Consumer Payment Card News

Web Card Battle

Yesterday’s announcement of the ‘Yahoo! VISA’ drew fire from another competitor who recently launched an Internet card product. San Francisco-based Internet Access Financial Corporation says the new ‘Yahoo!/First USA’ card is a “mass marketed product” that lacks a “100% Internet focus”. IAFC says its ‘NextCard VISA’ product is superior because it offers online approvals, customized pricing, balance transfer rates as low as 2.9% and full online customer service. The company’s top executive said yesterday he believes Yahoo! made a strategic error by locking into an exclusive relationship with First USA and will eventually “regret that decision”.

What are the competitive dynamics of the new online credit card industry?

This is an extraordinarily exciting time to be involved in the area of online credit cards. For the first time, some of the precepts on which our company was founded two years ago are beginning to be more widely understood that the Internet is a very powerful channel to market credit cards to consumers and that we can provide services over the Internet that are radically different and truly unique for the Internet consumer.

At this time, the two leaders in this arena are NextCard and First USA, with two very different approaches to the channel.

NextCard VISA (sm) is 100% Internet focused, and this allows us to create a truly unique product, which made history when it launched in December 1997. This is an Internet-enhanced credit card, offered only through the Internet, targeted only to Internet users. Some of the pioneering features we offer our customers are

— First ever online approval system. A customer can apply online and receive a response in real time, usually in less than a minute. We can do this through our internally developed Rapid Results (sm) system, with links to each of the three national credit bureaus.

— First ever real time customized design of your card once a customer’s approved, they can choose between different sets of terms, each of which has been uniquely selected for them based on their credit profile

— Money-saving online balance transfers. Our system allows customers to transfer balances immediately from other credit card accounts, allowing them to enjoy immediate savings with initial rates as low as 2.9%.

— 100% Internet purchase guarantee, offering consumers for the first time the ability to buy over the Internet without having to worry for a moment about security this applies to any merchant site over the Internet without exception not just to a selected list of sites that have partnered with a particular company.

— Full online customer service virtually everything you would normally call an 800 number for, you can now do with us over the Internet check out your statement, or your last 16 statements, check out all purchase activity since your last statement, sort your transactions online, or download your statement in categories to Quicken(R) or Microsoft Money(R).

This is just for starters. You’ll be seeing exciting new product enhancements coming out through 1998.

First USA, on the other hand, is taking a volume approach, trying to establish partnerships with some of the biggest sites on the Web, offering their standard products, with some slight modifications, to site visitors. They began this a couple of years ago with the AOL Visa card, which really offered no significant enhancement to the customer, other than it had the AOL logo on the plastic. The Yahoo!/First USA VISA product comes part of the way to matching our product, with a purchase guarantee, reward points and online customer service. However, it doesn’t provide the online approval system, interactive card design and immediate savings from online balance transfers, that our applicants can enjoy.

How would a consumer compare your two products the Yahoo/First USA card versus the NextCard VISA?

An Internet consumer will find that our card offers truly valuable Internet-related features. I’d like to suggest the NextCard challenge to everyone who’s thinking about applying for the Yahoo card Before you apply, come to our site, and look at what we offer you. I’m absolutely convinced that you’ll take our card over theirs.

The full set of features we offer online approval, design your own card, online balance transfers offering immediate savings with rates as low 2.9%, guaranteed safe purchases anywhere on the Internet, and full online customer service, can’t be matched. And we’ll be offering further exciting Internet-related features to our customers through 1998.

The Yahoo!/First USA VISA has followed our lead in providing a purchase guarantee to Internet consumers, and has instituted a limited online rewards program. They appear to offer a similar level of online customer service, but we can’t verify that because they provide no demonstration of these features. They do not however, allow the customer to interact online in designing their own card.

How can you expect to compete with a major issuer like First USA, which can afford to spend tens of millions of dollars to lock up the major Internet sites?

Size doesn’t equate with success in the credit card business. First of all, the credit card industry is both huge and very fragmented this is not your typical software or consumer industry where you have to be number 1 or 2 to survive. There are literally thousands of credit card issuers, and even a company as big as First USA has only a 6-7% market share.

There are two very important reasons for this fragmentation the first is the incredibly powerful brand equity of the VISA name. As you know, VISA is one of the most powerful brand names in the world that means that a consumer can feel comfortable with your brand instantly, and then take a look at the extra features of your product, even if your company is unheard of. Ask most people which bank issues their VISA card and they won’t know but they will know the important features of their credit card instantly.

The second reason is that the credit card business is all about target marketing rather than mass marketing. In the credit card business, it does you no good to have millions of customers if they don’t actually use your card, or if they end up having bad credit. This is different from most other businesses where you’re just concerned about making a sale. The successful companies have largely been the monoline credit card issuers companies which for the past ten years have focused solely on understanding how to use direct mail and telemarketing to target profitable customers. These are companies like MBNA, First USA and my ex-company Providian, companies that in the past ten years stole the industry from the traditional banks through the expertise they gained in these direct marketing techniques.

A detailed understanding of the unique dynamics of the new Internet channel is a prerequisite for success here and NextCard is exclusively focused on building the data about this channel to become the experts in it. We’re all about database marketing, understanding the behavior of every customer who comes to our site, and learning from it in order to target our preferred customers more directly.

If you look at the history of the credit card industry, you’ll see that there are a few examples of big splashy entrants who didn’t use target marketing, and ultimately were burned badly. A great example of this is the AT&T Universal card. When it came out in the early 90’s it took the market by storm, gaining millions of customers in a few months. But they never understood how to make these customers profitable, and they recently sold the whole business to Citibank at what many observers believe was a fire-sale price.

But a company like First USA understands target marketing well, so why shouldn’t they be successful in the Internet channel?

They may well be successful but there’s plenty of room in this industry for success by more than one company, because of the dynamics of target marketing. However, we will both need to learn about the true nature of the Internet channel, and that’s where we have a distinct advantage because of our exclusive focus on the Internet. As I said in a recent article in American Banker, “Our competitive advantage will be based on the fact that we have a 100% Internet focus.” First USA, on the other hand, has millions of non-Internet customers to worry about.

Won’t they try to lock up all the key distribution sites, like Yahoo?

That certainly appears to be their strategy. However, I believe that the sites like Yahoo that sign exclusive relationships with First USA may be making a strategic error that could ultimately give a big advantage to their competitors. We can offer a Yahoo competitor a far more Internet-focused product, which will appeal to their visitors more than First USA’s product. A company that partners with us will become known as the cool place to go for an Internet credit card, which can ultimately give them an advantage over a company like Yahoo that’s locked in to First USA. We believe that Yahoo, and others who sign exclusives with First USA, may regret that decision.

First USA can offer cash and a big customer base for cross marketing. We can offer a better mousetrap a card whose features are optimized for Internet customers, creating a far more powerful loyalty nexus with NextCard, our partners and their customers.

Internet Access Financial Corporation is a privately held company based in San Francisco, California. The company is the creator of NextCard (sm), the First True Internet VISA(R), offered through a strategic relationship with Heritage Bank of Commerce of San Jose, California.

NextCard is a division of Internet Access Financial Corporation. NextCard can be contacted through its Web site at, by calling 415/836-9772 or via e-mail at [email protected]

For more information, reference BusinessWire story BW14, which ran on 2/6/98, “IAFC Launches NextCard(sm) – The First True Internet VISA” and American Banker, Friday, February 20, 1998, “For This New Visa, Only Web Surfers Need Apply”.

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