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Telephone and on line finance: Will branches wither as phone banking takes root?

There are better places to spend your lunch break than standing in a queue at the bank. But if you use the telephone service your bank probably offers, frustrating visits to your branch at peak time may now be only an infrequent irritation.

By the year 2000 nearly a third of the population will be using phones to do their banking, says Datamonitor, a firm of analysts. Banks setting up new and enhanced telephone services say customers are keen to use them. TSB's PhoneBank system, launched in September 1994, signs up 20,000 new customers every month and now serves around 640,000 people.

Most banks offer a telephone service, ranging from fairly basic to fully comprehensive. All allow you to pay bills (as long as the destination has been pre-arranged), check balances and recent transactions, and order cheque books and statements. Although you must register to use the services, most are free except for the cost of a local-rate phone call (0345 or 0645 numbers).

Whether there's another human being on the line is up to you. TSB's PhoneBank Express is automated, using either touch-tone or voice commands, while NatWest's Primeline, also a 24-hour service, can give you access to a named bank manager at an agreed time.

Some banks have gone further than others. First Direct, part of Midland Bank, was launched in 1989 as a pure telephone banking operation with no branches; it now has 750,000 customers. Lloyds Bank started its LloydsLine phone service in 1993. But it does not actively market the service, says a spokesman, and has a comparatively meagre 75,000 users.

Given the fact that these services are much cheaper for banks than costly branch operations, any reluctance to push customers towards telephone banking is surprising. "Research shows that for every pounds 1 it costs to serve a customer over the counter, the cost is 80 pence for telephone banking and 40 pence for an automated service," says Philip Blackwell, director of electronic commerce at Cap Gemini, the information technology company.

But rather than shifting inquiries away from branches, some banks say telephone banking has simply meant that customers ask more questions than they did before.

"It's an additional cost at this stage because most people use both the branch and the phone service," says Lloyds TSB.

Computer-based services are growing rapidly, and these cut the cost for banks still further. On-line banking, through a private network or even the Internet, costs just a penny for every pounds 1 it costs over the counter, according to Mr Blackwell. "From a pure communications cost there are some attractive gains to be made on the bank's side," he says.

Royal Bank of Scotland, having enlisted the help of the software giant Microsoft, rolled out its Internet service in June with access through Microsoft's Internet Explorer 3. First Direct has begun a trial of a new PC banking service, with 3,000 customers using it. More are set to link up in November. First Direct says people using the service have been enthusiastic, with 82 per cent saying they would recommend it to friends and relatives.

Withdrawing cash through your home computer might even become possible one day if use of Mondex, the "electronic purse", becomes widespread. Trials of the card, which can be used to carry and spend money electronically loaded from your bank account, are continuing. Nottingham University is the latest organisation to introduce the Mondex system, from the beginning of this academic term.

There is no doubt that banking through your computer is convenient when it works well, allowing you to sort out banking matters at a time and place of your choosing. But hurdles remain. For example, although 31 per cent of people use a PC at home, according to NOP market research carried out for Barclays Bank, far fewer have modems and access to the Internet, which are necessary to link up your computer. Worries about security deter many people, although the computer firms behind the new systems are developing safeguards to keep thieves out of the on-line banks. First Direct says it decided to operate its PC banking service on the bank's private network rather than the Internet to bolster client confidence.

But a watertight system is hard to create. "The difficulty is always, even with existing banking systems, that criminals spend a lot of time looking at the system and trying to find ways to defeat it," says Stuart Cliffe of the National Association of Banking Customers (NACB). "And the need for tight security measures can lead to unacceptable delays.

"If banks make it too difficult to access your money then you will complain, but if it's too easy then other people can get at it as well," says Mr Cliffe.

q Contacts: Royal Bank of Scotland, 0131 556 8555; Lloyds TSB, 0171 626 1500; NatWest, 0171 920 5555; First Direct, 0800 242424; NACB, 01291 430009.