Internet poised to give banks big shake up

The traditional Irish retail banking structure is set for a serious shake-up over the next couple of years. The Republic's two largest banks - Bank of Ireland and Allied Irish Banks (AIB) - agree that the branch network as we know it will be dramatically transformed.

"The Internet is a very rapidly moving environment, and we would envisage any function currently available in a branch, will soon be available over the Internet channel," says Mr Nick Fahey, programme manager, Bank of Ireland.

Irish banks have redoubled their efforts regarding Internet business during the last six months, as their European and US counterparts have begun to attract significant customer bases from non-traditional quarters.

The impact which Bank of Scotland made on the market when it began offering mortgages here, simply by dialling the bank - which also offered very competitive rates - is a good indication of what lies ahead.

The British marketplace has seen dramatic changes in the past year. The most successful foray into Internet banking, has been Egg, the Internet arm of Prudential. At the end of September it had 200,000 Internet banking accounts, second only to Barclay's with 400,000 and ahead of Lloyds-TSB which had 100,000 accounts.

Egg, which has added an offline operation, currently has $13 billion (€12.2 billion) in deposits, with average deposits of $30,000 (€28,171). When the market average is $5,000 (€4,695) per depositor, the necessity of an Internet banking strategy becomes compelling for traditional operators.

At present, Bank of Ireland and AIB offer basic Internet banking services to consumers where they can view real-time statements within current, loan and credit card accounts. They both offer facilities to pay utility bills, and move money between multiple accounts in the account holder's name.

By early next year, both plan to allow transfer payments into other third party accounts. This facility is already available to business customers, although AIB has yet to make it available over the Internet, where businesses can pay or invoice customers in real time and across international boundaries.

However these offerings still remain a long way off the pure Internet model demonstrated by Egg, or more recently Enba, the Dublin-based holding company for European Internet-only financial services.

Both companies have invested heavily in attracting young, technology-familiar customers, who might previously have been put off by traditional banking institutions. The key to their success is that they have launched new brands, offering discounted products and services.

Now Lloyds-TSB, one of Europe's most highly regarded banks, is to establish a separate Internet banking brand which would encourage customers to migrate to online banking. Its first year target is one million online accounts.

"There's no longer any loyalty out there," says Mr Michael Hennigan, managing director of www.finfacts.com, the online financial information site.

"Once people accept a brand has an element of trust, they'll bank with them. In the UK it's currently a bear pit for business, but to say Ireland is up there with European leaders is a serious exaggeration." The Irish banks, however, have no immediate plans to set up independent brands of their own. Although he accepts its success in building up a huge customer base, Mr Billy Andrews, AIB general manager for non-branch channels, questions the wisdom of Egg's strategy, which is expected to report losses of £200 million sterling (€290 million) this year.

"Every deposit they take they lose money . . . For our own part we expect to announce some initiatives in the coming months. We absolutely believe this new arena can't be addressed entirely alone, and we have to look at bringing combined strengths to bear," says Mr Andrews.

Both Mr Andrews and Mr Fahey agree that there will be implications in the longer term for the high street branches of traditional banks. But they do not envisage wide scale closures.

"We don't expect a fall-off in staff, because our research has found that customers interact with us more frequently as new services are added. More complex product sets like investments and pensions need more one-to-one contact, which adds value to the customer relationship," says Mr Fahey.

Mr Andrews predicts branches will be radically re-engineered. "Routine transactions will be conducted directly online, and branches will focus on sales, service and advice. This will lead to better opportunities for staff, who can now engage in more interesting activities," he says.

Some 10 per cent of AIB's customer base is currently banking online, and Mr Andrews expects this to grow to as much as 65 per cent within five years.

Bank of Ireland currently has 15,000 people banking online. Neither bank will specify how much it is willing to spend on its Internet strategy. If Citibank's experience in the US is a yardstick, both banks need to budget heavily if they want to be serious players in the online game.

Citibank has 400,000 Internet banking customers, and in the three months to the end of June its e-Citi unit recorded a net loss of $44 million (€41.32 million) on $55 million (€51.65 million) in revenue. Operating expenses rose from $94 million (€88.27 million) to $128 million (€120.2 million) over the year.