Innovation: Virtual rivals stalk the clearing banks

BRITAIN'S retail banks and building societies are bracing themselves for a wave of competition from 'virtual' banks using electronic links to eliminate the need for traditional branch networks.

Through services ranging from interactive television in the home to automated public kiosks in public places, virtual banks will offer multiple points of access to complex products, many configurable at the point of sale, to a highly segmented customer base.

Virtual banking will offer opportunities not only to the financial services establishment but to new bankers such as telecommunications or utilities companies, which will be able to exploit their huge customer databases, huge transaction- processing capacity and extensive telecommunications networks.

There are already straws in the wind. AT&T and General Motors are two of the biggest card issuers in the US, and BT will act as banker for such companies as Interflora, which sell products via its networks.

Rob Baldock, a partner at Andersen Consulting, who chaired an international conference on virtual banking in London earlier this month, expects to see 'at least one virtual bank' in the UK within three years. 'It is beginning to dawn on the retail banking community that it is vulnerable,' he says.

John Grimmett, managing director of Barclays Network Services, says: 'The real question is what if someone does provide virtual banking and customers take to it? The name of the game is to acquire the ability to move very quickly.'

This means putting a technological infrastructure in place now. Whether they recognise it or not, many financial institutions are already thinking about virtual banking as they struggle to square an unforgiving competitive circle. Business volumes are at best static; customers are increasingly choosy and pushy; financial products are becoming commodities; and technology is opening up the financial services market to newcomers.

The challenge facing traditional bankers is to compete in this environment without pushing their costs through the roof - which is what conventional telephone banking threatens to do by adding another cost layer to their existing structures. Mr Baldock characterises a virtual bank as 'a bank you see less of but spend more time with'.

'Customers will be able to access the bank wherever they are, whenever they want to.'

The virtual bank will support a host of interactions. If a customer wants to pay a bill to another customer, for example by setting up a direct debit or transferring funds from one smart card to another, this will happen without the direct involvement of bank staff. What is radical about this model in retail banking is that it will allow true micro-marketing - the tailoring of intimate mixes of products, channels and prices to individual customers.

Unsurprisingly, the prospect of virtual banking gets a mixed reception from today's financial retailers. The Halifax Building Society is wedded to its expensively refurbished branch network. Nationwide is experimenting with a 'self-service' branch in Aylesbury.

But it is in South Africa that virtual banking is most advanced. Eric Tomlinson, divisional general manager of Standard Bank in Johannesburg, is a virtual banking pioneer. He has long argued that the key to South Africa's highly developed but static market is delivery. Now the challenge is to hang on to existing business while making a return in the emerging market among blacks.

Standard Bank began putting virtual banking components into place in the early 1980s, first with multi-function automated teller machines (ATMs) in 1981, followed by electronic branches, one-card banking, office and home banking, access to loans via ATMs, and an interactive banking terminal introduced this year.

The trick, Mr Tomlinson said, had been to harness these electronic delivery channels in a cohesive strategy. Standard offers them both as supplementary to its branch network, and as a separate, direct banking option. The bank is using this experience to serve a growing demand for banking services from the black community.

In September, it launched E Bank, a purely virtual operation with its own branding and a 'fast-food feel'. E Bank has no branches or branch staff, only sophisticated electronic terminals, equipped with thumbprint recognition systems and smart cards, and able to handle coins as well as notes. Many of these terminals will be franchised or sponsored by employers or retailers. Uniquely, E Bank expects to make a profit on transactions.

What drives Standard Bank's programme is that as South Africa opens up, foreign banks, unencumbered by local branch baggage, have the potential to cream off its most profitable customers. This could strike a chord among UK clearing banks, as they contemplate BT's database of 22 million customers.