NextCard to allow financing of big-ticket goods

NextCard, the first Internet-only issuer of credit cards, will offer consumers the ability to make large-ticket purchases using installment loans beginning Oct. 16 at 10 Web merchants, including jewelry retailer Diamond.com and GetPlugged.com, a consumer electronics store.

Meta Group says NextCard will achieve no competitive differentiation with its new credit offering, and its financial plight illustrates a basic fact of the new economy. see commentary

The service, dubbed "Instant Finance Network," is similar to the loans hawked at brick-and-mortar retailers where shoppers are drawn to terms such as not having to make payments or pay interest for 90 days. The loans will be for between $500 and $10,000 for consumer electronics, computers, jewelry, and home furnishings and appliances. Next year, the San Francisco-based company said it plans to offer similar loans for travel services such as cruises and dream vacations.

"We think we can make some real hay with this service," said Rich Goebel, vice president for consumer finance at NextCard. "This is a logical extension of our credit card business and what our technical abilities are for near-instant credit approval."

The time may be just right for NextCard to launch this service. The company faces stiff competition from the dominant credit card companies, which are successfully tapping online shoppers. The company, which traded as high as $53.13 per share during the past 52 weeks, has been marooned at approximately $8 per share. Analysts said the notion may be that consumers may see little reason to sign up with an online credit card issuer like NextCard when American Express, Visa and MasterCard have made big strides onto the Web with special services and products.

"There is a crying need for alternative payment schemes than the credit card for merchants," said Avivah Litan, a research director at Gartner. "It will also benefit consumers because they get more credit without having to use a credit card."

The ability to buy without using up one's credit line may be particularly important as the demographics of the Internet shopper continue to evolve. Most online shoppers have more education and are generally more affluent than average. These early online shoppers are also more comfortable using credit cards online. But with the rise of free Internet service providers like Kmart's BlueLight.com, a less affluent socioeconomic group is beginning to shop online.

"These consumers are probably more used to this kind of financing program," said Rebecca Nidositko, a senior analyst at The Yankee Group who covers online retail strategies. "It could open up some shopping to them that they previously didn't do."

Still, it doesn't mean such loans won't take a bite out of consumers' wallets. The interest rates charged on these loans range from as low as 13.99 percent to a whopping 29.99 percent.

"At first glance, 29.99 percent does sound shocking," Goebel said. "But it allows us to say 'yes' to people that are higher credit risks."

The big winners in the arrangement with NextCard are surely the merchants, which have to pay credit card companies between 2 percent and 5 percent for each purchase. Online merchants tend to pay credit card companies at the higher range of these fees. Using NextCard's services, the fees merchants pay will be cut in half--in some cases, even lower.

"This is quite revolutionary," Litan said. "We would expect more companies to follow."

Credit card companies, however, are unlikely to follow.

Litan said credit card companies make 22 percent of their revenue on these fees and have no incentive to lower them to offer alternative payment methods to consumers.

"Someone has to be bold enough, and NextCard isn't as vested (as) traditional credit card companies," Litan said.

With the new service, however, NextCard retains some of the benefits credit card issuers like Visa offer, such as purchase protection for consumers, including the ability to "charge back" a merchant if a shopper is dissatisfied with a product.