NextCard Grows Up: CEO Welcomes Rivals to Web, Sees 4Q Profit

NextCard Inc. has been the darling of the analysts, who hail it as a rare example of a reliable Internet start-up and an innovative credit card firm. Now all the chief executive officer wants is for NextCard to become, in his words, “a real company.”

By that, the CEO, John V. Hashman, means that he wants to “take our seat at the table” of companies that make money.

“We’ve built a lot of capabilities. We’ve built a lot of infrastructure. We’ve brought the customer acceptance to a point where we feel good about the accounts we’re getting. Now we need to be profitable. Those things that would delay profitability will have to wait.”

The San Francisco company is “on track” to turn a profit in the fourth quarter, “economy willing,” Mr. Hashman said in an interview last week.

NextCard burst on to the scene in 1997 with a Visa card available only through the Internet that guaranteed 30-second decision times on applications.

Various innovations followed: an online concierge program, a feature that lets people put any picture on their credit card, a ubiquitous banner ad campaign. NextCard was hailed as a marketing leader, and several established card firms began copying it.

Though the bigger issuers have largely caught up, NextCard is not worried about a competitive squeeze.

In Mr. Hashman’s view, the larger card banks are doing his company a service. “They’re getting customers used to using Internet technology, getting them comfortable that it is actually more convenient,” he said. “In increasing the pool of people and the growth, the demand for the [NextCard] product is higher today than it ever has been in its history. The pie is getting bigger.”

He cites research from Gomez Advisors, the Internet consulting firm in Waltham, Mass., that says six million people have received a card online within the last two years, and seven million people will get a new card online within the next six months.

NextCard said in June that it has more than a million customers and $1.8 billion of receivables. More than 500,000 people apply for the card each month, and the company expects to top $2 billion of card loans by yearend.

The company was founded by Jeremy Lent, a former chief financial officer at Providian Financial Corp. But Mr. Lent’s wife fell ill soon after the company started up, and last year he handed the CEO title to Mr. Hashman, a former colleague at Providian.

Mr. Hashman said the 11 years he spent at Providian taught him a lot about the card business, but when Mr. Lent called in 1997 to recruit him as NextCard’s chief financial officer, he knew little about the Internet.

“It was Jeremy’s vision that the Internet was the direct marketing channel, and that it would become important in credit cards,” Mr. Hashman said. “At that point First USA was doing a little bit on the Internet, but I don’t think anyone had an idea of how important it would become in such a short period of time.”

When the Internet’s reputation started rising, so did NextCard’s.

“There was a very short window of time — which was probably known as 1999 — when [the Internet] was going to be everything,” he said. “It was going to be all things to all people. All business models would succeed. It would fundamentally improve everything. We’re now going into a realization that it does improve certain models, and one of the things that it does improve is the credit card lending model. People will respond to banner ads, to certain direct-response mediums, in a direct marketing channel.”

NextCard started out offering a startling 0% teaser rate for purchases and balance transfers. This was guaranteed to be a big draw, but skeptics wondered whether the company would attract anyone other than rate-surfers.

As it turned out, the instant online approval system — the first for a Visa card in the United States — and the online balance transfer features were “a wonderful positive, really, from the first day,” he said. “We were taking things that telemarketers were doing in the credit card industry, and allowing the customer to interact directly with the institution through this smart channel.”

The 0% teaser is a thing of the past, replaced by one that he described as “as low as 2.9%.”

Rate-setting is a particularly tricky business in the online world, he said. “You have to make the rate attractive at the time the customer comes to your site. Most people, when they get to the moment of purchasing a new card, they’re paying 16%, 17%, and we come in and say, ‘Look, as low as 2.9%, or as low as 9.9%. Why don’t you apply? We’ll give you an answer in 30 seconds. We’re not going to make you fill out a form and wait four weeks.’ ”

The type of people NextCard wants to attract — people with three or four other credit cards and perhaps a dozen years of credit history — respond well to such offers, Mr. Hashman said. Actually, he said, the approval time is more like eight seconds.

“From the moment they are approved, then they go through a series of steps,” he said. “You let them choose their offer. You let them do the balance transfer online. Some of them, if they qualify, get the account number immediately. You allow them to download them into a wallet.”

Next, he said, “You get them to design the look of their card. You give them a customer service site that’s very good, and you contact them through e-mail.”

