Building a virtual bank

Like any new business, its development has been far from smooth – culminating in the sale of the business earlier this year to US banking heavyweight Citigroup. FST takes a closer look at the business and speaks to Egg’s Chief Technology Officer Robin Young

By Julian Rogers

Back in the 1990s when the financial world was licking its lips over the potential money-spinner that was the world wide web, the idea for a pure online bank was hatched. Egg, created by Prudential, would harness this new business channel and meet the needs of a tech-savvy customer who craved 24/7 banking. The groundbreaking venture had no high street branches or any physical presence – all customers’ needs could be met with the click of a mouse or by a voice at the other end of the phone. Egg, which was aimed at younger customers, was one of the first companies to offer 0% credit card deals. It’s emergence also coincided with the start of a boom in UK borrowing as consumers took a ‘buy now, pay later’ attitude to spending.

Today all of the major banks have an online presence but 10 years ago the emergence of an internet-only bank was seen as bold and innovative. With an aggressive advertising campaign beamed into living rooms and splashed across billboards, Egg made the public sit up and take notice. We were told that you could move money and pay bills through the beige piece of kit sat on the desk in your spare bedroom. It seemed almost too good to be true.

Of course, back then the technology, especially the internet, was crude and extremely slow compared the way that everything zips along today, as Robin Young, CTO, Citi UK Consumer and Egg, explains: “In 1998 when Egg was launched most people that were connected to the Internet did so over a 28.8kbs dial-up modem on an Intel 486-based machine running at 120Mhz with 8Mb of Ram.” In layman’s terms – the technology was primitive. Over the years things have got a whole lot better, though. “The widespread adoption of affordable broadband coupled with the seemingly never ending effects of Moore’s Law have given rise to the Internet-savvy generation that come to expect instant access to their banks 24/7.”

For Egg, which today specialises in savings, credit cards and loans, as well as offering mortgages and insurance products, the internet sure looked a winner. With reduced costs of not having branches the bank was able to offer competitive rates – all of which started to leave the established institutions feeling a little hot under the collar. “By leveraging the internet as our primary customer channel Egg has been able to create a low cost digital infrastructure,” Young reveals.

“This has meant that we are able to not only provide customers with a compelling user experience but also extremely competitive rates as we don’t have an expensive branch network to maintain.” For some though, the idea of not being able to walk into a branch and do business face-to-face seemed alien. For others though, Egg was a breath of fresh air and a convenient alternative to traditional banks and their rigid opening hours. The company grew rapidly and within just six months it had reached its initial five-year target of attracting UK£5 billion in deposits and half a million customers.

Weathering the storm

Despite this early success caution was in the air because no one knew for sure that the internet wasn’t just a passing fad. In hindsight too many companies put all their eggs in one basket, so to speak, and some went to the wall when the dot-com bubble burst. Egg was strong enough to emerge wounded but wiser. “We all learnt lessons from the dot-com crash – chief of which was to keep an eye on the underlying fundamentals of the business,” Young notes. “Unlike many of the other dot-com companies that are no longer around Egg always had a business plan that made financial sense.”

Since Egg’s early days the technology behind the internet has come of age, while the much-touted Web 2.0 is heralding a new era for businesses with an online presence, especially a firm as web-reliant as Egg. “The Web 2.0 phenomenon is something that many CIOs/CTOs have a watching brief on,” Young points out. He also says that the bank is “ahead of the curve” in this area. “We have a number of projects at the moment looking at how we can integrate financial services like person-to-person payments into social networking sites. Furthermore, we have already laid the technical foundation that allows us to offer web service access to key banking services.”

Another factor that has altered the banking landscape is the sheer choice available to the consumer. You only have to open a newspaper or switch on your TV to see banks offering ‘unbeatable’ savings rates and ‘ultra-low’ borrowings on their credit cards. This competitiveness between the institutions has created the so-called ‘rate tart’ – a fickle customer willing to switch lenders at the drop of a hat if he or she sees a better offer or lower repayment rate. This sort of business has fuelled much of Eggs growth down the years. “This trend was embryonic back during the launch of Egg but even then we found that our extremely competitive rates attracted huge interest – so much so that we achieved our five years targets for funds under management in a matter of months.”

This “transparency”, as Young puts it, between the rates that the banks and building societies offer allows customers to easily asses whether or not they are getting a good deal. “Customers find it much easier now to compare products and services from a multitude of firms.” he acknowledges. And it doesn’t stop there: “More interestingly, customers are now using consumer-focused sites to discuss their own experience of financial services firms, both good and bad. The rise and rise of social networking sites also means that customers have yet another forum to talk about their experience with their banks.” It seems the emergence of popular websites like Motley Fool and Money Saving Expert are also altering the balance of power between customers and their banks too. “Now more than ever before customers can do their own research and make informed decisions about the products and services that are right for them.”

