Proof of the big bank theory

The Lloyds takeover of TSB is evidence of the transformation sweeping service industries

So the bank that likes to say "yes" to its customers has said it for itself: the TSB is being taken over by Lloyds.

Newspapers tend, reasonably enough, to write about these large takeovers in one of three ways. There is a financial story: the billions going to one or other set of shareholders. There is a human story: the hundreds, perhaps thousands of jobs that might be lost in what is politely called "rationalisation". And there is a public policy story: might a large merger like this result in less competition for banking services in the high street?

Nothing wrong with any of that, for all these approaches are useful in their own way. But there is another way of looking at this takeover that encompasses all three, and it starts with a simple question: why?

A takeover like this does not happen just out of whim. Of course, some takeovers have little rationale and subsequently unravel, but this is not a one-off. We are seeing a whole industry transform itself, and industries do not put themselves through large structural changes unless there is some powerful impetus to do so.

There is. Several of our big service industries, including banking, are in the early stages of a transformation akin to that which has governed our manufacturing industries for a generation. Until recently most of these industries lived in a protected environment - just as, say, our car and motorcycle industries lived in during the Fifties. Banking, insurance, retailing and telecommunications all lived, and still live to a large extent, immune from international competition. They compete with each other, to be sure, but within known rules of engagement.

It was international competition, or rather our inadequate response to it, that did for our mass-market car and motorcycle industries. Much the same thing happened to our consumer electronics industry, although we have been more successful in preserving some indigenous up-market brands. In some corners of manufacturing we have kept such successful niche players, but much of our mass manufacturing is now foreign-owned. Indeed, foreign ownership, by bringing in world-class standards, has led to the welcome renaissance now evident.

But it is a harsh process. Mass manufacturing is a commodity business. The products are much the same, sothere is tremendous pressure to grind down costs. To make money you have either to be very big in world terms (being big in national terms is not enough) or you have to find the undiscovered corner where craft and cunning enable smallish players to excel.

This process, this division into commodity and niche businesses is less advanced in most service businesses, largely because they have been less exposed to international competition. But it is happening. Look at retailing. It is an area where we have not only responded effectively to foreign competition, but are exporting our own expertise. Retailing is not yet a truly global business, but if it does become one, we have several global brand names: M&S in particular.

But our high streets and our out-of-town shopping centres are dominated by chains. There is a homogeneity about British retailing which is unequalled in Europe. An M&S, a Boots, a Sainsbury or any of the other top 10 brands provides consistent high quality. We have voted for these dominant chains with our purses and wallets in exactly the same way that we have voted to buy our cars and our TVs from a dozen or so dominant manufacturers. And we seem to be in the process of making the same choice with financial services.

There have, of course, been large banking groups for many years: witness the waves of mergers before the Second World War which led to the "big seven" clearing banks. The seven then became four and names like Martins and the District disappeared. So in one sense we are seeing just another act of a very long-running play.

But there are two new features in the past couple of years that are now forcing even faster change. One is the ability of building societies to change from mutual ownership to shareholder ownership. This has increased the spirit of competition for retail banking business and created new entities that can be taken over.

The other is a change in what might be called the manufacturing of financial services. We don't think of banking services being manufactured, but someone has to feed the information into computers, handle the cash, make the decisions about loans, try and sell travellers' cheques and so on. Some of this work is done at central "factories", such as the banks' computer centres. But a lot still goes on in branches in the high street. Next time you have to queue at a bank counter and see several of the staff just sitting at their desks, reflect on the fact that they are not doing nothing - they are manufacturing banking services.

But now banking is changing from being a cottage industry with lots of branches staffed by lots of people into a genuine factory system. FirstDirect, the telephone banking service of the Midland Group, has its staff sitting in a central "factory" doing their business over the phone. This has had an absolutely shattering impact on the way banks think. It does very well on customer satisfaction (excellent results in this month's Which? report), it isvery cheap and it does not trade on what banks have assumed was one of their great assets, their brand name.

Much the same is happening with telephone insurance services, pioneered by the Royal Bank of Scotland's Direct Line, which are proliferating.

Result: banking and insurance are becoming true commodity products, where people make a utilitarian decision on who is doing the best deal, rather than being loyal to their parents' bank, or the one that gave them their first student overdraft.

This put tremendous pressure on the industry to find ways of driving down costs. There may be room for a handful of boutiques that charge much more and offer a personal service. This is certainly very profitable - all the big banks are seeking to provide this sort of service. But the big business consists of driving down costs, "rationalising", "downsizing", "letting people go", and all the other euphemisms that companies employ when they are cutting their labour force. No one knows how far telephone banking will cut into branch banking but the banks know that they have to slim their branches and offer some form of telephone service. And slimming is less painful if you huddle with someone else while you do it.

So what we are seeing is the same sort of process that has happened in manufacturing; the same sort of job insecurity; the same pressure to drive down costs; and from the customer's point of view, the same homogeneity of service. We clearly want it. We chose the banks (or building societies) that offer the best perceived service for the lowest price: the cheapest loans, the highest deposit rates. We may regret the loss of independence of the TSB, just as we bemoan the closure of the corner store or the demise of names such as Austin or Riley. But that is where our actions lead.