Picture cards, which let customers select from hundreds of available designs or put a picture from their own album on the card face, have been a great loyalty feature. Only 30% to 40% of customers take them, but the ones who do keep higher balances, said Mr. Hashman, whose NextCard Visa features a snapshot of his two sons.

“You can say, ‘Oh, a picture on a card. That’s kind of gee-whiz technology, but does anybody really care about that?’ ” he said. “But end to end, we’ve built a differentiated experience, and for the first time, really, since MBNA introduced affinity cards.”

NextCard says its customers make five times more purchases online than typical U.S. customers, who make about 2% of their purchases online. “Let’s assume ours is in the range of 10%,” Mr. Hashman said. “So 90% of the purchases still occur offline. We have to be mindful of that. Our goal is that if you have a card you’re using for online purchases, use our card.”

To coax people to put their card number on the Internet, NextCard introduced a “safe shopping guarantee.” In truth, Mr. Hashman admits, it isn’t much different from the guarantees Visa and MasterCard offer, but most consumers do not notice.

“We just said, ‘Look, 100% guarantee,’ ” he said. “Now it’s funny, because if you look at any other major card issuer, they all have safe-shopping guarantees. It’s not like we invented it and they stole it, but we certainly understood that it was a concern in customers’ minds.”

NextCard only approves 15% to 20% of the people who apply for its prime card offering. “This isn’t about growing as fast as you can,” Mr. Hashman explained. “You have to grow at a healthy rate, but you don’t want to get ahead of yourself. So we know we’re turning down 80%, 85% of the people, and we don’t like it, but you have to build your risk management capabilities.”

Last year NextCard introduced a secured card, which offers a $300 line of credit against a $300 deposit. Only 40,000 accounts are open and funded, but “we expect it to become a very meaningful contributor to the business in the next year or two,” he said.

To serve applicants with middling credit, NextCard last month announced an unorthodox partnership with CompuCredit Corp. of Atlanta, a subprime card monoline that will underwrite loans to unsuccessful NextCard applicants.

“Those people who apply for a NextCard whom we say ‘no’ to will get a NextCard Aspire card,” Mr. Hashman said. “We’ll get paid a fee by CompuCredit for originating the account, but CompuCredit manages the account relationship. It’s CompuCredit’s terms and conditions. CompuCredit has shown an ability to price those people appropriately and manage the risk appropriately, so it’s a way for us to monetize those leads.”

Though American Express Co. and other card companies have been touting smart cards for use on the Internet, NextCard has no immediate plans for one.

“I think our customer base has a certain level of requirements about the actual functionality of a card,” he said. “I don’t want to introduce a smart card that doesn’t do anything, and no one has been able to convince me today that those smart cards do anything of value to a customer.”

That situation may soon change, Mr. Hashman said. “I’ve talked with Visa and MasterCard, and they will put the railroad tracks in place that allow some meaningful things to happen. When they build those tracks, I’ll put the fastest car on the tracks.”

Analysts continue to smile on NextCard’s strategy. A June report by Goldman Sachs Group Inc. called NextCard an “increasingly attractive risk-reward tradeoff,” and predicted the firm would break even by yearend and earn $1 per share next year.

Goldman also said that NextCard “appears to be cost-effectively tapping into the burgeoning population of Internet users through its three billion monthly banner ads, 85,000-plus affiliates network, and finely honed feedback loops aligning marketing spend with actual financial returns.”

The banner ad barrage has been another helpful experiment, Mr. Hashman said. “We’re constantly testing new positionings, new creative banners. We test hundreds and hundreds of different banners in any particular quarter. We have a little credit card that limbos under a little pole that says, ‘Limbo over to a lower rate.’ We do different colors based on the different times of year. One of the things we tested were some pop-ups that say, ‘Are you paying too much on your other credit cards?’ ”

The company tracks “every dimension over time on every single banner,” he said. “If people don’t like it, people won’t click on it, and we will stop doing it.”

NextCard’s “vintage” business plan, written in 1996, described a company that looks very much like NextCard today, Mr. Hashman said. Since then, one similar company has sprung up — Juniper Financial Corp., which is run by veterans of Bank One Corp.’s First USA. While Juniper emphasizes credit cards, it also offers a range of banking products, and it is being acquired by Canadian Imperial Bank of Commerce.

Mr. Hashman said NextCard has proven that an online credit card company is more appealing than an online bank. “Credit cards work in direct marketing. When was the last time you got a direct mail package that says, ‘Please send us $1,500 for a checking account?’ It just doesn’t work.”