How new technology, new entrants and even a new currency have sparked a global shakeout

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The Independent Online
ANOTHER DAY, another deal. Across the globe there is feverish speculation about another massive merger in the financial services industry. In the United States, the UK, Europe and the Far East, consolidation is the big story and the Bank of Scotland's ambitious pounds 20bn bid for NatWest is just another chapter.

A list of recent mergers numbers at least 40, topped off by the giant $70bn merger between Citicorp and Travelers to create Citigroup, the world's biggest bank. The US accounts for at least 10 other multi-billion dollar deals.

In the UK this year, Lloyds TSB bought assurance group Scottish Widows for pounds 7bn, quickly followed by NatWest's pounds 10.5bn takeover offer for Legal & General - a deal which is now threatened by Bank of Scotland's hostile bid. This decade saw HSBC buy Midland Bank in 1992, Lloyds' takeover TSB in 1994 and, more recently, a spate of ex-building societies have been snapped up.

Across Europe there have been mergers or takeover bids between major banking groups in France, Germany, Holland, Spain, Italy, Sweden, Denmark and Austria. Three of Japan's banks are merging to create the world's biggest bank with assets of $750bn. A wind of change has blown across the three main economic continents. New technology, new entrants and even a new currency have forced the big players to rethink their strategy.

This decade has brought a revolution in the way that financial services are sold and delivered. Thanks to the telephone and lately the Internet, banks have been able to bypass the high street branch and reach customers directly. The traditional banks, led by NatWest, Lloyds TSB and Bank of Scotland, have embarked on massive cuts in staff and branches. Salomons forecasts the current network could be cut by a quarter.

Alan Leach, director of the financial services division of analysts Datamonitor, said that as business models - such as branch banking - were made obsolete, the traditional banks needed to react. "Competing institutions have realised there is potential for cost cutting by combining their operations. This a universal theme," he said.

The new technology also brings in new players who take advantage of the fact that enables a banking operation to be set up without a branch network. In the UK these entrants include First Direct, Standard Life, Virgin, Sainsbury and Tesco.

"It was not that the market was overbanked, it was that most of the players were the wrong sort of old-fashioned players," said Mr Leach.

While the traditional banks have faced a domestic threat, the accelerating trend towards globalisation has forced them to prepare to compete in the international market - or face the threat of being marginalised.

The big players realised they need to gain critical mass to compete, prompting mega-deals such as Citigroup and the Japanese. But UK banks - with the exception of HSBC as the third biggest in the world - are relatively small players. In the case of Bank of Scotland, the NatWest deal would convert it from a regional into a national bank, and give it a platform to make further global acquisitions.

Within Europe, the banking sector is rapidly consolidating but so far only within each country. Thus in Holland the three largest banks have 80 per cent market share. However, the launch of the euro opens the door for cross-national mergers as the logic of adopting common settlement systems and software becomes unavoidable. Commerzbank has already said it wants to create a huge pan-European bank.

The Nineties have also seen a radical revolution in the wider financial services market as building societies convert to banks, savings and loans business move into banking and vice-versa.

Banks have been attracted to assurance groups as a means of getting into the fast growing, but equally competitive market of pensions and life assurance. Meanwhile insurers, especially for motor and home policies, have encountered the same challenge of new technology and competitors and have embarked on their own merger mania.