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The Value in Payments at Capital One

Capital One Financial (NYSE: COF) can be a hard to company understand. After all is it a bank, a credit card provider, a fintech organization or something else?

The best way to think of Capital One is that it is a payment processor. What Capital One does is to provide a number of different payment solutions. These solutions include bank accounts, credit cards, payment apps and debit cards.

This business is highly diversified and it is also very profitable. Capital One reported a profit margin of 13.07% on December 31, 2017. It also generates a lot of cash Capital One reported a free cash flow of $3.109 billion; and a net income of $3.751 billion, on the same day.

More importantly the business is growing Capital One’s revenues expanded by $2.47 billion in 2016. The revenues rose from $23.41 billion in December 2015 to $25.5 billion a year later. The company’s assets also grew by $22.98 billion in 2016, rising from $334.05 billion to $357.03 billion.

 (AP Photo/Mark Lennihan, File)

Capital One’s Growing Cash Cow

If you love cash you will love all this growth because of the incredible amount of float it generates. Capital One reported $9.976 billion in cash and short-term investments, and $10.98 billion in cash from operations on December 31.

That cash proves Capital One’s profit margin is for real and its growth is actually leading to more cash flow. It also demonstrates that Capital One has a great business model.

The combination of basic banking services such as checking, savings and investment accounts with credit cards is paying off. Capital One may have found the perfect payment industry model and there’s a lot of room for growth of that business model.

For example there are all the customers who are unhappy with American Express (NYSE: AXP) and with Citi Bank’s various products. Exclusive branded cards are another opportunity for Capital One; it took over Costco’s credit business in Canada from Amex.

 The Bright Future for Online Banking

Beyond that there is the growing demand for online banking combined with good customer service, something that Capital One specializes in. Its 360 offers easy to access savings and checking accounts a person can access from anywhere.

People walk by a Branch of the Capital One bank located on Fifth Avenue in Manhattan on March 15. (Benjamin Chasteen/The Epcoh Times)

That appeals to younger people that don’t go near brick and mortar banks and those dissatisfied with the big monster banks. One product that’s sure to drive more business to online banks is digital wallets such as Android Pay which make them easy to access from phones.

Apple and Android Pay in particular seem to be made to drive more business to Capital One. Its customers can access both their bank accounts and their credit card balances through those solutions.

One very appealing feature of Capital One is the ability to deposit checks instantly online without going to a brick and mortar bank. All people need to do is take pictures of the checks to deposit them which makes life far easier.

An Open Sourced Payment Solution

All this shows us what Capital One really is a provider of open-sourced payment solutions. Capital One 360 and the credit cards are open sourced payment solutions that can be accessed with open sourced technology such as Apple Pay.

That drives growth because it makes it easy for people to take advantage. More importantly it allows products such as PayPal, Apple Pay and Android Pay to drive more business to Capital One.

Beyond that it makes Capital One an ideal platform for the adoption of new technologies. That will ensure a high level of growth for years to come.

An Open Sourced Payment Solution that Pays a Dividend

More importantly Capital One is an open-sourced payment solution that pays a dividend. Its investors received a payout of 40¢ on February 9. They also took home a return on equity of 7.85% on December 31, 2016.

That makes Capital One an almost perfect investment for those who want to cash in on the growing fin tech revolution and the massive expansion of payment processing. Best of all it is extremely rich in cash and offers a high level of revenue growth.