DOT.COM mania, the threat of new and aggressive competitors and concerns about the economy overheating, lie behind the sharp fall in Irish bank share values.

Allied Irish Banks' (AIB) share price is now just about half its 1999 high price of €18.15 (£14.29); Bank of Ireland shares are about 40 per cent down on their 1999 high; Irish Life and Permanent is 48 per cent down on its 1999 high; and First Active shares have fallen from €5.00 to about €2.40. The best performer has been Anglo Irish Bank which is currently just about 20 per cent off its 1999 high.

Irish bank shares began to slide in the middle of 1999 and are now firmly in the doldrums. A number of factors were behind the dramatic fall. One factor was international concern that the Irish economic growth bubble was close to bursting which in turn meant international investors became considerably less interested in financial institutions' shares.

Another factor is an international environment of rising interest rates - rising rates always depress bank shares. And the uncertainty about the liabilities of the banks for DIRT, interest and penalties because of bogus non-resident bank accounts has weighed on bank shares. But probably the most important factor currently holding down share prices is the rapid and far-reaching change under way internationally in how financial services are distributed. Dot.com mania has arrived in the banking sector, following telephone banking, as yet another method of serving customers without the need for a wide and relatively expensive branch network.

Although Internet banking is still at an early stage of development, the huge explosion of customers using the Web means it is expected to become a very important method of delivering financial services.

With Internet and mobile-phone banking developing and telephone banking now well established, the concern is that traditional banks with their costly branch structures may not be able to compete effectively with a new breed of leaner competitor. This concern is depressing bank shares.

Some of these leaner competitors will be traditional banks which are moving their distribution focus from branches towards distribution through telephone banking and the Internet. This move involves branch closures and job losses.

But others will be the new companies set up specifically to use the Internet to sell and target customers usually in niche areas such as mortgages and savings products. These competitors offer only electronic service and because they have a lower cost base can compete aggressively on price.

Irish banks are developing their online capabilities: Bank of Ireland has 25,000 customers for its Banking 365 on-line service and claims 1,000 new customers per week; AIB this week launched its online mortgage operation. But what is not yet fully clear is their overall Internet strategy - how they plan to compete in a new environment where the traditional and relatively expensive bricks-and-mortar network is being challenged by electronic operators who can cherrypick the more profitable business areas. The issue for banks is how to develop an effective e-commerce service while at the same time cutting costs to ensure their products and services can be priced competitively. It is still unclear where Internet strategy will fit within their future overall product-delivery strategy.

So far the Irish banks appear to see the Internet as part of a well-rounded delivery platform which includes branches, telephone and other methods of delivery - the clicks-and-mortar approach. This scenario sees the ATMs, the Internet and the telephone delivering many of the services traditionally provided in branches. The branches, in turn, would be refocused into sales outlets selling life assurance and more complex products where customers want face-to-face explanations and advice.

In Britain this week Barclays chief executive, Mr Matt Barrett, said online banking would be a major part of his long-term strategy. The market welcomed the announcement which came with good results and pushed Barclays' share price up 74p to £15.07 sterling (€24.44) in early trading.

But at the same time, Mr Barrett unveiled plans to cut costs and an efficiency drive which will cut £1 billion sterling from the organisation's cost base by 2003. And he said Barclays would not sacrifice profits pursuing an Internet customer base.

"We are aware of the pitfalls. We do not plan to buy market share by sacrificing margins, but to introduce new technology in step with our customers' willingness to pay for it," he said. He dismissed the view that established bricks-and-mortar organisations would find it tough to compete against leaner, more agile e-banks.

"Five years from now, there will be no distinct e-businesses or dot.com companies, only companies that have learned how to change their business models and survived - and those that have fallen by the wayside," he said. In January alone, 100,000 new customers signed up for Barclays' Internet service.

"A bank with the brand value of Barclays, 300 years of trust and integrity and a customer base that a dot.com business would envy is particularly well placed to take advantage of this new economy," he said.

At the same time as the Irish banks are developing integrated e-commerce strategies, external competitors have started to target the Irish market. First Active was an early casualty - it failed to recognise its vulnerability in the mortgage market to competition from telephone banking. The arrival of Bank of Scotland late last year using telephone banking to offer a mortgage product price one percentage point below the then lowest rate gave the Irish financial institutions a first taste of real external competition. It was followed by the Northern Rock telephone banking assault on the savings market.

With these assaults expected to intensify, margins will continue to tighten, forcing the banks to cut costs to retain their market shares. In prospect for the sector are branch closures and job losses. Irish analysts consider that the fall in bank shares is now overdone. But no immediate recovery appears in prospect unless the Irish market sees some bid-interest in one of the main banks.