NextCard Links Up With Amazon (News) November 10, 1999

NextCard Links Up With Amazon

By Brian Graney (TMF Panic)
November 10, 1999

Online credit card issuer NextCard (Nasdaq: NXCD) jumped into the investing spotlight today after announcing a five-year exclusive deal to offer co-branded credit cards in conjunction with (Nasdaq: AMZN).

Investors probably should have seen this one coming, considering NextCard pre-announced yesterday that a "significant strategic partnership" was in the works, using a stream of familiar Amazonian language to suggest that the deal would "impact the competitive landscape of online shopping and financial services." We'll see about that. In the meantime, the announcement had an immediate impact on NextCard's share price, which extended yesterday's 24% gain with a 50%-plus jump this morning.

Amazon expects to realize about $150 million in fees over the life of the relationship, while NextCard gets to mine the purchasing data for the online retailer's more than 13 million customers in an effort to sign up new cardholders. Perhaps even more important in investors' eyes today, Amazon effectively gave the credit card company its Internet seal of approval by picking up a warrant to buy a 9.9% equity stake in NextCard.

"We invest only in companies that share our passion for customers," said Amazon founder and CEO Jeff Bezos. Going out of your way to service the customer is nothing new cyberspace, but what NextCard really cares about is how to go about rounding up new, profitable customers in the first place.

Instead of carpet-bombing mailboxes across the country with "You're Pre-Approved!" come-ons like traditional credit card lenders, NextCard gobbles up banner ads on websites where potentially high-value customers might be hanging out. By closely tracking and evaluating the credit profiles behind the click-throughs, the company can then focus its ad spending only on the sites that yield the most lucrative customers.

This strategy enables the company to keep its acquisition costs low and helps to limit some of the adverse selection risk associated with marketing products on the Internet. So far, NextCard has managed this risk pretty well, with annualized net charge-offs coming in at a very low 1.7% in the third quarter.

If NextCard's total managed loans and customer account figures continue to ramp up at the roughly 60% sequential rates seen recently, how well it manages the adverse selection risk will become a major issue sooner rather than later. So far, NextCard has impressed many individuals with the level of attention it has given to credit costs during the first two years of operation.

The company was stringent in the beginning for a reason, owing to Chairman and CEO Jeremy Lent's desire to avoid high charge-offs down the road as the initial accounts mature or "season." But as more credit card origination moves to the Web, account attrition at the traditional issuers may put pressure on a company like NextCard to lower its credit standards in order to keep attracting new business.

In the meantime, however, NextCard will busy itself attracting new customers from among Amazon's large user base. Obviously, NextCard likes the profile of the average Amazon shopper. Amazon's incremental account generation quarter-to-quarter continues to be impressive, even though average quarterly revenue per account has been falling. Still, there's no denying that users must use a credit card to make purchases through Amazon, which plays right into NextCard's hand. And by agreeing to a five-year deal, NextCard will be able to keep its Amazon-related acquisition costs in check in the event of future online advertising inflation.

With today's deal providing added visibility and account generation opportunities, and the recent formation of its NextBank subsidiary originating FDIC-insured deposits and providing a new source of funding, NextCard looks much different now compared to a year ago or even six months ago, when the company first came public. Interested investors who may have placed NextCard on their watchlists earlier this year may want to refamiliarize themselves with this fast-changing company.

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