NextCard
Encyclopedia
NextCard, Inc. was a United States company that was one of the first issuers of credit cards online, and the first to offer instant online approval. Its headquarters were located in San Francisco, California
and maintained offices in Livermore, California
and at 44th St. and Van Buren in Phoenix, Arizona
. The issuing bank was known as NextBank and was fully owned by NextCard, Inc.
NextCard, Inc. was started during the Internet boom of the late 1990s. Jeremy and Molly Lent, a married couple, founded the company in 1996 as Internet Access Financial Corporation, later changing the name to NextCard in 1997. During the early 1990s, Jeremy Lent had served as CFO for Providian Financial Corporation which had relied heavily on direct mail marketing methods "to identify and recruit customers who made extensive use of credit cards". Convinced that he could adapt this marketing strategy for the Internet, Lent left Providian to form NextCard.
Because of these assumptions, NextCard, Inc. offered credit cards at interest rate
s lower than its competitors'.
NextCard issued MasterCard
and Visa
cards under its own brand, and co-branded cards with MyPoints.com, PlanetOut.com
, and Amazon.com
. NextCard also issued secured credit cards. NextCard was a major online advertiser at the time, as they only accepted applications online. Its website was "regularly named one of the top 50 financial websites by Money
magazine and by 2000 attracted more online 'hits' than any other website in the financial services industry".
The company set aggressive growth targets and went public in 1999. Following its initial public offering
, the internet 'bubble' in the stock market had burst. This "effectively shut off the access of NextCard and thousands of other struggling Internet companies to the debt and equity markets" . Jeremy Lent's assumptions also proved to have flaws; the acquisition cost per-customer was higher than expected because Internet users tended to ignore NextCard's online ads (which were also very costly), and the customers were people with little creditworthiness looking for a "lender of last resort
".
The Comptroller of the Currency (OCC) reviewed the company's accounting records and operating policies and procedures and forced NextCard to "significantly increase its allowance for bad debts". In response to this, NextCard stated that its high bad debts were due to fraudulent schemes perpetrated by hackers and the like.
On October 31, 2001 it was announced that NextCard was under-capitalized and was then investigated by the Federal Deposit Insurance Corporation
(FDIC) and the Office of the Comptroller of the Currency
. The reason, as stated to employees, was that the company had been categorizing as "fraud losses" what should have been categorized as "credit losses"... meaning the company was trying to categorize as fraud some of the money lost due to issuing cards to people with very poor credit. The Amazon.com
Visa issued by NextCard was subsequently issued by BankOne (now Chase
) following NextCard's demise.
NextCard investors soon filed a class-action lawsuit with charges that the management had engaged in insider trading
and hidden the financial status of the company. To add to the controversy, NextCard's external auditors, Ernst & Young
, edited past-audit's work-papers and electronic timestamps in order to rid themselves of any liability for giving NextCard a clean audit opinion in the previous year.
One of the auditors, Oliver Flanagan, saved a computer disk containing evidence of the edits and turned it in to the federal authorities. The lead auditor of NextCard from Ernst & Young, Thomas Trauger, would be sentenced to one year in prison and two years of "supervised release."
NextCard's stock price fell from its high of $53.12 to $.14 per share, and in February 2002 the company was taken over by the FDIC. The bank tried to find a buyer and was under negotiations with CompuCredit for a while, but in the end no buyer was found. In early July 2002, most NextCard credit card
accounts were closed.
A small portfolio of credit cards that were issued to those with low credit scores was sold to Merrick Bank of Utah, who then increased the annual percentage rate
s (APRs) and fees. In 2003, NextCard was liquidated with liabilities of nearly $470 million and realizable assets of approximately $20 million. Fraud charges and insider trading charges were filed against five former NextCard executives.
In 2005 the U.S. Securities and Exchange Commission dismissed its fraud charges against Jeremy Lent and by 2006 the regulatory and shareholder suits against the former NextCard executives were settled.
San Francisco, California
San Francisco , officially the City and County of San Francisco, is the financial, cultural, and transportation center of the San Francisco Bay Area, a region of 7.15 million people which includes San Jose and Oakland...
and maintained offices in Livermore, California
Livermore, California
Livermore is a city in Alameda County. The population as of 2010 was 80,968. Livermore is located on the eastern edge of California's San Francisco Bay Area....
and at 44th St. and Van Buren in Phoenix, Arizona
Phoenix, Arizona
Phoenix is the capital, and largest city, of the U.S. state of Arizona, as well as the sixth most populated city in the United States. Phoenix is home to 1,445,632 people according to the official 2010 U.S. Census Bureau data...
. The issuing bank was known as NextBank and was fully owned by NextCard, Inc.
NextCard, Inc. was started during the Internet boom of the late 1990s. Jeremy and Molly Lent, a married couple, founded the company in 1996 as Internet Access Financial Corporation, later changing the name to NextCard in 1997. During the early 1990s, Jeremy Lent had served as CFO for Providian Financial Corporation which had relied heavily on direct mail marketing methods "to identify and recruit customers who made extensive use of credit cards". Convinced that he could adapt this marketing strategy for the Internet, Lent left Providian to form NextCard.
