Two years after Juniper Financial Corp. opened its virtual doors as an Internet-based credit card company, the venture is looking an awful lot like First USA, the last company set up by its founders.
First USA, the Dallas credit card monoline founded by James W. Stewart 3d and Richard W. Vague, was an industry dynamo when Bank One Corp. bought it and put them at the helm of what became its credit card subsidiary. But when high chargeoffs, bad loans, and complaints about late fees started hampering the performance not just of First USA but of Bank One as a whole, Mr. Vague and Mr. Stewart left.
They emerged a year later to form Wilmington, Del.-based Juniper. They hired a lot of their former management team from First USA and embarked on similar marketing tactics: a direct-mail blitz, cobranding partnerships. Then, in another deja vu, they were purchased by Canadian Imperial Bank of Commerce.
There, said Mr. Stewart in a recent interview, the similarities end. He said that Juniper's already seasoned managers have learned yet a few more lessons that they are applying at their current venture.
Most notably, the team that pioneered the 0% APR balance transfer now disparages the tactic.
The card industry's reliance on free balance transfers as a customer acquisition tool is "at a ridiculous level," Mr. Stewart said. "The industry has decided that consumers should finance all their balances at 0%. We're staying away from that."
He added, "It looks great for the first six months - the balances soar real high - but then, like clockwork, as soon as that 0% goes to 9.9% or whatever it is, the people head off to the next 0%. It's a money-losing strategy, and I think the industry will wake up to that in the next 12 months."
Juniper does offer balance transfers as low as 3.9%, plus 0% financing on some purchases for a short time. It also pursues a strategy of "organic growth" through mail solicitations, Mr. Stewart said. Juniper has 450,000 cardholders and $750 million of receivables.
"We'd rather compete with frequent-flier miles" than on interest rates, Mr. Stewart said. "People would rather have something they could keep … than swap around for introductory rates."
One other difference between Juniper and First USA may be the relationship to the parent bank. Both Mr. Stewart and Canadian Imperial characterized its relationship to Juniper as that of a primary investor.
The bank maintains a Visa-issuing card division separate from Juniper, while First USA was integrated with Bank One's existing card business and became its primary card subsidiary. And though Mr. Vague and Mr. Stewart are not involved in the management of Canadian Imperial, they had been rising stars in the retail/Internet banking at Bank One.
The Toronto bank bought its majority stake in Juniper in September of last year and owns 56%. Mr. Stewart said it also has a majority on the board of directors, including the chairman.
Juniper's return to what looks like the First USA model is a migration away from its original mission, which was to use the credit card to acquire customers for an online bank and to cross-sell a variety of products through the card relationship.
Early on, Juniper partnered with United Parcel Service Inc.'s Mail Boxes Etc. to provide a way for customers to fund deposits, but it gave up on that idea when lack of a physical presence proved too difficult to overcome.
Juniper has become a card monoline, just as First USA once was.
Canadian Imperial does not break out financials for Juniper in its financial reporting, so it is difficult to get a handle on the operation's performance. But one seed investor that has filed a lawsuit against Juniper says there is more than meets the eye.
Benchmark Capital is a Silicon Valley venture fund that invested $20 million in the start-up in 2000 and an additional $5 million in a second round of financing, and that tried unsuccessfully in July to prevent a third, $50 million round by the Canadian bank. A Delaware chancery court judge denied Benchmark Capital's request for a preliminary injunction against the bank, which has invested about $200 million, according to industry sources.
Bill Gurley, general partner at Benchmark Capital, said it thinks Juniper and the bank treated it unfairly in a number of ways. Among other things, he said, "CIBC promised management additional incentives, engaged in corporate loan forgiveness for officers, artificially adjusted its ownership in Juniper to enhance its own earnings, and ignored a failed proxy attempt to the minority shareholders."
In an e-mail Wednesday, Juniper called Mr. Gurley's remarks "a rehash of allegations made by Benchmark in litigation it commenced in an unsuccessful attempt to block a legitimate and necessary funding transaction.
"Benchmark was fully aware of the terms of the transaction and never challenged the valuation upon which CIBC made its investment in Juniper," the company said. "Rather, they were trying to assert a right they did not have, not for economic reasons but, as they admitted in court, to obtain leverage over Juniper.
"After hearing Benchmark's argument the court sided with Juniper and allowed the transaction to go forward."
Observers say that despite the dispute with Benchmark, Juniper is a good-looking franchise but may or may not be able to build the scale it needs to survive in the card business. The company has cut a lot of attractive partnership deals, they say, but those may not be enough to build a profitable business,
"They are burning cash right now, but there are reasons to be confident this will ultimately be a successful business," said Christopher E. Musto, a vice president of research at Gomez Inc., a Waltham, Mass., company that rates online financial companies. "Really the question is, will [Canadian Imperial] have patience long enough for Juniper to show bottom-line results?"
Juniper currently ranks fifth on Gomez's Internet Credit Card Scorecard. "Juniper has historically done well," Mr. Musto said.
Chris Theoharides, the president of a card industry consulting firm in Jericho, N.Y., called Advantage Consulting Group, said that Juniper's cobranding strategy has been "pretty successful to date."
"The challenge it will face," he said, "is building and maintaining the infrastructure to successfully deliver against their program goals and objectives. The more programs you put out, the more arms and legs you'll need."
Mr. Theoharides said it can take years before a company "turns the corner on these deals and turns a profit on these alliances."
Juniper's most recent cobrand deal is with Midwest Express Airlines, whose portfolio it acquired in August from U.S. Bancorp. This followed a deal in May with Orbitz, the online travel site. Other partners include Laura Ashley and the National Arbor Day Foundation.
The company also recently hired three executives who had worked at First USA: Kevin Murphy as director of collections, Phillip Weaver as director of strategic planning, and Kathy Kreusch-Cobb as director of human resources.
