Monday, November 16, 1998 Published at 00:54 GMT
Business: The Economy
The account snatchers
The days of the bank counter could soon be over
Banks in the UK and across Europe could lose their best customers if they fail to make massive investments in online banking and marketing.
Traditional 'retail' banks are most at risk, according to a survey by Deloitte Consulting, which talked to senior executives of 133 banks and insurance companies around the world.
These banks, which provide High Street customers with loans, mortgages and current accounts, could lose up to 25% of their profits over the next five years.
Most retail banks rely for their profits on a very small number of well-off clients. At a typical retail bank about 20% of its customers generate nearly all the profit, effectively subsidising poorer account holders.
Technology is the driving force. Online and telephone banking cuts costs; better interest rate deals are the result.
Meanwhile, smarter database management and marketing techniques allow the newcomers to target the well-off customers.
The assault is coming from several directions.
The Royal Bank of Scotland was forced to buy Direct Line to get ready for the online banking age.
Others, however, lag behind and risk seeing their profits dwindle as customers flock to financial service providers like Virgin Direct, which has huge success with its PEPs and current accounts and Sainsburys and other supermarkets who now offer banking services.
European banks will have to brace themselves for tougher times. Until now their 'customer churn' - the number of people switching their current account from one bank to another - has been low, only 3%.
But if the development in the United States is anything to go by, the numbers will go up fast.
First Direct, for example, claims that it is signing up 12,500 new customers each month.
MBNA, a US-based credit card issuer which came to the UK several years ago has now snatched a market share of 10-15%. One of its main competitors, Barclaycard, was recently forced to sack over a thousand workers as its business slumped.
And many banks are just not prepared. Only 20% of executives questioned for the survey believe that their bank has done enough to keep customers on board.
According to Deloitte, the banks have reacted so slowly because they have been spoilt by strong profits in the past.
They are also hindered by out-dated computer systems that prevent them from targeting and servicing their customers in the same way as upstarts do.
But many people do not know how to operate a computer, never mind setting up an online bank account.
John Harrison, partner with Deloitte Consulting, predicts that the generational gap between computer-savvy 30-somethings and the rest of the population will soon disappear.
These cash points were quickly accepted by younger people. The market was then stagnant for five years, before the technology finally took off.
Mr Harrison forecasts that customers will switch as the new banking technologies get more established. In 10 years, he says, the majority of Europeans will have their account on the Web.
John Reeve, also a partner at Deloitte Consulting, calls it a "watershed in the evolution of the (banking) industry".
But are customers really prepared to hand over their money to a computer, instead of depositing it with a bank clerk in a proper bricks-and-mortar building? Is online banking safe?
John Harrison says he would be more worried giving his credit card to a waiter in a restaurant than passing on his financial details to a trusted bank on the Internet.
So how can traditional retail bankers fight back?
For starters they will need money, and lots of it. Deloitte's experts estimate that a bank will need to invest up to $160m (£100m) to get up to speed.
Besides the new technology, they will need to re-focus their marketing. Mr Harrison says banks will have to target and tailor their services for up to 25 to 30 different customer segments. Only then will they be able to retain those which generate profits.
If banks fail to adapt, their clients will simply fade away into cyberspace.
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