Analysis: NextCard Bets on Flooz

Online Visa card provider NextCard, Inc. has lent some legitimacy to the often-maligned world of “electronic currency” by entering into a strategic partnership with Flooz.com, a company that provides “gift currency” that can now be used at more than 60 Internet stores.

NextCard, which claims to be the largest provider of credit cards on the Internet, recently forged deals to become Amazon.com’s exclusive credit card provider and to provide a “name-your-price” credit card for Priceline.com.

In the Flooz.com deal, Nextcard said that it will promote the use of Flooz to its growing base of credit card customers and thousands of affiliates that offer NextCard on their Web sites. NextCard and other investors have also purchased an undisclosed minority interest in Flooz.com for $27 million (US$).

Since alternative Internet currencies have been less than stellar performers, the big question is why?

Alternative Currencies Have Flopped

When the Internet was emerging in the mid-1990s, a number of companies announced initiatives to develop electronic currencies that could be spent like cash on the Net. The currencies were intended to provide an alternative for consumers who did not want to use their credit cards to shop online.

Basically, the alternative currencies have all failed because most consumers did not think that using their credit cards online would be any less secure than using them for mail or telephone order purchases.

In short, electronic currencies have been virtually ignored by consumers. Companies that started such currencies have either left the business, switched to handling traditional payment vehicles like credit cards, or taken a significant new tack.

Why Bother With Flooz?

What could a company like NextCard, which is making major deals with the likes of Amazon.com and Priceline.com, see in a company like Flooz? Even the name sounds a bit flaky, or is that floozy?

The answer is that NextCard sees Flooz as a universal gift certificate that can be potentially used at hundreds, or even thousands, of e-tail sites. NextCard is betting that Flooz will catch on as a wide-ranging gift for consumers to give to their friends and relatives, or for businesses to give their employees, clients and customers.

Right now, Flooz is accepted by only about 60 e-tailers. However, among others, it recently signed up Barnesandnoble.com and Toysrus.com. Plus, it will undoubtedly receive a push by NextCard at Amazon.com and other leading e-tailers.

New Spin Can Make All the Difference

One of the problems with online currencies was the spin that they placed on themselves as a better security alternative to using credit cards. Consumers did not buy the spin — and did not use the currencies.

Flooz.com is trying to dress up electronic currency in new clothing. It is spinning itself as a friendly, convenient way of sending gifts over the Net via e-mail — and is using Whoopi Goldberg and a cast of friendly cartoon characters on its Web site to describe what Flooz is and why people should use it.

Natural Monopoly… If It Works

While there are numerous hazards down the road to making Flooz an online household name, there is an equally large reward. Since merchants will only be accepting a few universal gift certificates, the two or three companies that establish themselves in this marketplace first will have the equivalent of a natural oligopoly in much the same way that American Express and Thomas Cook established one with Travelers’ Checks.

This potential undoubtedly helped NextCard decide to take the risk. If the gambit succeeds, it will be extremely difficult for new competitors to gain a foothold in the market.

Making it Succeed

While the risk may be worth taking, there is still a long way to go in getting consumers to change their notoriously settled gift-giving habits. Gift certificates have been around for many years in the brick-and-mortar world, and have largely survived in a small niche. They are worth doing, but they are rarely considered a big deal within most companies.

This lack of widespread usage, however, may be just what both Flooz.com and NextCard are hoping for. Even though online gift certificates will not be a big deal with individual e-tailers, when measured across the entire Net, there may be a sizeable market for electronic gifts of hundreds of millions — if not several billion — dollars.

So, if Nextcard’s gamble pays off, one of the failed engines of e-commerce — electronic cash — will finally find a home.