Outlook: Customer care is the key for battling bankers

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The Independent Online
Savers are being treated to a veritable litany of eye-catching interest rate and new product offerings right now, from established players and newcomers to the market alike. The latest of these comes from the Halifax, which promises to pay a headline rate of a remarkable 7.85 per cent on instant access accounts. This is not quite as good as it seems, since that very high rate is available only on deposits of more than pounds 40,000. For smaller deposits, the rates are not so competitive.

Even so, the initiative is indicative of the way in which the savings and retail banking market is being transformed by new entrants and low cost products. The good news for consumers is that these new highly competitive rates and products are not one offs, brief aberrations that will vanish as quickly as summer snow. In fact, things are just going to get better and better for buyers of financial products. The bad news for shareholders in these companies is that as they do, the profit margins are going to get worse and worse.

Underlying these changes is the rapid development and falling costs of information technology. The effect has been greatly to increase capacity in retail banking and other forms of financial service while simultaneously decreasing the need for big work forces to support them. This in turn is making possible the provision of enhanced services at considerably lower cost. Traditionally high barriers of entry to the financial services industry are falling as technology becomes more widely available and reduces the scale required for low cost operation.

As a result, a range of new entrants - supermarkets, other financial institutions like Standard Life and the Prudential, and entrepreneurs like Richard Branson - have begun to attack what was once the exclusive preserve of high street banks and building societies. The established players have little choice but to compete head on, both on price and service. If they don't, then even taking account of the usual inertia of banking and building society customers, they'll find the ground swept from under them.

In responding to the shock of the new, present market leaders will also need to rediscover some of the basic traditions and attributes of retail banking - most notably in the area of customer care. Time was when your local bank manager could be relied upon to know all about your personal finances and offer usually sound advice on how to manage them.

That at least is the picture most people have of bespoke Victorian banking traditions. Actually, that kind of service was never available to more than a small minority of the relatively well healed. It has all but vanished in the age of banking for the masses. Today, banking is too often about selling - shoving highly priced and disparate products down the customer's throat, sometimes in a way which is positively against his best interests.

Again, new technology and enhanced competition offer the possibility of a return to those traditional banking values and standards of customer care, only this time they will be available to all. Virgin One has already recognised the demand for one stop banking, of offering a rounded reasonably prices customer service rather than a series of different highly priced products.

The more savvy established banks and building societies are beginning to move in that direction too. Unfortunately for their shareholders, this brave new world may prove a good deal less profitable than existing retail banking models.