Why Egg Is on a Roll

A savvy marketer, the British cyber bank turns a profit

Online consumer sales, online lending, online banking. Didn't all of that explode with the dot-bomb? If it did, somebody forgot to tell Paul Gratton. He's the CEO of Egg PLC, a London-based Internet financial services company that is rolling along very nicely, thank you. In the four years since it hatched, the online bank has attracted more than 2 million customers. Last year it generated revenues of $132 million, almost ten times as much as in its first full year of operation. And on Feb. 25, Egg announced its first profit-making quarter--$5.7 million for the final three months of 2001.

Contrast that with the dismal situation at most European Internet banks, such as Germany's troubled Consors Discount-Broker and Italy's Bipop. They're losing money by the bucketful. "Egg is one of the very few leading lights in a troubled sector and is now ready to expand abroad," says Remus Brett, senior analyst in London with Forrester Research Inc., a Cambridge, Mass., research firm. On Jan. 29, Gratton paid $8 million for Zebank, the loss-making online-finance operation of France's Groupe Arnault.

Egg's evolution into Europe's premier online bank was something of an accident. It was set up in 1998 by Prudential PLC, the British insurer that still owns 79% of its shares, as a telephone-based bank. But the high interest rates it offered depositors drew so much business that its call centers were swamped. Management pushed new clients onto its Web site. Since then, Egg has run a series of promotions to keep old customers and win new ones, including 0% interest for six months on newly issued credit cards. Its online store, where customers can buy everything from ready-to-wear clothes to fossils--using Egg credit cards--is surprisingly successful. Gratton notes that last summer the bank sold more cases of wine than investment products.

So far, so good. But Egg will find it harder and harder to maintain its momentum and justify its current $1.7 billion market capitalization. Other banks, online and off, are aggressively trying to poach Egg's credit-card customers with lower interest rates. Egg's bad-loan provisions, which jumped from $53 million in 2000 to $97.2 million last year, could sap profitability. And there are big question marks over the move into France. "France is not like Britain," warns Patrick Frazer, a retail banking specialist with Lafferty Group, a London financial research firm. "It will be harder to bring in new customers and to earn as much from them."

Gratton, who just bought himself a 16th-century mansion in Derbyshire, is not worried. "The key to success is a strong brand name and a broad range of services to cross-sell," he says. Egg has clearly achieved the first. One recent survey showed that 88% of Britons polled knew Egg's name. That kind of brand recognition for such a young company is hard to beat.

By David Fairlamb in London

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