A Look Back at the
Rise-and-Fall of an
Early Dot.com Lender
Timeline of Events
Company Overview
--
Launches NextCard Visa (Heritage Bank of
Commerce is the credit card lender)
1998
--
Introduces Rewards and Platinum credit card
products
1999
--
2001
--
Launches Priceline.com
co-branded credit card
Launches Amazon.com co-branded credit card
Fed declares NextCard undercapitalized;
NextCard announces it was improperly
categorizing credit losses as fraud
and held for sale
Company put up for sale after it could not
establish $140MM in additional loan loss
reserves required by the Fed
JUL.
2002 - -
Completes acquisition of Textron National
Bank; announces intent to name NextBank, N.A.
MAR. FEB.
2000 - -
DEC. SEP.
1997
JUL. MAY JAN.
Company founded as “Internet Access Financial
Corporation”
OCT.
--
NOV.
1996
ƒƒ Founded: 1996
ƒƒ Founder: Jeremy Lent (former CFO of Providian Financial
Corporation)
ƒƒ Headquarters: San Francisco, California
ƒƒ Business Model: Credit card lender offering instant credit
online (marketed as “first true Internet Visa”)
ƒƒ Initial / Planned Differentiators: (1) cost of acquisition,
(2) reach of internet user base
Product Offering
Receives bank charter from OCC
(i.e., NextBank)
ƒƒ Base, Rewards and Platinum credit card product
-- Pricing: Applicants given customized offers based on risk
profile
-- Balance Transfer: Customers offered automated balance
transfer at 2.90% APR upon approval
-- NextCard Rewards: Points redeemable for variety of
goods and services, discounts at retailers and miles
accepted at major airlines
ƒƒ Also offered early generation co-branded products with
partners such as Amazon.com and Priceline.com
Lent steps down as CEO; remains Chairman
and Chief Strategy Officer
The Rise
ƒƒ Company was founded on the premise of two primary
components of its business model:
1. Low cost of acquisition via direct marketing strategies
2. Interactive, customizable credit offering and instant credit
decision using proprietary algorithms over the internet
ƒƒ 1.7 million credit card applications were submitted for the
NextCard in the 15-months after launch - NextCard would
become the nation’s largest Internet credit card lender (~$2B
in loans by 2001)
Fed forces the company to cease operations
Lays off 90% of work force; stock delisted
from NASDAQ exchange
The Fall
ƒƒ 200k accounts are sold to Merrick Bank for
$126 million
ƒƒ FDIC deactivates remaining 800k credit
card accounts after failing to find a buyer
ƒƒ The company experienced higher than reported credit losses
(disclosed ~8% in 2001)1 and its cost per new account ranged
from ~$95-$100 in 2000
ƒƒ Regulators concluded that NextCard (1) misclassified
seriously delinquent loans that should have been written-off
as “loans held for sale” and “fraud losses” and (2) substantially
changed its reserve methodology to avoid P&L impact
ƒƒ NextCard was declared undercapitalized by the Fed in Oct.
2001 and subsequently ceased operations in 2002 after it
was unable to establish the additional $140MM in reserves
mandated by the OCC under proper accounting practices
Growth
Managed Credit Card Receivables ($MM)
(Period End Balances as of March 31st)
$1,595
$2
$96
1998
1999
$639
2000
2001
NextCard had 1.1 million accounts by the end of 2001
For more information please contact: John Grund, Partner, john.grund@firstannapolis.com
U.S. Headquarters
1
Sources: Wall Street Journal, FORTUNE Magazine, cardtrak.com, San Francisco
Business Times, CNET, SFGate, NY Times, LA Times, SEC filings.
David Woynerowski, Partner, david.woynerowski@firstannapolis.com
European Office
Three Park Place, Suite 200 l Annapolis, Maryland 21401
P: 410.855.8500 l info@firstannapolis.com
NextCard: A Look Back at the Rise-and-Fall of an Early Dot.com Lender
Actual charge-off rate using the accounting methods deemed acceptable by the
OCC. NextCard would have reported ~6% for the period under its own improper
classification methods according to SEC transcripts.
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