Egg will break even in Q4

Customers numbers are up, the decline in deposit funds has lessened, but can it persuade customers to buy more products?

Internet bank Egg is on target to break even in Q4, according to a trading statement Thursday.

Despite the positive news analysts believe Egg's future profitability depends on its ability to sell a range of financial products.

Egg increased its customer base to 1.33 million by 11 December, up from 1.2 million on 1 October. The net outflow of deposit funds over that period was down, at £154m compared with £443m in the third quarter of 2000.

These figures are in line with the company's business plans and published commitments.

The re-launched Egg card boosted numbers as other customers joined to take advantage of a loyalty card tie-in with high street chemist chain Boots. Egg expects the rate of acquisition from the Egg/Boots loyalty card to "increase significantly" in the first quarter of 2001 once Boots begins its in-house sales and marketing campaign.

The net outflow of deposit funds was caused by changes in the demographics of Egg's customer base. According to the company, telephone-based customers are leaving and being replaced by Internet-savvy customers who tend to have lower account balances than phone-based consumers. Therefore, even though Egg has more deposit accounts, the total sum of its deposit funds decreased by £154m.

When Egg was first launched by Prudential it offered significantly higher rates of interest than were available through high-street banks, but it has been lowering these rates over recent months.

David Plank, analyst at Internet Research Group Durlacher, believes that while this will have driven some customers away, Egg's challenge is to make money from those left behind.

"As Egg has lowered the interest rates of its deposit accounts over recent months some customers have moved their money away, leaving the less price-sensitive people. Egg now has to make a profit from this customer base", Plank explained.

According to Plank, for Egg to achieve profitability it will have to sell financial products and services to its own customer base -- a technique known as cross-selling. "The high street banks have been dreadful at getting their customers to buy additional financial products -- the average customer only owns one and a half. Internet banks can use electronic technology such as email to develop more sophisticated ways of cross-selling, but it's too early to say whether Egg and Cahoot succeed", said Plank.

There will be several new financial products launched by Egg in 2001, including current accounts, home and contents insurance, and a mortgage intermediation service.

Benjamin Ensor, analyst at Forrester Research, believes the key to Egg's profitability could be the fact that it is selling good financial products from other organisations. "Cross-selling has always been the Holy Grail in the financial sector, but no-one has ever cracked it, partly because consumers were suspicious of companies who only sold their own products. Egg is doing something different, by offering best-of-breed products from a range of other providers," he said.

According to figures from analysis firm MMXI, there were 754,000 unique visitors to Egg in October 2000 -- an increase of 46 percent month on month. This gave Egg 18.1 per cent of the UK audience share for the online banking and finance sector.

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