The power behind the business

Steering the conversation back to Young’s area of expertise and the technology supporting the business, it becomes clear that there is a lot going on behind the scenes when customers reach Egg’s homepage. R&D is taken seriously too. The bank has its own in-house customer experience and usability labs where products and services are road-tested on real customers, “not guinea pigs as the ads might suggest”, Young quips when referring to an old ad campaign featuring the furry creatures. “The insight we get from this coupled with the Technology Trends assessment we carry out regularly means that we are well positioned to produce products and services that not give our customers what they want, but also fit in with their modern ‘digital’ lifestyles.”

An extension of this is mobile banking. This is area that the banks see as serious revenue stream in the future. Egg is no different in that respect, especially since the long overdue third generation of mobile phones are finally here. Whether consumers will want to access their accounts on their phone remains to seen but for the time being the technology cannot be ignored. Indeed, many handsets on the market today are like mini computers with full internet capabilities. “At the moment we are working on several offerings in the mobile space,” says Young. “The advent of affordable 3G bandwidth and the introduction of mobile devices like the Nokia N95 and, of course, the Apple iPhone lead us to believe that the technical foundation is ready to be exploited. So together with our customers we are designing the next generation mobile banking platform.”

Opening up to the questioning being fired at him, this CTO admits that “costs of operation, integration and speed of change” are three key challenges that the business has to combat when it comes to implementing and managing new technologies. “Like most organisations year on year we are faced with the challenge of doing more with less when it comes to running the bank.”

Young expands: “Although we are investing heavily in building modern modular systems, integrating different technical platforms is still an area that is more complex that perhaps it should be. We are strong supporters of web services and the standardisation that this drives but we are often frustrated by the lack of support for this from vendors.” And what about change? “Not unsurprisingly managing change in an extremely dynamic company such as Egg is an art form. However we are restructuring to ensure that we are organised in the best possible way to achieve this.”

With online banking – be it by a desktop PC, wireless laptop or mobile phone – security is ongoing headache for the banks and their customers. In this day and age the fraudsters seem hell-bent on getting their grubby mitts on our personal information. It’s the same situation for Egg. Young is keen to highlight how Egg regularly reviews the situation to assess if any gaps need plugging in the company’s defences. “Egg constantly reviews the security threats it faces and develops controls to those threats,” he clarifies. “The controls may be education to our customers or employees, process changes or technical solutions.”

It’s the same for Phishing, a crime that the banks and the authorities are finding extremely difficult to stem, let alone stamp out. “Egg takes a holistic approach to combating phishing incorporating detection and preventative security and fraud measures to minimise the risk to customers. Egg provides customers with a mechanism to report suspicious email, we have the ability to detect sites once active and have a comprehensive network of law enforcements contacts worldwide that are ready to assist.”

Boiling point

From chatting to Young it is clear that Egg, as a technology-reliant company, has come a long way since the days of frustratingly slow internet connections and clunky operating systems. But despite being recognised as the world’s largest pure internet bank serious cracks have appeared in the last few years. Mounting bad debts on personal loans and a sharp rise in personal bankruptcies contributed to losses of last year of UK£145 million. As a result Prudential decided to offload Egg to Citigroup for UK£575million – 40 percent less than bosses had valued the company 12 months previously. Indeed, Prudential paid UK£200 million to buy out Egg shareholders in deal that valued the company at UK£973 million. But even this is overshadowed by the fact that a 21 percent stake in the business was floated back in 2000, valuing the bank at UK£1.3 billion. Egg has since been de-listed from the London Stock Exchange. To add to Egg’s woes a failed expansion into France in 2002 proved a flop and the business was later sold to ING.

At the time of the Citigroup deal, which was rubber-stamped in May, Egg had over three million customers. The US giant hopes to quickly slash costs and turn the business into a profitable one. Egg CEO Ian Kerr now also manages Citi UK Consumer, which has a network of five retail banking and 49 consumer finance branches. So has integrating Egg with Citigroup been a tough experience so far for Young? He agrees in a roundabout response to the question: “There have been all the challenges of integrating two major UK businesses, the new executive team dynamics, an ever growing list of market initiatives and meeting up with some of the most creative and innovative IT people in the industry. UK Consumer (Citi & Egg) has a worldwide presence that brings with it the challenges and opportunities of time-zones, cultures and global scale.”

So it looks like an interesting period ahead as we keep a watchful eye on whether the US lender can resurrect Egg’s fortunes. Citigroup believes it has bagged a business with great potential and one that will significantly strengthen its foothold in the UK. Young sees a bright future ahead: “The success of Egg has proved that customers are prepared to trade the over the counter experience for better rates on their borrowings and savings. This area will be a key differentiator for Egg in the months to come as we launch services that leverage the power of modern operating systems like Microsoft’s Vista and Apple’s Leopard.” So how would he describe his time as CTO at Egg? “I can certainly say it’s not been boring.” And boring is not something that you would associate with Egg; just as ask Prudential chiefs who endured a white-knuckle ride of fortunes before finally jumping ship a few months ago. Will the Americans have better luck? Watch this space.