The brutal part of the banking revolution hits NatWest

`Customers in future are to be considered simply as entries in a "database", to be sold products "direct"'

MY EMOTIONS on learning of Bank of Scotland's audacious bid for National Westminster Bank, more than twice its size, have ranged from delight through cynicism to despair, ending up with hope. Delight, in the sense that a connoisseur experiences it, because, if you follow take- over battles, this one is already worthy of an entry in the text books. It would feature in the chapter headed "Perverse Outcomes". This is what happened.

After 10 years of strategic errors, with a new chairman in office, NatWest tries to pull off the Big Deal. Earlier this month it announced that it was to acquire the major life-assurance and pensions company, Legal & General. But instead of securing the bank's future as a major force in the financial services market, the deal exposed its weaknesses. Professional investors believed that NatWest was over-paying, and immediately sold some of their holdings and depressed the bank's share price.

Many observers, too - including, no doubt, Bank of Scotland - thought the logic of the merger was faulty in the sense that it was far from certain that NatWest customers would cheerfully stock up with Legal & General life policies and pension plans just because they had become, so to speak, in-house products. And the final flaw was the announcement that the admired chief executive of Legal & General would be put in charge of NatWest's private customer business, thereby admitting that its own managers had lost the plot.

The Scottish bank sees its opportunity and pounces. As a result, NatWest, rather than proudly taking over a famous insurer, is now, just a few weeks later, fighting to prevent its extinction as an independent bank. The fate of its old rival, the Midland Bank, stands as an awful warning. The Midland Bank name has virtually disappeared from high streets; branches carry merely the dreary initials of its Hong Kong owners, HSBC. In 1945 Midland was the biggest bank in the world.

Cynicism because Bank of Scotland, judging by its public pronouncements, seems to be basing its plans on the dubious assumption that it can quickly change NatWest's internal ethos or style. In fact, the character of institutions is hard to alter. It is formed comparatively early, and generally persists through generations like an old religion. To take an example from a different area, attempts to reform the House of Commons, which are mounted by every new government, have foundered for this very reason.

High-street banks are venerable (they first assumed their current form in the middle of the 19th century), they are bureaucratic by nature and their managers tend to have spent their entire careers in their service. This means that they are resistant to different ways of doing things. NatWest's highly intelligent chief executive, Derek Wanless, could give eloquent testimony of this if he was disposed to write his memoirs - as he may shortly have the time to do.

His bank, for instance, with terrible consistency over the past 20 years has made disastrous choices of chairman. Their shared characteristics have been ignorance of banking and no experience of management. They have come from the bar or from politics. This is part of the ethos. The general managers run the bank; the board is there to perform a decorative role. Twenty Scottish troubleshooters, or however many Bank of Scotland can spare, won't quickly be able to change the character of which this is a part, a style at once conservative and, when rattled, erratic.

Despair comes from contemplating the hard selling of financial products which awaits NatWest's customers. Bank of Scotland says that NatWest's branches should be diverted from processing towards selling; NatWest should become a slimmed down retail operation using a handful of high-technology call centres to sell more products to customers who will continue to bank at branches. In high-tech jargon, Bank of Scotland announces that "the database of branch clients will be sold products direct in a more sophisticated way than ever before".

If this means what I think it does, it makes me shiver. It appears customers are no longer thought of as individuals possessing different circumstances and aspirations with whom a bank has a life long relationship; in future they are to be considered simply as entries in a "database". They are to be sold products "direct", which carries the risk that they cannot readily compare what they are being offered with rival products. And I fear that "more sophisticated" may mean that the packaging of financial products will be more artfully designed than hitherto.

We have experienced high pressure selling of financial products in this country. It has recently given us inappropriate pension arrangements and ill-conceived house loans on a large scale. Moreover, as one firm of financial advisers comments: "neither bank offers particularly good products and I can't remember when we last recommended them." It is a question of attitude. Outside the financial services sector, many companies believe that if you put customers first, shareholders will automatically do well. Priorities in the financial services market, on the other hand, often seem to be the reverse: commissions for sales staff and dividends for shareholders come top of the list.

Why, then, am I also hopeful? Because technological developments are revolutionising high-street banking. First cash cards and credit cards, then telephone banking and now the Internet; all these not only make it easier to carry out financial transactions, they have also allowed the arrival of strong new entrants into the sector, such as the big supermarket groups. At the same time, de-regulation has increased competition from building societies which have turned themselves into banks. And because an unsuccessful bank like NatWest still earns a higher return on capital than an efficient retailer like Tesco, this trend will continue.

In other words, high-street banking is in flux. The fact that a small Scottish bank can bid for a substantial English business is proof of that. The revolution has some way to go. Now it is passing through its brutal stage - branch closures, disappearance of old names, redundancies, high- pressure selling, customers as sales targets. Eventually, though, the banks should be able to harness the superior skills of other high-street retailers and, using new technology creatively, build a new and better relationship with their customers. Bank of Scotland's audacious plans are part of the process.

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