The banking industry in the Republic is not competitive and does not serve customers in key areas, according to a report published by the Competition Authority.
Its release came as Denmark's biggest financial institution said yesterday it was paying €1.4 billion to enter the Irish market, with the promise of cheaper mortgage and other products within a year.
Danske Bank is to buy National Irish Bank and Northern Bank from National Australia Bank and will finalise the deal next spring. The bank said it is keen to aggressively increase its share of the Irish banking market. The two banks will continue to trade as NIB and Northern Bank and will be run by its current local management.
The Competition Authority report - published as part of a continuing investigation of the banking sector - claims that "competition is not working well for business or personal customers".
It accuses the banks of "locking in" customers by making it difficult for them to switch current accounts and also putting in place structures which prevent new banks entering the market.
These obstacles do not apply to Danske Bank as NIB is already part of the clearing system. The report, which will form the basis of final recommendations to be made next summer by the authority, calls for a revamp of the clearing system, which banks use to transfer money between accounts.
Access to the system, which is controlled by the large banks, is vital to any new competitor that wants to enter the Irish market.
The authority also wants an end to controls on bank charges, arguing they prevent innovation. Other recommendations include a stronger voluntary code for banks to facilitate account-switching by both personal and business customers.
The study found that the refusal of banks to pass on interest rate cuts to small businesses was costing companies €85 million a year. Mr Terry Calvani, a member of the Competition Authority, said the reforms would have a positive effect on business and personal customers. However, small business lobby groups yesterday questioned the ability of the authority to see the reforms through as they did not have the power to force the banks to change their policies.
The Danske Bank chairman, Mr Peter Straarup, warned that Irish consumers would have to wait up to a year before NIB and Northern would be offering a wider range of products at competitive prices.
"We have a willingness to gain market share and we will be price-competitive to do that," he said.
The deal was welcomed by the Irish Bank Officials Association which said it would end the uncertainty for the 800 staff at NIB and the 2,300 at Northern Bank. Danske Bank has said it will cut operating costs by about 15 per cent but that this would not reduce customer service.
It will be primarily focused on achieving improved efficiency and profitability through the integration of the business within the Danske Bank group and new information technology systems.
The deal marks the withdrawal of National Australia Bank from the Irish market after 17 years. Its chief executive, Mr John Stewart, said the sale was a "win-win" situation for NAB and Danske.
"This is an excellent outcome. We have achieved an attractive price for these banks. It also opens an exciting new chapter for the two Irish banks and for Danske."