first anniversary this week with more than $12 billion of deposits and 600,000 customers.

Those numbers make it six times bigger than Telebank, the branchless U.S. bank that has been on the Internet for four years. Telebank announced last week that it had amassed $2 billion of deposits and 100,000 customers.

"We have massively exceeded our expectations," said Michael J. Harris, chief executive officer of Egg and Prudential Banking PLC. Egg is a division of that bank, which in turn is owned by Prudential PLC, the United Kingdom's largest life insurer, with $248 billion of funds under management and 10 million customers worldwide.

Egg appears to be benefiting from having a built-in base of insurance customers who can be sold banking products with an innovative brand name and which pay attractive rates. The company's life insurance salespeople had sold about $1 billion of mortgages from other providers before Prudential developed its own mortgage line, Mr. Harris said. Similarly, the proceeds of maturing insurance policies and investments had found their way into the hands of other providers before Prudential began offering its own savings accounts.

Egg got off to a fast start by offering rates that are several percentage points higher than the norm, said a London-based analyst. Egg "was hit by a wall of money" from depositors seeking to take advantage of its 18-month guarantee of favorable rates, said the analyst, who, citing British custom, asked not to be identified by name.

The massive flow of deposits, however, has yet to translate into profits. Prudential PLC last year reported a loss of $127 million, and Egg is expected to contribute to a $248 million loss this year.

The Internet bank is Prudential's second attempt at direct or branchless banking. In October 1996 it launched Prudential Banking to sell its mortgages, loans, and deposit accounts by telephone and via a network of financial consultants. Prudential Banking now books $1.6 billion of mortgages a year.

One year later, when Prudential Banking decided to go on the Internet, it opted to build a new brand called Egg. It foreshadowed Bank One Corp.'s approach with the recently introduced WingspanBank.com, and it had some growing pains, said Patricia Seybold, CEO of Patricia Seybold Group, in a keynote speech last week at the American Banker Online '99 conference.

She said the deliberate cannibalization strategy is "the best way to deal with organizational inertia and get there faster." The unique name Egg got around the fact that "the old brand doesn't resonate" with a new generation of customers, and advertising commitment was essential because "you have to be serious to see a payback down the road," she said.

A joint survey by International Business Machines Corp. and Interbrand voted Egg one of the world's top 10 Internet banking brands.

The "slightly ridiculous" Egg brand "hit everybody's hot button," said Mr. Harris, who declined to reveal the bank's marketing and advertising budget. "People liked that it was generic, short, memorable, and slightly shocking." The name subliminally alluded to golden egg or nest egg, he said.

Ms. Seybold said the Egg experience underscores the importance of "getting service quality up." In its early stages, Egg had systems problems and call-center confusion, which customer response suggests have long been resolved.

Egg customers can contact customer service representatives by telephone, the Internet, and mail, but are not able to speak to financial consultants face-to-face, as Prudential Banking customers do.

"We realized we needed to reinvent what 'direct' meant in financial services," said Mr. Harris, who also served as CEO of First Direct, the pioneering telephone bank of London-based Midland Bank, from 1988 to 1991. "Direct means fast, efficient handling of transactions."

In a segmentation of direct banking customers that has yet to hit U.S. shores, Egg is giving higher interest rates on savings accounts, mortgages, and personal loans if customers use only the Internet. Egg's Internet-only savings account pays 5.75%. As a result, nearly 45% of Egg's customers bank exclusively on-line. The rest also use the telephone.

Web transactions are typically a quarter of the cost of telephone transactions, Mr. Harris said.

Egg is driving other transactions to the Internet. Since April, it has not accepted savings account applications via telephone, though loan applications can still be submitted that way. In May, it stopped accepting savings applications via mail. After an account has been opened, contact may be by Internet, phone, or mail.

With on-line applications approaching 1,000 a day, Egg has set itself a target of two million Internet customers by 2004.

The U.K. Internet market as a whole has been growing steadily since May, boosted by the free-access packages offered by several U.K. Internet service providers. The country's Internet users, at 16.3 million, are up from 11 million in 1998 and 2.7 million in 1997. Currently, 3.4 million people shop on-line.

Egg's next move is to become "an investment supermarket where we can manage long-term savings," Mr. Harris said. He likened Egg's approach to that of E-Trade Group, which has agreed to acquire Telebanc Financial Corp., the holding company of Telebank.

"We will add e-brokerage in the next few weeks," Mr. Harris said.

With 60% to 80% of Egg's customers holding equity investments already, and 20% of them retired, "we have a customer base to drool over," he said.

Egg offers a variable rate mortgage, a travel insurance package, personal loans, and a Visa credit card with rebates. The cash back is 2% on purchases from 110 U.K.-based retailers in the "Egg Shopping Zone," and 1% on goods bought elsewhere, either on-line or off-line. Customers can also receive checking-account statements by e-mail.

Egg has formed many partnerships including marketing agreements with AOL Bertelsmann On-line and a $1.7 million deal with Excite U.K., a joint venture of British Telecom and Excite Home. The Excite portal carries on-line application forms for Egg products.

Egg and Prudential Banking, which employ 600 each, share a 120,000-square-foot communications center in Derby to deal with customer inquiries by telephone and e-mail. Staff members go through an eight-week training program before coming in contact with Egg customers.

Egg is available to residents of England, Scotland, Wales, and Northern Ireland but "our ambition is to go overseas," Mr. Harris said.

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