July 10, 2002 12:25 PM PDT
NextCard credit cards cut off
The Federal Deposit Insurance Corporation (FDIC), which had been trying unsuccessfully to sell the 800,000 accounts since taking them over in February, shut them down after they failed certain performance measures over the past three months, said David Barr, an FDIC spokesman. Although NextCard customers will no longer be able to use their cards to make purchase or cash withdrawals, they will continue to be responsible for their outstanding balances.
"They still have to pay it off," Barr said.
The company and federal regulators began notifying customers via e-mail in recent days that their cards will soon be defunct. A note on NextCard's Web site attributed the problem to the closure by federal regulators of the company's NextBank subsidiary, which issued the credit cards.
"There are no funds to keep the credit cards operation going. Therefore, your account (will be) closed on July 10, 2002 through no fault of yours," the company said in its note.
NextCard's general counsel, Bob Linderman, said NextCard ceased to have any control over the cards after the FDIC seized NextBank's assets in February, and so declined comment on the deactivation.
"I'm not in a position to comment," Linderman said. "It's not something that we have any involvement in."
The NextCard Visa card was part of the Internet boom. Launched in 1997, NextCard aggressively marketed the credit card over the Internet as a solution for e-commerce, taking applications only online.
Government regulators shut down NextCard's banking operation in February after the company said that a liquidation of its assets would not pay off its existing liabilities. The following month, the company laid off 90 percent of its work force and its stock was delisted from Nasdaq.
Last week, the FDIC, which holds NextCard's assets, sold 200,000 of the company's credit card accounts for $126 million to Utah-based Merrick Bank. NextBank still owned those accounts directly when the FDIC took over its assets.
In contrast, NextBank had sold off the assets in the other 800,000 accounts to investors. Money paid by cardholders on those accounts was supposed to fund new purchases and pay off investors. But enough money wasn't coming in to do both, according to Barr, so the FDIC shut down the accounts. Any money that comes in when customers pay their balances will go to pay off investors who hold the outstanding loans, Barr said.
Unable to find a buyer for the 800,000 accounts, the FDIC estimated that the closure of NextBank would cost it between $300 million and $400 million.
NextCard's signature product was the NextCard Visa. Visa was notified by the FDIC that NextBank would cease all operations on Wednesday, Kelly Presta, vice president of Visa USA, said in a statement Tuesday. Although the 200,000 accounts purchased by Merrick will remain usable, Presta said, the remaining NextCard Visa cards will become defunct. Affected cardholders will be able to get information on obtaining a replacement card through the financial giant's Web site, he said.
"Visa is working to ensure that any inconveniences to cardholders will be kept to a minimum," Presta said.
The FDIC is also working with two credit card banks that have agreed to offer new credit cards to NextCard customers and allow them to transfer their balances from their defunct cards, Barr said. The banks, which he declined to name, will not be required to offer new cards to all customers, he said.
In 1999, NextCard teamed with Amazon.com to issue a co-branded credit card and drew a $22.5 million investment from the e-commerce leader. By the end of last year, the company had 1.1 million credit card accounts.
But like other dot-com companies, NextCard bled cash, accumulating $390.2 million in losses by the end of last year. By last fall, the company was searching for a buyer.
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