Born in the era of the dot-com bubble, NextCard Inc. held out the promise of attracting high-quality credit customers through a low-cost marketing channel.
Now, with the holding companys card-issuing subsidiary, NextBank of Phoenix, shuttered by regulators last week after mounting losses, regulators and observers are beginning to sift through the ashes of the online flameout to determine what went wrong and whether the premise for the company was flawed from the start. 
Regulators seem uneasy over the whole notion of offering stand-alone Internet banking. Speaking last week at a banking seminar, Comptroller of the Currency John Hawke Jr. said that even first-tier banks found the channel too slippery.
Bank One, through First USA, launched Wingspan Bank as an ostensible stand-alone Internet operation and poured hundreds of millions of dollars into that but were not able to make a go of it, Mr. Hawke said. If Bank One, with that kind of top-flight management talent and tremendous resources, couldnt make a go of it, it is hard to see anybody else doing that.
On the other side of the issue, the chief executive officer of San Francisco-based NextCard complained last October that jittery bank regulators were part of the problem. NextCard contended that they were getting tighter scrutiny than would have been paid to a larger institution. Without the OCCs demands that it increase capital and restrict marketing, it would have been on track to turn a profit by fourth quarter 2001, the company said in a press release.
Executives at NextCard declined to be interviewed for this story. But in the wake of the closure of NextBank on Thursday, at least one analyst thought the failed company might still have had a chance.
The problem is NextCard was trying to grow relatively rapidly, said Michael Vinciquerra of Raymond James & Associates. They could have survived, but the OCC was getting nervous about higher chargeoffs, and they were a small online issuer. The OCC saw potential problems in a challenging economic environment and acted quickly.
By Friday the point was moot. The Federal Deposit Insurance Corp., named as receiver for NextBank, said it would begin mailing checks to the banks customers who had purchased certificates of deposit. As much as $29 million in deposits belonging to 2,075 customers may not be covered by banking insurance.
That capped a final year of frustration for the company and its top executives. One of the first credit card issuers on the Internet, NextCard had issued more than a million credit cards online and had $2 billion in receivables. It said it was poised to turn a profit in last years fourth quarter, and was considered one of the most successful credit card issuers on the Internet.
But trouble had surfaced long ago. An OCC source said the agency began talking with NextCard executives about credit problems nearly two years ago, in March 2000.
Though NextCards original business plan did not call for it to focus on subprime customers, it began attracting many risky customers through the Internet. The OCC had concerns about credit quality.
The Internet bank is really like the new bank that opens in a small town. Every time a new bank opens, the first people in line at its door are the people who were turned down for credit at every other bank in town, Mr. Hawke said. That problem may be compounded if you are offering credit over the Internet, when banks dont have to deal face to face.
Some analysts agreed that credit-quality problems were particularly hard to avoid on the Internet.
There is an appeal to the Internet, in the sense that it is a way to attract customers, and people like it, said Richard McCaffery, a stock analyst at Morningstar Inc. But in the lending business, growth isnt worth anything if credit quality isnt there.
In October 2000 the board signed a resolution to get the problem under control, but the bank continued to experience ever-growing loan losses. The issue came to a head one year later.
NextCard had said that fraud, perpetrated by customers, had been behind its portfolio woes. But by late 2000, the OCC was taking a different view. The agency told NextCard it had to recategorize as simple bad loans certain losses it had characterized as fraud. This change bumped up NextCards chargeoff rate by 306 basis points from the second quarter to the third and triggered a drop in its risk-based capital ratio to below 6%, which left it significantly undercapitalized under federal banking regulations.
A year later, during its third-quarter earnings report, NextCard announced that it had put itself up for sale because it was unable to meet new capital requirements the OCC was imposing. A buyer never emerged.
NextCard lost more than $131 million to bad loans in 2001. That, along with other operating expenses, depleted $300 million in capital that had been provided by the parent company, NextCard, to its bank in late 2001.
In January the company said it had eliminated about one-fifth of its employees. It was too little, too late.
NextCard plans to continue to seeking a buyer for its business, and the future of its credit card operation is apparently in limbo.
There is nothing to suggest that the OCC was responding to general pressure to move faster, but certainly that pressure has been evident in recent months, amid a weakening economy and some high-profile bank failures.
Indeed, on the same day that the OCC acted to shut down NextBank, congressional leaders in Washington were criticizing another regulator, the Office of Thrift Supervision, for moving too slowly last year in responding to problems at Superior Bank FSB, the Hinsdale, Ill., thrift company that failed last year.
