The Fool: Now one thing that the press has said a lot, and I guess some of your competitors, the big banks, have said, is they've wondered how "sticky" the money is that you've attracted. I mean the criticism that Egg was essentially selling pound notes for 95p by offering these very high rates of interest in an attempt to gain market share, and it worked. So how "sticky" is the money? Can you give me an idea of that? And if there are quantifiable measurements that would be interesting.
MH: Fine, I can certainly talk about it qualitatively, quantifiably not really at this stage. I think, you know, that it's important to look at our intention in the way we launched that and what we actually did. So, what we'd seen was we believed looking forward that pricing of deposits would get closer and closer to base rates. It had happened in the United States and we saw it as almost inevitable over here as more competition came in. So effectively we anticipated that and took advantage of it to move the market there before it would otherwise have moved and in doing that we gained a lot of customers. Now the very specific offer we made was "look, we expect this to settle at around base rate and as an introductory offer to this company you've never heard of and never experienced we'll give you an extra sixty basis point for the first sixteen months." So it was very, very specific and we've reduced the rate to base rate on our core savings account at the start of this year we've actually done exactly what we said we were going to do. Have we had customers leaving in droves? No. In fact we've had a net gain of customers.
The Fool: OK. And can you give me any idea of what your average savings per account are?
MH: I'm trying to think of what we have quoted in the past and I can't give you any new numbers but it is over ten thousand pounds. If I can just say that. Over ten thousand pounds. Between ten and twenty thousand pounds is an average balance.
The Fool: And do you know how that compares to offline...
MH: It's much higher, much higher.
The Fool: Right. And how easy do you think it is going to be, from here on in, to attract more money given the inertia that people have with bank accounts? I mean the much trailed statistic in the press, you're more likely to change your spouse than your bank account. You had phenomenal growth originally, do you think it's going to plateau off from here and it's going to be a question of making better use of the customers that you have or providing better services to them?
MH: Both. We're intending to continue to grow the customer base aggressively and to focus on the customers that we've acquired and providing more and more products to them. I think a number of points: historically, it's been very hard to grow a customer base by offering a current account as the method by which you draw in new customers, and we don't even have a current account yet. We will have one. Don't see it as a key customer acquisition product, much more of a cross-sale. We've so far had two waves of mass customer acquisitions, one of which is still in full flow and they are the savings account which, you know, has eased off a lot now, we're not promoting that a lot now, and the credit card, which is still in full flow. Now the credit card will continue to be our key customer acquisition route in the foreseeable future but we've also, just, actually this week, announced a further initiative, which is the strategic partnership with Boots(LSE: BOOT), which gives us access to another customer base under a jointly branded credit card and that should give us a third, significant wave of customer acquisition. Now, given in an Internet world even the most farsighted of us looks forward about eighteen months, you know, that takes care of that period and then after that I think we'll see. But, you know, in the back of our mind is this model is not necessarily confined to the UK, there are opportunities elsewhere, particularly in Europe.
The Fool: That's interesting because direct banking, Internet banking is actually much more developed in some countries in Europe. I mean in Germany for instance, there's a very high percentage of direct banking, and in Scandinavia.
MH: That's right, Germany and Scandinavia. Yes.
The Fool: I mean those are going to be pretty tough markets to break into.
MH: They are and, you know, breaking into them as Egg, probably from scratch as a start-up is not in our minds. Post an IPO with a currency with which we can do deals and joint ventures, you know, we're much more likely to do it that way.
The Fool: And it's sensible to assume that those would be the first places that you would look on the Continent?
MH: Yes, can't really comment on that but the big markets are the interesting ones.
The Fool: OK. So if we just come back a second to revenue streams and revenue models. I mean in the long term it seems pretty clear, as with any number of Internet businesses that have used one form of business to build up market share and build up the business, you are going to have to migrate towards a fairly significant e-commerce revenue stream. I mean, do you have any kind of feel or any vision for where the revenue is going to cross over and where the majority of your revenue is going to be coming from e-commerce?
MH: Very hard to say much about that at this stage. Merely to say we've got three businesses and we don't intend any of them to be a loss leader. So three businesses of banking where, as we've long said, we see the rates on saving moving to around base rate, if you like a sort of break-even position, but all of our other products are, today, priced with positive margins. We see the investment business that we've got as obviously a business that can contribute revenue and we see the shopping business that we've got as also a business that can contribute revenue. It does indeed take a commission from retailers on the sales that are generated that way. So effectively three sources of revenue in the business model.
The Fool: OK and if we come back to the parent of Egg which is the Pru which obviously still owns the company, there is some conflict there: the birth of Egg, the death of the man from Pru. Egg in its long-term business model is effectively going to scalp a lot of the business from the Pru. How do you see that developing and how has the reaction been with the Pru?
MH: Well the Pru's focus on everything it does and certainly in the launch and growth of Egg has been "what's the best strategy to grow long-term shareholder value for Prudential sustainably?" Saw an opportunity with Egg for a new brand to take a new position in the market that it couldn't take as a conventional brand. It wouldn't have permission, effectively, from customers to take that place in the market. To date, really, there's been little or no product conflict between the two. We've been banking and mutual funds and shopping and obviously the core business of Prudential has been much more in the life fund type products. Now, as you say, over time, clearly, these will move more clearly towards competition. Having said that, you know, Pru is very much, I think, re-inventing itself around an Internet model. So if you like it's a traditional economy company re-inventing for an Internet model and certainly, in my view, is that there's room for both of those sort of companies in the new economy. New companies like Egg designed specifically for it; traditional companies like Prudential that reinvent themselves for it. I think the only problem is the traditional companies that don't reinvent themselves quickly enough.
The Fool: I think that's definitely true. I guess, as I see it more, I appreciate what you say about individual products, it's more the fact that I guess, the model of The Pru is "Come to us, we'll advise you, we'll look after you" and Egg's proposition is "Come to us, we'll help you make your own decisions and then you can buy whatever product you like."
MH: That's right. They are different in models and my view is that the market can support both models. There's a segment of the market that's confident, wants to be in control of its own destiny -- an increasing segment for sure as people get more educated and between us both we simplify and demystify. That's your game and very much ours. But there's also a model of people who do need the help and support of advisers which is, historically, the Pru model.
In Part 3: Mike Harris on competition, marketing spend, technology and the forthcoming IPO of Egg.
