NextCard
| Company type | Public |
|---|---|
| Industry | Financial services, Credit cards |
| Predecessor | Internet Access Financial Corporation |
| Founded | 1996 |
| Founder | Jeremy Lent, Molly Lent |
| Defunct | 2003 |
| Fate | Liquidated; FDIC assumed control in 2002 |
| Successor | None |
| Headquarters | San Francisco, California , United States |
Area served | United States |
Key people | Jeremy Lent (Founder) |
| Products | Credit cards (MasterCard and Visa), Secured credit cards |
| Parent | None |
NextCard, Inc. was an innovative credit card issuer in the United States, recognized as one of the earliest companies to provide instant online credit approval. Its main headquarters were located in San Francisco, California, with additional offices situated in Livermore, California and Phoenix, Arizona. The issuing bank, NextBank, was a wholly owned subsidiary of NextCard.
Established in 1996 by Jeremy and Molly Lent under the name Internet Access Financial Corporation (which was rebranded as NextCard in 1997), the company arose during the Internet boom of the late 1990s. Jeremy Lent, who previously served as CFO at Providian Financial Corporation, applied his expertise in direct mail marketing to focus on affluent internet users. This approach aimed to reduce both customer acquisition expenses and bad debt losses compared to traditional credit card issuers.
Operations
The Lents based their business model on two primary premises:
- The Internet could significantly reduce customer acquisition costs relative to conventional "brick-and-mortar" competitors.
- Online users generally possessed higher income levels and better creditworthiness, leading to fewer bad debt write-offs.
Guided by these beliefs, NextCard provided credit cards with interest rates below those offered by rivals.
NextCard issued both MasterCard and Visa cards under its own brand and through co-branded agreements with MyPoints.com, PlanetOut.com, and Amazon.com. It also marketed secured credit card products. As a purely online issuer, NextCard invested heavily in digital marketing; its website consistently ranked among the top 50 financial sites according to Money magazine and attracted substantial traffic within the financial services industry.
After setting aggressive expansion goals, NextCard went public in 1999. However, the bursting of the Internet bubble soon after drastically limited its access to capital markets. Furthermore, Jeremy Lent’s assumptions proved inaccurate: customer acquisition costs were higher than anticipated due to expensive and inefficient online advertising campaigns, while many customers exhibited poor credit quality, often using NextCard as a "lender of last resort."
Downfall
NextCard failed to adequately account for credit losses by not "establishing sufficient allowances each period for expected bad debts." The Comptroller of the Currency (OCC) conducted a review of its accounting practices and compelled NextCard to "substantially increase its allowance for bad debts." The company blamed elevated bad debt levels on fraudulent activities carried out by hackers.
On October 31, 2001, regulatory authorities declared NextCard under-capitalized and initiated investigations by the Federal Deposit Insurance Corporation (FDIC) and the OCC. It was revealed that NextCard had been misclassifying credit losses as "fraud losses," thereby concealing its deteriorating credit risk profile. After NextCard’s failure, the Amazon.com Visa accounts it issued were transferred to Chase.
A class-action lawsuit was filed by investors accusing management of engaging in insider trading and hiding the true financial condition of the company. Moreover, external auditors from Ernst & Young altered historical audit documentation and timestamps to evade responsibility for issuing unqualified audit opinions. Auditor Oliver Flanagan preserved critical evidence and reported these actions to federal authorities. Lead auditor Thomas Trauger received a sentence of one year imprisonment followed by two years of supervised release.
NextCard’s stock price collapsed from $53.12 down to $0.14 per share, leading the FDIC to assume control in February 2002. Efforts to sell the business—including negotiations with CompuCredit—were unsuccessful. By July 2002, most NextCard credit card accounts had been closed.
A portfolio comprising cards issued to customers with poor credit was sold to Merrick Bank in Utah, which subsequently increased APRs and fees. In 2003, NextCard was liquidated with liabilities close to $470 million against roughly $20 million in assets. Fraud and insider trading charges were brought against five former executives.
By 2005, fraud allegations against Jeremy Lent were dismissed by the U.S. Securities and Exchange Commission, and regulatory as well as shareholder lawsuits against other former executives were resolved by 2006.