David Berger spoke to Mike Harris, chief executive of the Prudential's online bank Egg, about technology, the bank's relationship with its parent, and the company's forthcoming IPO.
The Fool: Mike Harris, Chief Executive of Egg, thanks very much for agreeing to be interviewed by the Fool.
Mike Harris: No problem.
The Fool: I guess what's really going to interest a lot of the users at The Fool is the first-hand history of Egg: if you give us the thumbnail, how it arose, whose idea it was, what was the inspiration, what was the vision at the time when it was conceived?
MH: Fine. Well, it really started with the launch of Prudential Banking in 1996, which was the job I came to Prudential to do, and that was designed to fill out the Prudential's product range so to add banking products to the existing mix and have them sold under the Prudential brand under the existing Prudential distribution channels. But we launched that in '96, and then in '97 we were starting to do some customer research on how we could widen this banking proposition into new channels effectively, and so we started with new customer research and we looked at technology research as well, and by around January '98, you know, we got clear that there was such a huge change happening in the market that it opened up an opportunity that those who were bold enough to move at it first and aggressively, you know, could actually create something and obviously the change is mostly fuelled by technology but also fuelled by changes in the structure of markets and that sort of thing. So, I mean, to put it in a nutshell, we just saw the emergence of the new economy, if you like, with everything connected together, and we saw an opportunity to create a new sort of financial services company that was designed specifically for that new economy. That was January '98. We presented it to Peter Davis at the Prudential and the Prudential Board and that, essentially, was the birth of Egg.
The Fool: Right. OK. And so what do you think are some of the elements, as you said, of designing a financial service for the new economy? What's different, from, I won't say the old economy, the traditional economy?
MH: Well, I think what we saw was traditional economy. What we saw was with all of the information available, easily available to customers, in the new economy, on the web, then effectively there seemed to be a big shift of power to customers because of greater transparency and greater choice, so that was a big driver -- and yet the customer research that we saw said "well, actually customers are a little bit confused and overwhelmed by all of this", you know, and they maybe need a bit of help in exploiting this increasing economic power.
So what we saw as an opportunity for a financial services company was to actually build something around a banking core, because, you know, you have a good relationship with your bank and this way you keep control of your cashflow, and you go back to the website and you transact on it frequently and if we got that banking core we could then build around it a set of offers and products for a customer that were drawn more widely from the market. So rather than a traditional professional finances services, or a bank, say, in the existing economy, saying "I'll provide banking and then I will sell you my investments and insurance and so on," we're saying actually we want to make the whole market available to customers and why confine it to financial services? You know, after all financial services can be a touch boring -- what's interesting is what money buys really rather than money in and of itself, so that leads us out of financial services into areas like shopping. So, basically, in the new economy, everything's easier to handle, it's lower cost so you get better prices, and you literally can operate on a much wider scale for customers than in the traditional economy.
The Fool: So we can come back to competitors in a sec, but I guess that actually in one sense some of your competitors of the future are Yahoo!, Freeserve, really any site that is trying to define itself as an e-commerce portal. Do you think that's true?
MH: I think it's fair and I think we distinguish ourselves from them saying that to build a credible banking core which we have done, brand and trust are important and it also is quite a capital intensive business which traditional portals, you know, are not so, if you like, we're both in the intermediation business: we build ours around a banking core, which we think gives us a set of customers who are definitely transactional and probably stickier and have deeper relationships than with a traditional portal.
The Fool: Do you think that you have a big psychological advantage in actually owning people's money, in the sense of being the guardian of people's money, because there are big barriers still to people using credit cards on the Internet. So if the money can come directly out of their accounts that's a big advantage to you and if it is, how long do you think that's going to stay the case?
MH: It's certainly an advantage today. I think the specific advantage you mention about people's worry about Internet security will be sort-lived. I believe that will get taken care of one way or another. What I think is sustainable is that someone has a relationship with their bank which is different from a relationship with other suppliers, particularly if the bank's handling their affairs well, and particularly if you are borrowing from a bank. I think you've got a relationship that I think is stronger and deeper than you would have with many other sort of intangible suppliers in cyberspace, if you see what I mean.
The Fool: Right. If we go back to the sort of the sort of old, traditional economy competitors who are obviously the big banks who, it's pretty clear, you've got them very, very worried indeed, viz. the kind of spate of kind of Egg look-a-like divisions and spin-offs that we've been seeing. How do you view them? Do you view them as significant threats, I guess, is a good place to start.
MH: Well, I think so. We see them in two bands really. We see traditional players, I think Barclays is probably the best example, who are using the web quite effectively around an existing business model. And then we see newcomers that look like Egg copies really, and I think we would say that yes, we believe the market will get more and more competitive -- inevitably so. We think the business model that we've got is an interesting advantage against traditional banks and in more interesting than most traditional banks and, in a nutshell, you know, we don't try to cross-sell like they do, we're not trying to cross sell own brand products at a sort of mid-market price. We're effectively trying to offer the best of the market to customers and we think that's an effective business model. Against the newcomers that maybe are copying Egg then we do have this advantage of the customers that we've acquired already, and perhaps even more importantly the learning that we've had in doing all of that which they have still got to get through. That shows up tangibly in the supplier relationships we've built up for example and mutual fans and the retailers.
The Fool: Right, so and what do you think about all this business recently about cashpoint charges, the banks imposing cashpoint charges? They don't want you to have free access to their infrastructure effectively. I mean, do you think that's going to be a significant issue going forward?
MH: It's certainly been a worry for us. We absolutely agree with what the Cruickshank Report, which said that the pay system is a network, a complex network that can have anti-competitive characteristics about it -- actually quite accidentally -- in the way it works. It's no great surprise that that report came from an ex-telecoms regulator and the telecoms networks have similar characteristics. And I, you know, I'm encouraged by the fact the Government has seen that and are putting pressure on the incumbents to make it available to newcomers at a fair price. We don't want free access, we don't want preferred access but we don't want it to be used as an anti-competitive weapon. We certainly at one stage feared that it might be, but we were encouraged by the Cruickshank Report and the Government's response to it.
In Part 2: Mike Harris on "stickiness", customer churn and where Egg's future growth will come from.
