On-Line Lending

The growth of the Internet has created new opportunities for marketing and granting consumer credit. While initiated in residential mortgage lending, online financing has moved into the credit card area as well. As one example, NextCard Inc. (San Francisco) reaches potentially profitable customers and designs credit cards to their credit profiles. The firm markets its credit cards by posting ads on the Web and by co-branding its services. Recently, it co-branded a credit card with Amazon.com and will be offering it to that firm’s 13 million customers. According to Specialty Lender, Amazon “is expected to receive up to $159 million in fees from NextCard.” It also paid $22.5 million for warrants for a 9.9 percent share of the card company. NextCard has a sophisticated profitability scoring system that can design a card suitable to the applicant and profitable to NextCard and offer instant approval on-line. Other credit card issuers that give applicants for cards immediate decisions over the Internet are BankOne Corp. Providian, Wells Fargo & Co., and American Express Co. 

Presently, NextCard’s average acquisition cost is reported to be $180, but Robert Hammer (R.K. Hammer Investment Bankers) has estimated that economies of scale could drive the cost down to $40 per acquired account, compared with about $67 per account acquired by direct mail solicitation. 

According to an article by Hala Habal in the American Banker, most of the Internet-only mortgage lending has been for refinancing existing residential mortgages. However, many pure Internet-only firms have not been profitable, and are struggling to compete with those lenders who have developed sophisticated technology. Further competitive pressure will come from established lenders who provide all of the usual lending services in addition to on-line marketing.

 

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