Customers’ anger could damage Egg

Customers’ anger could damage Egg

By Jane Croft, Retail Banking Correspondent

Published: February 14 2008 22:05 | Last updated: February 14 2008 22:05

The withdrawal of 161,000 credit cards in the UK by Egg, the internet bank, could lead to a rise in arrears and non-payments among customers disgruntled by the move, according to a rating agency.

Egg, which is owned by the US bank Citigroup, outraged customers last month when it said cards would be withdrawn from those deemed to be a high credit risk.

Nigel Griffiths, the Labour MP and former consumer affairs minister, is due to meet the bank’s executives next week to discuss customers’ concerns.

Fitch, the rating agency, believes Egg’s actions could lead to an increase in defaults and write-offs among those customers affected. It said in a note there was “an increased likelihood, given the current difficult economic environment for UK personal finances, that this action could lead to increases in delinquencies and charge-offs”.

Overindebted Egg cardholders might decide to repay other credit card debts first, it added, rather than pay off debts on a card they could no longer use.

“It is possible that the change in financial relationship between Egg and these borrowers might lead them to prioritise payments to other creditors ahead of Egg.” Fitch monitors the Pillar Trust, a securitisation vehicle that is used by Egg to raise money against £2.2bn of its credit card assets. The 161,000 withdrawn cards represent a sizeable chunk of the trust by assets.

Pillar, which was set up in 2002, has already shown signs of stress because of rising bad debts. The securitisation vehicle was forced to buy back a large chunk of assets last November after a number of credit card loans went into arrears.

It sought permission from the Financial Services Authority, the regulator, to remove 46,000 accounts in arrears from the securitisation vehicle, which meant that bad debt levels within the trust were reduced.

Egg caused controversy two years ago when it put struggling customers on a reduced minimum payment plan that would help them clear their debts over 10 years. At the time the rating agencies said it artificially reduced the level of write-downs in the loan book.

The struggling customers were being charged no more interest and had had their minimum monthly payments cut from 2 per cent to 0.83 per cent of outstanding balance. Egg’s policy was reversed in early 2007.

Citigroup, which acquired Egg last year from Prudential, the life assurer, said that its decision to withdraw cards from higher-risk customers came after an extensive review of its acquisition. “We do not anticipate that bad debts will increase significantly as a result of this action,” it said on Thursday.

Citigroup said those customers affected had a blemished credit record – for example, they had previously missed payments or had gone over their credit card limit.

Many are customers already close to their credit card limits and pay off the minimum payment by direct debit each month.

Egg is thought to have started to introduce risk-based pricing for customers only shortly before its acquisition by Citigroup. This is common practice among card issuers globally.

Risk-based pricing allows credit card issuers to assess each customer and then offer them a variety of annual percentage rates according to their riskiness.