When Capital One Financial Corp. announced its second big bank acquisition in a year in March, the move raised more than a few industry eyebrows. The McLean, Va.-based credit card giant's strength lies in using data and technology to statistically assess consumers' needs and payment abilities, and then provide them with highly customized products. It services those customers -- about 50 million of them -- through high-tech call centers. On the surface, these skills don't look like a good match for old-style relationship banking. Nor, with earnings up 20% in 2005, did the company appear to need a dramatic makeover.

Yet there was Capital One co-founder and CEO Richard Fairbank agreeing to pay $14.6 billion for North Fork Bancorp Inc., the No. 3 bank in metro New York, just months after paying $5.3 billion for New Orleans-based Hibernia Corp., the biggest bank in Louisiana and a mover in fast-growth Texas. When the North Fork deal closes later this year, Capital One -- already the No. 4 credit card issuer -- will become a top-10 player in traditional commercial banking, with $140 billion in assets and $60 billion in deposits.

Why the rush? Beginning in the late 1990s, Fairbank began peering into his crystal ball to determine the financial services industry's "endgame," and how Capital One could get there first. "Most companies say, 'Here's where we are, and here's where we think we can get to,' " Fairbank explains. "We've said, 'This is where we think the market is going. How can we get to that endgame?' " Almost by definition, he adds, such an approach calls for "bigger, bolder, sooner moves ... so that when the music stops, we're in position to be competitive."

Of course, the thing about bigger, bolder, sooner moves is that they also tend to be harder to pull off. Fairbank, who wants to see growth in banking continue, has turned to North Fork president, chairman and CEO John A. Kanas to step in as president of the banking business, replacing Herb Boydstun, who will head operations in Louisiana and Texas. In Kanas, Fairbank says he's found a "soul mate" -- both were entrepreneurs who built their companies from scratch to big players. Kanas is expected to run banking with a free hand, and Fairbank says he's committed to retaining such traditional North Fork strengths as middle-market corporate lending. The approach is similar to the one Capital One took with other non-card acquisitions.

"They stay in the background, focus on big-picture strategy and their core competency ... and let people on the ground run the execution," one analyst says.

So what will the endgame look like? As Fairbank sees it, consumer asset classes are transforming into national businesses and consolidating rapidly. Already, 10 lenders control 90% of all outstanding U.S. credit card assets; home equity, auto and student loans aren't far behind. Capital One is already the No. 2 noncaptive auto lender, and it is expanding rapidly in such areas as home equity and small-business lending.

But having an asset generator without a strong funding source is a lot like "one-handed clapping," Fairbank says. In Capital One's case, regulators and investors have gotten jittery over its reliance on securitizations for funding, and its lack of revenue diversification, fearing that a big jolt to financial markets could imperil the business model. That's where the banks, with their stable, low-cost deposit bases, come in. Deposits can provide lenders with balance sheet ballast, new sources of revenue and improved margins. But attracting them is a "fiercely local" endeavor, requiring big branch networks. Building such capabilities from scratch would be literally impossible. So instead, Capital One went out and bought what it needed: banks with proven organic growth capabilities.

The upshot is a new sort of model where, according to Fairbank, "the winners will be those companies with strong brands and large customer bases who can best fund national assets with local deposits.

"Retail banking is one of the last great frontiers that's ripe for reinvention," Fairbank adds. That, combined with greater diversification -- by year's end, Capital One will get just 50% of its earnings from cards, while reaping 30% of its funding from deposits -- could make investors happy indeed.

A lot has to go right first, though. This is, after all, an integration checklist that includes cross-selling, rebranding and combining cultures. But give Fairbank this: He knows where he wants to go. - John Engen

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