Operations
The Lents' business plan was based on two assumptions:- Since a key metric in the credit card industry is acquisition cost of a new customer, he felt that he could "use the internet to undercut the average acquisition cost" of its "brick-and-mortar" competitors and
- He believed his company would have "significantly lower bad debt losses than conventional credit card issuers since marketing research had found that internet users were generally more affluent and, thus, better credit risks, than individuals drawn from the general population of consumers".
Because of these assumptions, NextCard, Inc. offered credit cards at interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s lower than its competitors'.
NextCard issued MasterCard
MasterCard
Mastercard Incorporated or MasterCard Worldwide is an American multinational financial services corporation with its headquarters in the MasterCard International Global Headquarters, Purchase, Harrison, New York, United States...
and Visa
VISA (credit card)
Visa Inc. is an American multinational financial services corporation headquartered on 595 Market Street, Financial District in San Francisco, California, United States, although much of the company's staff is based in Foster City, California. It facilitates electronic funds transfers throughout...
cards under its own brand, and co-branded cards with MyPoints.com, PlanetOut.com
PlanetOut Inc.
PlanetOut Inc. was a public media and entertainment company exclusively targeting the lesbian, gay, bisexual and transgender demographic...
, and Amazon.com
Amazon.com
Amazon.com, Inc. is a multinational electronic commerce company headquartered in Seattle, Washington, United States. It is the world's largest online retailer. Amazon has separate websites for the following countries: United States, Canada, United Kingdom, Germany, France, Italy, Spain, Japan, and...
. NextCard also issued secured credit cards. NextCard was a major online advertiser at the time, as they only accepted applications online. Its website was "regularly named one of the top 50 financial websites by Money
Money (magazine)
Money is published by Time Inc. Its first issue was published in October 1972. Its articles cover the gamut of personal finance topics ranging from investing, saving, retirement and taxes to family finance issues like paying for college, credit, career and home improvement...
magazine and by 2000 attracted more online 'hits' than any other website in the financial services industry".
The company set aggressive growth targets and went public in 1999. Following its initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
, the internet 'bubble' in the stock market had burst. This "effectively shut off the access of NextCard and thousands of other struggling Internet companies to the debt and equity markets" . Jeremy Lent's assumptions also proved to have flaws; the acquisition cost per-customer was higher than expected because Internet users tended to ignore NextCard's online ads (which were also very costly), and the customers were people with little creditworthiness looking for a "lender of last resort
Lender of last resort
A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
".
Downfall
To understate its credit losses NextCard refused to "provide sufficient allowances each period for expected bad debts" .The Comptroller of the Currency (OCC) reviewed the company's accounting records and operating policies and procedures and forced NextCard to "significantly increase its allowance for bad debts". In response to this, NextCard stated that its high bad debts were due to fraudulent schemes perpetrated by hackers and the like.
On October 31, 2001 it was announced that NextCard was under-capitalized and was then investigated by the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) and the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
. The reason, as stated to employees, was that the company had been categorizing as "fraud losses" what should have been categorized as "credit losses"... meaning the company was trying to categorize as fraud some of the money lost due to issuing cards to people with very poor credit. The Amazon.com
Amazon.com
Amazon.com, Inc. is a multinational electronic commerce company headquartered in Seattle, Washington, United States. It is the world's largest online retailer. Amazon has separate websites for the following countries: United States, Canada, United Kingdom, Germany, France, Italy, Spain, Japan, and...
Visa issued by NextCard was subsequently issued by BankOne (now Chase
Chase Manhattan Bank
JPMorgan Chase Bank, N.A., doing business as Chase, is a national bank that constitutes the consumer and commercial banking subsidiary of financial services firm JPMorgan Chase. The bank was known as Chase Manhattan Bank until it merged with J.P. Morgan & Co. in 2000...
) following NextCard's demise.
NextCard investors soon filed a class-action lawsuit with charges that the management had engaged in insider trading
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
and hidden the financial status of the company. To add to the controversy, NextCard's external auditors, Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
, edited past-audit's work-papers and electronic timestamps in order to rid themselves of any liability for giving NextCard a clean audit opinion in the previous year.
One of the auditors, Oliver Flanagan, saved a computer disk containing evidence of the edits and turned it in to the federal authorities. The lead auditor of NextCard from Ernst & Young, Thomas Trauger, would be sentenced to one year in prison and two years of "supervised release."
NextCard's stock price fell from its high of $53.12 to $.14 per share, and in February 2002 the company was taken over by the FDIC. The bank tried to find a buyer and was under negotiations with CompuCredit for a while, but in the end no buyer was found. In early July 2002, most NextCard credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
accounts were closed.
A small portfolio of credit cards that were issued to those with low credit scores was sold to Merrick Bank of Utah, who then increased the annual percentage rate
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
s (APRs) and fees. In 2003, NextCard was liquidated with liabilities of nearly $470 million and realizable assets of approximately $20 million. Fraud charges and insider trading charges were filed against five former NextCard executives.
In 2005 the U.S. Securities and Exchange Commission dismissed its fraud charges against Jeremy Lent and by 2006 the regulatory and shareholder suits against the former NextCard executives were settled.