Capital One Looks to Gain Ground in the Student Credit Card Market

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Capital One ( COF ) is one of the largest banks in the U.S. and competes with JP Morgan ( JPM ), Bank of America ( BAC ), Citigroup ( C ), American Express ( AXP ) and Discover Financial (DFS) in the credit card business. Capital One's card business earns revenue in the form of interest on outstanding credit card balances as well as fee-based charges.

Capital One is the 4th largest issuer of credit cards in the U.S. with around $65 billion in outstanding credit card loans. The company offers various cards for personal, small business and corporate use. Capital One's credit card business accounts for 36% of the our $61.26 price estimate for Capital One, which stands nearly 30% ahead of market price.

Discover Financial Dominates the Student Credit Card Market

Competitor Discover Financial has a dominant position in the growing student credit card market. It already offers various student credit cards with competitive rates and attractive rewards. Discover is actually the preferred lender for over 750 schools across the United States, and the recent acquisition of Citigroup's Student Loan Corp further solidifies Discover's position in this space.

Capital One Makes a Move

But Capital One is making moves that could put it in position to gain ground in the student credit card market. Capital One recently unveiled its new 'Journey Student Rewards Credit Card' for college students. The card offers 1% cash back on purchases and an additional 25% bonus on the cash earned each month for paying bills on time. A key draw for students is that the card comes with no annual fee and relatively low APR of 19.8%. The card also comes with a low initial credit limit and aims to familiarize cardholders with how credit works..

See our full analysis and $61.26 price estimate for Capital One

Growth in Purchase Volumes on the Horizon

Capital One saw a decline in credit card business during the recent financial crisis when the purchase volume on its credit cards dropped from $114 billion in 2008 to $102 billion in 2009. Fewer new accounts and an overall depressed retail sales environment were the culprits of the 10% decline.

However, the introduction of new student credit cards should help put Capital One on the road to recovery. With economic recovery gaining momentum in recent quarters, we anticipate a surge in purchase volumes. We estimate that Capital One's credit card purchase volume will grow steadily from about $107 billion in 2010 to $141 billion by the end of our forecast period.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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