Business Analysis: New entrants turn up the pressure on Britain's high street bankers

Growing competition for customers is claiming some top management scalps

Lloyds TSB's axing of its retail banking head Peter Ayliffe this week was a sign of the increasingly cut-throat competition in the sector. Lloyds was blunt about why it was parting company with Mr Ayliffe, a 20-year Lloyds veteran, saying "different skills and qualities and a different person" were needed to turn around its core business.

Lloyds TSB's axing of its retail banking head Peter Ayliffe this week was a sign of the increasingly cut-throat competition in the sector. Lloyds was blunt about why it was parting company with Mr Ayliffe, a 20-year Lloyds veteran, saying "different skills and qualities and a different person" were needed to turn around its core business.

In recent years, competition to sell current accounts, mortgages, savings products, credit cards and personal loans to Britons has intensified among the big high street banks with new players pushing onto the market. The threat does not come from internet banks such as theloss-making Egg, but from HBOS, the country's biggest mortgage lender. HBOS is leading the way with its aggressive pricing and advertising strategies in an attempt to prise market share in all areas from the "Big Four" banks - HSBC, Royal Bank of Scotland, Barclays and Lloyds.

Unhindered by big legacy businesses, HBOS is in a prime position to slash interest rates on credit cards and personal loans unlike the incumbents, who need to balance the needs of old and new customers. HBOS makes 45 per cent of its total profits from its UK retail business, which compares with about 25 per cent or less for its major rivals.

HBOS, led by James Crosby, said yesterday: "We are in a strong position in not having a big back book. We can eat the Big Four for lunch. For them it's much more difficult to offer better deals to new customers because of their old customers."

Its aim is to boost market share in all retail banking areas to 15-20 per cent - except in mortgages where it is the market leader, with 22 per cent. By introducing high interest-bearing accounts, HBOS boosted its share of current accounts from 9 per cent to 14 per cent in the past three years. It says current accounts are a key gateway into the consumer credit market as frequent contact - through monthly statements - with account holders opens up opportunities to sell other products to them.

Customers have become more savvy and tend to shop around more for the best deals than they did in the past. A spokesman for HSBC said: "Customers' view of retail banking has changed. They want a much more retail-oriented proposition. Customers are much more used to comparing products at high street banks."

In response, the banks are also becoming more sophisticated in their marketing strategies and are seeking to emulate retailers in offering promotions.

HSBC recently became the first high street bank to hold a January sale when it opened its branches on the bank holiday after Christmas. It launched a package of banking and financial products that it claimed could save the average person nearly £2,500. Joe Garner, HSBC's head of customer propositions, said: "The January sale is a highlight of the retail calendar, so why not in banking too?"

Mr Garner, who previously worked for Dixons, is one of several retailers who have been poached by banks. Lloyds hired Helen Weir from Kingfisher as its finance director. HBOS, which was formed by Halifax and Bank of Scotland, hired Andy Hornby from Asda in 1999.

His arrival marked a key turning point for Halifax, which under his helm started to innovate and design new, simpler products to meet customers' needs, according to analysts at Dresdner Kleinwort Wasserstein.

Evidently new products cannot offer a lasting advantage over competitors because they can be copied. Lloyds recently introduced a simplified range of long-term savings products for sale through its branch network.

Simon Maughan at Dresdner believes HBOS stands out in its ability to accurately assess and predict its customers' needs. "Itsamazing sales story suggests excellent processes for selling products - a combination of good advertising, simple and quick sales processes so customers do not have to fill too many forms out and, of course, the right staff incentives in place to encourage a sales culture within the organisation."

The consumer lending market has boomed over the past few years, driving economic growth, with house prices surging by up to 25 per cent a year. Now that the housing market is coming off the boil, competition among high street banks vying to grab a share of a shrinking credit market is set to intensify even further. The number of mortgage approvals for house purchases fell for the sixth month in a row to a nine-year low of 77,000 in November, according to Bank of England figures. The volume of the loans fell to £6.46bn, the lowest since June 2002.

"The drop over the past 12 months has been stunning - 43 per cent year on year," Simon Rubinsohn at Gerrard fund managers, said. "That even exceeds the collapse in activity seen at the tail end of the 1980s."

The banks' strategy of chasing volume growth to counter declining profit margins will come under increasing pressure as the consumer tightens his belt. The widespread strategy of making introductory offers of 0 per cent interest on credit cards is driving up the cost of gaining new customers and eating into banks' profitability as existing customers switch their accounts, according to a report by PricewaterhouseCoopers.

After a period when the banks sought to cut costs by moving away from branch networks by trying to sell more products over the phone and through the internet, they returned to the traditional branch network. They realised that it is far easier to sell - and cross-sell other products - to a customer sitting in their branch.

Lloyds has devolved its branch management, giving local managers discretion to set their own opening hours with the result that some branches even open on Sundays. After its decision to draw back from overseas markets, Lloyds, the smallest of the Big Four banks, is more dependent on the UK retail banking market than the others.

While rebuilding what was once a strong retail business, Lloyds is beefing up its wholesale banking operations, where it sees big potential for cross-selling to clients. Its size and narrow focus on the UK make Lloyds vulnerable as a bid target. Meanwhile, Barclays' retail banking business has struggled, with costs running high. John Varley, the chief executive, has vowed to reduce the cost to income ratio - an important measure of how efficient a company is - by 2 per cent a year for three years. Its ratio of 57 per cent compares with 40.5 per cent at RBS and 38.9 per cent at HBOS, the lowest of the major banks.

Yet Barclays has expanded its capital markets operations, with Barclays Capital now its fastest-growing business. Moreover it continues to build a presence outside the UK, and its planned acquisition of Absa, South Africa's largest consumer bank, would be a major coup.

Bigger, acquisition-hungry rivals such as HSBC and RBS, with big businesses in the US and elsewhere, depend even less on their UK retail banking operations. Both have large wholesale banking and capital markets operations, and RBS says UK retail and consumer lending makes up less than 10 per cent of its business.

It remains to be seen how Santander's takeover of Abbey National changes the retail banking landscape. Its new Spanish owners will seek to transform Abbey, a weak player, by becoming more aggressive on the pricing front and more innovative in product design.