Internet waits in wings for banking dinosaurs

Whether you are plugged into it or not, most of us have in some way or other already been touched by the Internet. Not so traditional high street banking, whose forays into the Net have so far been reluctant and half-hearted. If the findings of a report published this week by the management consultants Booz-Allen & Hamilton are to be believed, it is not hard to see why. According to Booz-Allen's vice-president of information technology, John Boochever, the Internet poses a very serious threat both to the customer base of the traditional banking oligopoly and to its profits. I would go further. The Internet promises a revolution in retail banking of monumental proportions, one in which high street banks as we know and hate them may largely disappear.

On Monday, Barclays is planning to launch what it claims to be the most advanced banking facility so far to be offered in Britain across the Internet. Using your Barclaycard, you will for the first time be able to pay utility bills through the Net. It can readily be seen that this falls a long way short of full Internet banking. Indeed, it is scarcely more than a gimmick, which only fanatics and anoraks might want to use.

Most European banks worth the name are represented on the Web already, but their presence rarely goes beyond what Booz-Allen calls "entry level", similar to a glossy brochure telling you what the bank can offer. With full Internet banking it is possible to envisage a world in which it would not only be possible to access your statement, mail your cash, pay your bills and transact all the usual business associated with a bank, but one in which it might also be possible to have your custom chase the best deposit rates and lowest overdraft rates automatically.

Banking services would be unbundled enabling unfettered promiscuity of custom. Banks would lose their proprietary grip on their customer base, bringing about a reversal of the present position where customers are made to feel grateful to their bank for providing a service. Instead, the customer's financial profile would become the property of middle men and software providers, with the result that banks would genuinely have to compete for your business. In short, retail banking would become much more like wholesale banking.

If all this sounds like futuristic fantasy, don't be misled; it is not. The technology already exists. Booz-Allen estimates that, by the turn of the century, some 15.7 per cent of households in the US will take Internet banking. Furthermore, because these people will be drawn mainly from the upper-income brackets, they will account for some 30 per cent of retail banking profitability.

Computer ownership in Britain is not yet as highly developed as in the US and, according to Barclays, its customers in any case demand a plurality of different kinds of banking. They still want branch banking alongside all the new services on offer, Barclays insists. Well, perhaps, but once everyone learns how cheap Internet banking is, I'm not so sure. Through the branch network, the average payment transaction costs more than 60p. With telephone banking it is 35p. The cost through committed computer banking is around 17p. With Internet banking it is even better - just 8p.

That gives the Internet bank a very considerable competitive advantage. The cost-income ratio of the best of the high street banks is something like 50 per cent. With Internet banks, it can be as low as 15 per cent. No contest. So why is this service not already on offer in the UK? Er ... technology, mutter the big clearers. We can't get access to the encryption technology which allows secure Internet banking. Undoubtedly this is part of the explanation, but there is another rather more obvious one. The fact is that for existing retail banks with their extensive branch networks, Internet banking offers no cost advantages. Rather, a bit like telephone banking, it merely adds to costs until the service reaches sufficient mass to allow other cost centres to be closed.

Herein lies part of the danger to the established banks. Unencumbered by the high-cost branch network and infrastructure of the traditional banks, the pure Internet bank can undercut with abandon and still make good profits. The high street banks are hard enough to distinguish one from another already; most customers cite convenience as the chief factor for choosing one bank over another. Once the advantages of geographical proximity go, all brand loyalty and value falls away. The traditional banks will find it increasingly hard to hold on to their market positions.

All this is for the future, but it is not so far away as to be only a distant concern. For the time being the old dinosaurs of banking are making record, many would say excessive, profits. A new, smaller, faster moving reptile is waiting in the wings. Twenty years from now, they may have inherited the earth.