Baked beans and bacon from a hole in the wall

Retailers are vying to serve our financial needs but, says Paul Gosling, the banks may strike back

Go into a branch of the Wells Fargo Bank in San Francisco on a Saturday, and you will queue up to pay in money or ask about a mortgage. Go in midweek, and you can buy yourself a tube of toothpaste.

The traditional bank branch is under threat as more people use Automated Teller Machines - ATMs or "holes in the wall" - and as banks force through waves of redundancies to cut costs. Wells Fargo is one example of the lengths branches are having to go to justify their existence.

But this is just a start. The fact is that not only the branch, but the bank itself is coming under threat from new technology. As the Wall Street Journal has said, "anyone who has distributed anything electronically can become a bank."

Sainsbury's proved the point a week ago when it announced it was applying for a bank licence. Marks & Spencer is already selling pensions. Many retailers and manufacturers of consumer durables, including car makers, now provide financial services. Stand by, too, for petrol retailers and computer companies moving into banking.

Inevitably, banks will be squeezed further. Almost all organisations with a large database of customers and the ability to process information efficiently have dreams of becoming niche financial players. They are encouraged by the poor reputation of banks: everyone, it seems, believes they can do the job better.

Does this mean bankers will meekly twiddle their cheque books until they are overrun by more efficient competition? Unlikely. Many are already moving into other areas to protect their profits - and one area they can target effectively is retailing.

The old barriers between many of the service industries are disintegrating. Increasingly, at the core of their operations are computer systems which can process money, baked beans, jobs, cars - anything - with equal ease. If they also have databases of their customers' names, they have a ready- made market to which they can sell. In a few years' time, it may be impossible to tell the difference between a bank and a retailer - and a travel agent, a utility and an airline.

So what is a bank? In the old days it was defined by its network of branches, which gathered, kept and distributed funds. That is a dangerous definition these days, according to John McKean, director of information-based competition at NCR, which has conducted an in-depth study of 15 of the world's largest financial services operations. "We have a redundant infrastructure out there," he warns.

Experts predict a strong and steady decline in the use of branches, thanks to developing technology. This follows years of shrinking branch networks: in the UK numbers have fallen from 20,400 in 1989 to 17,400 in 1994.

Banks now consider these outlets an expensive overhead, and are looking for ways to shed them. The branches of Bankinter in Spain are already franchises, not owned by the bank at all, while the UK's Chartered Institute of Bankers has suggested that a new type of independent or "free" branch may replace the traditional tied model. It suggests they could be sold off to companies that will use them to sell financial services on behalf of a number of banks.

Then there are "virtual banks" that have no branch network. These include telephone-based operations such as First Direct, which was set up by Midland, and a number of US Internet-based banks. The TSB offers electronic banking via the online information service CompuServe. The home computer is set to become a standard banking tool as online security improves.

If a bank is not a network of branches, what is it? It becomes nothing more than a conductor of transactions, and this is where it is at threat from any number of high-tech organisations. In theory, telecoms companies should be best placed to attack, because they have the infrastructure and customer databases. But they are unlikely to move quickly. "They don't have the focus to make it work," says Paul Feldman, head of management services at the Nationwide Building Society. "And some of their biggest customers are financial institutions."

Bill Gates of Microsoft has hinted that computer firms could put themselves at the heart of the banking process, controlling the payment systems. "Give me a piece of the transaction business and [the banks] are history," he said. A report compiled for the Bank Administration Institute by the Boston Consulting Group said banks would be taking a huge risk if they allowed new entrants to control online payment systems: "For banks, payment systems could represent a Trojan horse."

Meanwhile, the loyalty cards offered by petrol stations and stores can be used to build databases that then become a core of potential customers. Tesco even offers its loyalty-card holders a bank account, though this is administered by NatWest. Other retailers, including Sainsbury's, will follow.

The way the banks can strike back into enemy territory is to master the information technology themselves. In spending terms, British banks seem to be doing the right thing: they have invested far more heavily in IT than their counterparts abroad. Where they fail is on skills. In a study conducted for the Chartered Institute of Bankers, not a single senior manager in retail banking described himself as an expert on IT.

One of the few go-ahead players is Barclays, which is busy with a number of experiments in retailing. Car Shop UK, a joint venture between the bank and Sky TV, is a noticeboard for the sale of used cars. It can be accessed through Sky's interactive teletext service, Intertext, which allows viewers to search by price or model.

An international car-hire booking system is being added and John Bacon, a director of Car Shop UK, says there could be many other applications. "Customers feel in control for the first time."

Abroad, several banks have seen that ATMs can be much more than cash machines; they are technically similar to the "multimedia kiosks" increasingly used for on-screen information in town centres and malls. The San Paulo Bank of Italy uses ATMs as multiple information points, financed by advertising from a range of companies including travel agents, estate agents and clothes retailers. Clients can match a big purchase with a bank loan application there and then.

In South Africa, some ATMs sell cinema tickets. Meanwhile, Lisbon branches of the Banco Portugues do Atlantico have replaced human tellers with machines, and given them a wider remit: as well as the usual transactions, customers can read bills issued by the utilities and pay them by pressing a few buttons.

While technology seems to be the enemy of the branch, some of the more forward-thinking organisations are turning it to their advantage. The Nationwide, one of the few UK financial institutions led by a former IT director, is using kiosks to attract customers into branches. These feature touch screens that trigger pre-recorded explanations of financial products, as well as live video links to specialists based elsewhere. Staff, freed from the tills, now roam the branches asking visitors if they require assistance. Plush seats, coffee and toys add to the cosy atmosphere and Nationwide hopes shoppers will drop in for a rest. Sales of mortgage and insurance products have risen by 20 per cent where the kiosks have been installed.

Nationwide's Mr Feldman says there is no reason to limit the kiosks to finance: he would be happy if they sold anything from baked beans to cars. That does not mean the Nationwide would have to keep tins of beans on its shelves; it would simply be the ordering point for goods that were then delivered to customers' homes. He has talked to several retailers about forming partnerships to sell supermarket products from its branches, but has found little interest. The stores see themselves as providers of financial services, but cannot see that banks or building societies might return the compliment.

Nevertheless, the bank branch as retailer is seen by some experts as its best chance. "Financial institutions should be recruiting far more people with experience in retailing - people who have operated in the world of low margins," says Rob Baldock, a senior banking consultant with Andersen Consulting.

Whatever happens, the world will become more confusing for the banks, the retailers and every sort of service company. We shall have to wait to see if that confusion is good for consumers.

q Adapted from Paul Gosling's book `Financial Services in the Digital Age', published on 21 November by Bowerdean Publishing (0181 788 0938) at pounds 12.95.