Case Study: Next Card

Case Study: Next Card

Introduction:

NextCard was founded by Jeremy and Molly Lent in 1996. It was an innovative, internet oriented credit card issuer. The credit card issuing bank was known as NextBank and was fully owned by NextCard Inc. NextCard provided fastest credit card approval. They collaborated with companies like Amazon and provided its customers with promotional offers

Competing for customers:

There is stiff competition among credit card issuing companies for customer acquisition and retaining. Companies occasionally come up with promotional offers, incentives and rewards to attract customers. Here are a few attractions credit card companies offer.

Rebate: Rebate on certain products purchased using company’s credit card
Frequent flyer miles: Customers can collect frequent flyer points while flying through certain airlines using credit card and later those accumulated points can be used to get discounted or free air traveling.

Extended warranties: Credit card companies tie up with certain other companies and offer its customers extended warranty on those products provided that the customers buy those products using credit card.

Rewards: Credit card companies affiliate with some other companies and offer its customers reward points which could be spent while shopping with affiliate.

Cash Back: Credit card companies offer 1 to 2% cash back on the amount spent using credit card. Companies use fees earned from merchants for this cash back.

Annual Percentage Rate: Credit card companies offer 0% APR for first several months to attract new customers. Companies also compete by offering low APR later to retain their customers.

Instant Loans: Instant loan approval to the customers who have good credit history.

These offers reflect the fact that the customers have to spend money to save money and that is how credit card companies retain their customers and earn profit.

Analysis: NextCard

Strengths:

NextCard was innovative; it provided online applications and approval to the customers signing up. It had a consistent mission of providing internet oriented credit card service.

NextCard offered fastest credit card approval, less than two minutes to get balance on credit card and to transfer of balances from other accounts.

NextCard offered varying Annual Percentage Rate for different customers according to their credit profile. This way, customers with good credit profile were benefited and retained by NextCard.

NextCard was technology enabled and used it to track customers from the websites on which NextCard advertised. Ongoing assessment of the sites on which it advertised, NextCard could decrease its customer acquisition cost by 70% in 1999.


NextCard had earned recognition by its technological approach and was awarded with No. 1 internet credit card by Gomez

NextCard received approval from premiere site like Amazon.com and offered the Amazon credit card which helped NextCard in generating trust among its customers.

NextCard’s low charge off rate and Amazon deal kept it on a good financial position and its stock price went over 50%.

There was an increase of 22.1% in U.S. ecommerce market which was in favor of the company.

Reasons for failure:

NextCard was approving almost one in every four credit card applications online with low APR offering which was having higher level of risk involved than traditional channels.

Because of ease of application on internet, so many people with bad credit history took advantage of getting credit card from NextCard, many of them were potential frauds.

Economy started weakening in year 2000 which resulted in reduced demand of consumer credit.

NextCard had to tighten its criteria of eligibility to limit new account origination because of being announced undercapitalized by regulatory board and at the same time company pretended that the losses were related to fraudulent account origination and not credit or loan losses.

NextCard ran out of capital relative to the credit losses incurred in third quarter statement of 2001.

Company tried to find out some entity with large capital to sale the business but it couldn’t succeed.

A class action lawsuit was filed against NextCard for violating GAAP requirements by publishing materially false and misleading financial statements in year 1998, 2000 and 2001 showing credit and loan losses as fraud losses.

Aggregation of credit and law problems led NextCard to decline of 84 percent in its stock price.

Recommendations:

Though NextCard came up with innovative and technology enabled services, it should also have tightened its criteria of approving credit card applications. Though it could attract large number of credit card holders through its internet channel, not all of them were loyal and some of them never benefited the company.

While approving customers and defining their credit limit, company should have mapped its capital with potential credit consumers which would have helped the company in predicting consumer balances and it wouldn’t have become under capitalized.

Company should have been honest in its financial statements. Since 1998 the company knew that it is becoming under capitalized. It had enough time to sale the firm or gaining some capital by selling stocks, but it kept practicing the same way and finally when the fact opened up it was too late for NextCard to gain some capital.