Capital One knows how to swallow consumer bank operations. But its two recent acquisitions come with a much higher risk of regulatory indigestion.

The McLean, Va., bank spent almost $12 billion in cash and stock buying ING Direct and a $30 billion HSBC credit card portfolio this year, after a months-long fight for regulatory approval. It is currently in the process of merging both businesses into its main operations, and recently told customers that ING Direct and Capital One will officially become one company on Nov. 1. It expects to spend a combined $630 million on the two integrations.

Integrating a big purchase is complicated and expensive at the best of times. But this time that process has an added complication: the threat of heavy fines from watchful banking regulators. The new Consumer Financial Protection Bureau has started penalizing banks, including Capital One, for treating their customers carelessly. Capital One’s integration efforts will be a test case for banks bringing new consumer finance operations on board, industry members say.

“The stakes are higher after the CFPB entered into three separate consent orders with three separate issuers,” says Alan Kaplinsky, a partner at law firm Ballard Spahr.

Integrating new assets now means “you spend even more time and you devote more attention to dotting the i’s, crossing the t’s, checking things that maybe in prior years you didn’t focus on all that much,” Kaplinsky says. “You really have to scrub a portfolio to make sure that you’re not bringing on issues that you know the regulators may find problematic.”

Capital One is only too aware of the increased regulatory scrutiny. It was the first target of the CFPB, which this summer won a $210 million settlement from the bank over how it marketed credit card add-on products to customers. In July, a day after the CFPB settlement was announced, Chief Executive Richard Fairbank reiterated that “a key part of the due diligence” his bank had been conducting “was to review all of HSBC's practices” in the purchased credit card portfolio.

All big banks need to be reviewing their past practices, industry members say, but “there’s definitely a tremendous set of new challenges” associated with bringing new assets on board, according to one consultant who advises large banks on integrations. The CFPB and other banking regulators are particularly interested in fair lending issues and unfair, deceptive or abusive practices, according to the consultant, who asked not to be identified when discussing clients.

“One thing they [at Capital One] are going to have to do is a comprehensive review of the whole integration, to make sure they’ve got those issues well under control,” the consultant says. “Part of that is look back and, where necessary, remediation plans … and then going forward they’ve got to make sure that they’ve got the controls in place” to prevent any potential future violations.

While the CFPB has since moved on and won settlements from Discover Financial Services and American Express, industry members warn that Capital One’s two purchases could bring regulators’ attention squarely back to it.

The laundry list of complaints that the CFPB raised against American Express illustrates some of the many other problems regulators will be looking for throughout the industry: debt-collection practices, improper marketing, discrimination against new customers based on age and failure to report consumer disputes to the credit bureaus. The agency’s consumer complaint database is also likely to flush out any potential mistreatment of customers more quickly, observers say, drawing increased scrutiny to any legacy problems that banks integrating purchases are slow to address.

(Under the terms of another settlement this summer with the Department of Justice over Capital One’s treatment of military borrowers, the bank has already agreed to make additional payments if an independent audit of the HSBC or ING Direct accounts turns up similar violations.)

To be sure, Capital One by now knows largely what to look for. The onetime credit card specialist has been a serial acquirer in the past decade, snapping up Hibernia, North Fork and Chevy Chase in its quest to become a fuller-service, diversified retail bank. Its integrations of the branch-less ING Direct and the HSBC credit card portfolio are simpler processes in some ways than dealing with whole banks and branch networks. But the consumer-facing nature of those operations means that any slipups, or failures to catch past poor treatment of customers, could draw immediate scrutiny.

“Whatever due diligence you’ve done, there still may be something that pops up,” says one industry lawyer, who asked not to be identified when discussing clients. “The fact that the CFPB is there now and wasn’t there when they did their last deal for North Fork means that there’s a new set of issues that weren’t there before.”

Capital One lost the right to use the famous ING Direct branding by early next year, and most industry members contacted for this article said that retaining the online bank’s loyal and tech-savvy customers will be a big challenge. But from a regulatory perspective, lawyers and analysts say that the HSBC cards portfolio poses more of a risk of creating future issues for Capital One.

The HSBC customers are largely lower-income borrowers, whom analysts describe as slightly riskier than Capital One’s traditional customer base. Many banks and credit card companies have tried to wring more profit out of such customers by selling them add-on products, like the payment protection plans that got Capital One and Discover into trouble with the CFPB.

“The segment that that card book represents tends to be a somewhat lower-end segment,” says Lee Kyriacou, a partner at consultancy Novantas, adding that banks have “to figure out how to serve those segments effectively and do so in a way that can withstand higher scrutiny.”

The cards portfolio also includes cards that HSBC issued for various partners, including Saks Fifth Avenue and Best Buy, meaning that Capital One has to wrap its arms around all of those relationships and related vendor deals. In September, Fairbank told a Barclays conference that Capital One had acquired “259 service-level agreements that continue with HSBC that will take about a year and a half to run off as we continue to move one activity at a time over. So it's going incredibly well, but it's a heck of a lot of work.”

Capital One, which is due to report third-quarter results next week, referred to Fairbanks’ most recent public speeches and declined further comment for this article.

For banks and bank buyers, the biggest challenge is the unknown, Kaplinsky says.

“What’s more difficult is things that don’t violate a particular statute but you worry that the CFPB is going to find it unfair or abusive,” he says. “I get calls practically every day from clients who will describe something to me. They don’t ask me anymore whether or not something violates me the law, they ask me, “What will the CFPB think about it?”

And the scrutiny extends beyond the CFPB. All the bank regulatory agencies are “very, very focused on consumer issues these days. In connection with any transaction, they’re going to scrutinize it more carefully than they have in the past,” Kaplinsky says. “It’s very much in vogue these days to be shown, if you’re a regulator, to be paying attention to consumer issues.”

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