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Outlook: Co-op/Smile.co.uk

NO WONDER the established high street banks want to merge with each other. For them, the competitive pressures just seem to get worse and worse. It is hardly an exaggeration to say that such is the pace of change, they'll all be wiped out by the time the regulators finish arguing about who should be allowed to do what with whom.

Low cost newcomers such as Egg, Standard Life Bank and the supermarket banks have already succeeded in taking a very considerable proportion of the deposit base away from them. Now along comes the plucky little Co-operative Bank with what it bills as the first internet banking facility to offer current account holders the full low cost benefit of on-line banking.

All the big names have their own internet banking setups, but almost without exception, these are add on services to that already offered via traditional branch and telephone operations. The current account holder therefore gets none of the low cost benefit of cyberspace.

Through its cutely named Smile.co.uk offshoot, the Co-op plans to provide the whole range of current account services from direct debit to cash point cards and cheque books while simultaneously offering an interest rate of 4 per cent on outstanding balances. This is far and away above anything available via traditional banking arrangements. At 9.9 per cent, the overdraft rate compares well too.

Others will follow in the Co-op's wake with even more competitive rates, but to do so without risk of "cannibalising" existing customers, they have to be quite small. Thus do the smaller banks have a natural advantage over the bigger ones in exploiting the benefits of on-line and telephone banking. Perhaps surprisingly given the stodgy old organisation from which it has sprung, the Co-operative Bank has already managed to carve itself out an important niche as market leader in "green" and "ethical" banking.

Smile.co.uk maintains the pace of innovation, and who knows, if Don Cruickshank really does manage to force banks to carry the cost of account transfer, it may succeed in overcoming traditional customer lethargy to take a sizeable chunk of the current account market. Who would have thought such a poorly performing organisation as the CWS could have spawned such a treasure as the Co-operative Bank? And if Egg can be worth pounds 3bn after little more than a year of existence, what price Smile.co.uk a few months hence? Eat your heart out, Andrew Regan.