on the wrist.
Capital One isn't quite as big as Goldman Sachs, but it's still pretty big.
The banking company reported profits of about $1.4 billion for the first three months of this year. That's roughly 6.6 times the penalties and refunds it's paying for business practices since August 2010. (Capital One announced considerably lower second-quarter earnings today, a total it said was skewed by accounting adjustments and other unusual factors.)
At the same time, compared just to the company's credit card business, the payout announced today is more significant. During the first three months of this year, Capital One reported roughly $566 million as coming from its credit card business.
In other words, the fines and refunds amount to a little over a third of the company's credit card profits for the first quarter of the year. It's not a crippling hit, but it's not trivial either. (These figures take into account only Capital One's "continuing operations" — i.e., they exclude business lines the company no longer operates — primarily because that's the only way Capital One reports its credit card results.)
Capital One, in its press release on the settlement, blamed the problems on "third party vendors [that] did not always adhere to company sales scripts and sales policies," but acknowledges that the bank didn't keep a close enough eye on vendors. "We are accountable for the actions that vendors take on our behalf," a company executive says in the release.
It's worth noting that the bulk of the settlement, or $150 million, is slated to go to consumers. The consumer protection bureau notes that $140 million will go to 2 million customers, which works out to about $70 apiece. The agency has posted an explanation of how these payments will be made.