The Anglo File: Egg Hatches but Online Finance in U.K. Still Unfertilized - TheStreet

The Anglo File: Egg Hatches but Online Finance in U.K. Still Unfertilized

While rumors circulate that Prudential could float its Internet banking arm, Egg's success online isn't quite what it seems.
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LONDON -- U.K. life insurer

Prudential Corp.

announced Tuesday that

Egg

, its Internet banking arm, generated deposits worth 7 billion pounds ($11.6 billion) in its first year of business. Those are impressive sums, yet on closer inspection, it appears that institutions here have yet to really crack the online financial services market and the U.K. remains well behind the U.S. and parts of continental Europe in this area.

In fact, Egg is something of a basket case even though, by most accounts, it has been a successful addition to Prudential's business. It began by offering savers a guarantee that interest rates for most of its accounts would be 50 basis points above base lending rates, with another 0.25% on top for Internet users of its service, something that appealed to savers in the U.K.'s low interest-rate environment.

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This guarantee proved too expensive a liability, so Prudential subsequently decided to restrict new accounts to the Internet. It also scrapped the guarantee from January 2000 and replaced it with a pledge not to pay savers less than 0.5% below the base rate.

Still, as explored in earlier

TSC

stories, Prudential's online arm has garnered much interest, including speculation it will be spun off and floated. Prudential, which rose nearly 5% to 891.5 pence on the news, is itself seeking a separate U.S. listing on the

New York Stock Exchange

.

Although Prudential's CEO Peter Davis continued to deny Prudential is preparing to float Egg, people can't help but wonder what it might be worth, with some observers reckoning it could be valued at more than $4 billion.

A hard look at the deposit figures for Egg, however, suggests they are not quite as rosy as they first seem. Egg took 6 billion pounds of deposits over the first nine months of business, but only 1 billion pounds in the last three, during which deposits were restricted to the Internet.

Indeed, the development of online financial services in the U.K. remains well behind that in the U.S. and continental Europe. A survey in July by accountants

PricewaterhouseCoopers

and the

Economist Intelligence Unit

found that none of the big banks in the U.K. are fully prepared for the changes to the industry that will result from the Internet.

Nor is the situation getting much better. According to David Pannell, senior consultant at the research and investment bank

Durlacher Corp.

, online financial services in the U.K. are "treading water," while services in Germany and especially Spain are moving forward. In fact, Spain's

BSCH

has just introduced services through global systems mobile, or GSM, phones.

Much of the blame, of course, lies with the conservative nature of British banking and of the British investor, who is still loath to trust the integrity of the Internet.

Banks in the U.K. have found, much to their displeasure, that rather than cutting costs, offering banking over the Internet has merely added new costs.

"The banks are discovering that the Internet is not quite the panacea people were suggesting it is," Dulacher's Pannell says. "They're adding online services but not closing down branches so that the new channel is just adding new costs." It is notable that Egg is a standalone entity from Prudential, and new online services such as

Smile

from

Cooperative Bank

are also separate from the parent.

Even having a brand is no guarantee of success.

Virgin

began offering an account known as

Virgin One

, which replaces all the customer's borrowing and banking arrangements, including mortgage, current and savings accounts, credit cards and personal loans, with a single account. Yet one source, who wished to remain anonymous, told

TSC

that less than 100 people have so far taken up this offer.

Part of the problem may reside with regulations. While the U.K. fancies itself as a regulatory breed apart from the bureaucratic continent, a recent forum hosted by the London-based consultancy

Fletcher Research

discovered the reality is rather different.

"The

Financial Services Authority

explained its approach to regulating personal finance on the Web. As the U.K.'s brand-new unitary financial services regulator, the FSA's aim is, apparently, 'not to stifle innovation.' Yet the clear consensus amongst the 170-plus delegates was that it is achieving precisely the opposite," wrote William Reeve of Fletcher, after the forum.

Egg's growth shows to some extent that the British are interested in financial services on the Internet, but as yet, they are still too chicken to embrace it completely.