Beware of Discarding Good Consumers with the Bad

All customers are not created equal. A good marketer worries just as much about avoiding 'bad' customers as attracting the 'good' ones.

But once you do acquire a 'bad' customer it can be awfully difficult to get rid of them. Take Citigroup’s Egg for example. Earlier this year, it wrote to 7% of its 2m cardholders, informing them that their cards would stop working in 35 days due to their 'higher than acceptable risk profile'.

When Citigroup bought Egg for a knock-down price from Prudential last year, it was clearly a brand in trouble. Losses of £145m in 2006 meant that it was always likely that its new owner would act quickly to stem the tide. Removing bad customers was an obvious but much-needed move; the key issue, however, is how Citigroup has gone about defining 'bad' customers.

There are two ways to lose money in the credit card business. The first is to lend to a customer who eventually defaults on their payments. The other is to lend to a customer who never fails to pay off their monthly debt on time. Which of these 'bad' customers is Egg now rejecting?

If we accept the official Egg line, this is a bold act of responsibility in a time of financial crisis. Citigroup analysts have reviewed Egg databases and, using complex modelling, identified those customers most likely to get into financial difficulties. By cutting them off, Egg is avoiding a potential loss in the future, acting in the best interests of these over-extended customers, and differentiating itself against all those irresponsible sub-prime lenders which have been blamed for the current threat of recession. As Angela Knight, chief executive of the British Bankers Association, put it on the Today programme, it is 'a sensible way of looking after a business'.

But there is an alternative hypothesis based on a different definition of a 'bad' customer.

Egg's problems began in 1998, when it successfully launched its brand with an online savings account that offered a generous 8% interest rate. Within 6 months the firm had reached its five-year target of 500,000 customers, and it launched its credit card. The Egg card had a specific point of difference in that it guaranteed safe purchases on the internet. The combination of a very good interest rate and a trusted brand for internet purchases attracted all the wrong kind of customers to Egg: conservative, risk-averse, financially savvy people who always pay off their credit card balance each month and rarely switch banks.

These customers were one of the key reasons for the gradual loss in profits at Egg. Perhaps the bank has taken the opportunity to remove some of them as well as shedding the 'credit risks'.

This would explain the torrent of letters and blog posts that have suddenly emerged from some of the 160,000 people rejected by Egg. Most tell the same story - they have never exceeded their limit, always pay off their balance prior to the due date and in many cases have significant assets. Several rejected customers even checked their credit rating only to discover it was in the high 900s - essentially perfect credit.

The adverse public reaction to the letters received from Egg could be explained by bruised egos. Nobody likes to be rejected, especially in relation to their finances. But there seem to be too many plausible stories to dismiss.

Equally conspicuous are the anecdotes of the Egg customers who have registered their surprise at not receiving one of the letters, despite continually maxing out their cards and failing to make payments on time.

Surely, Citigroup is not naive enough to believe that it can reject stable but unprofitable customers under the guise of financial responsibility? Only time, and the gathering calls for an enquiry, will tell.

30 SECONDS ON ... REACTIONS TO EGG'S LETTERS

- Gillian Cox of Farnham told the BBC: 'My husband and I are retired, no mortgage, no debts, joint income of about £35,000. I phoned Egg, but the adviser could only recite the same paragraph that was in the letter.' She also contacted credit reference agency Experian, which said she had an excellent credit rating, 'thus totally negating Egg's claim that this measure is about credit risk'.

- Dave from London commented: 'I thought I would be affected, as we regularly max out our Egg card through balance transfers. "Risky customer," you may think, but I am yet to receive a letter'.

- An Egg spokesman said: 'We are sorry that some customers are upset after receiving notification that we are ending their credit card arrangement ... We understand the concerns, but even if they are up to date with repayments, they are people we no longer wish to lend to, regardless of their status.'

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