Case of the vanishing banks: Fall-off in lending spells closure for more branches as technology sets the pace, writes Richard Thomson

BY THE end of the decade you will probably never have to meet a bank manager again. For most people that cannot come soon enough, but the banks have now realised that it is in their interests too.

By then, the whole definition of what a bank is may have changed quite radically. They will still be doing the bread-and- butter deposit and lending business they have always done. But they are likely to have converted themselves into the only credible financial supermarkets in the country, offering everything from mortgages to life assurance and in some cases even stockbroking.

Last week's interim results contain clear indications of how far the big four clearing banks have moved since the early 1980s and how they are likely to develop in the next 10 or 15 years. The results show that their income and profits have been rising strongly. With each passing year, the proportion of profit coming from fees and charges - rather than from lending - increases.

At the same time, bad-debt provisions continue to soar as the recession drags on. The results also show that bank lending has fallen sharply because of a slump in the demand for credit and a policy by the banks to shrink their assets. Although good lending is becoming more profitable again after the highly competitive 1980s, very few bankers believe there is any prospect of a strong pick-up in lending over the next few years. That means the traditional source of banking profits will no longer be the most reliable.

And that in turn forces a particular kind of strategy on the banks. In broad terms, it means that to keep profits rising, banks will have to concentrate on boosting their fee income and cutting costs. They have already made considerable strides in this direction. To push it much further, they will have to make fundamental changes in their character and the way they do business.

The most striking changes are likely to be in personal banking, with the disappearance of the huge branch networks. Customers will be able to operate their accounts by a kind of remote control.

Branches have been disappearing in their hundreds since the mid-1980s, but the big four still have more than 7,000 between them.

Barclays and National Westminster, with the two biggest networks, are each closing about 100 branches a year, which means that about one third of their networks will have vanished in 10 years' time.

Branches are extremely costly, and relatively easy to cut out. They are becoming less important, too. Once the local bank manager was a pillar of his community. Now, more often than not, he is a glorified financial services salesman. His traditional job of lending money has largely been usurped. Personal loans are decided by credit scoring, a computer-based system that can be operated by junior clerks. Bigger decisions on corporate lending are normally taken in a regional central office or separate corporate banking operation.

As branches vanish under the pressure of cost-cutting, technology is stepping into the breach. Bank of Scotland, TSB Group, Midland and NatWest have been testing versions of telephone banking for several years. The simplest allow the customer merely to get information about his bank account. In the 'bank within a bank' pioneered by Midland, however, customers set up a new account with First Direct, its phone banking operation, and do over the phone all the transactions they could complete in a branch.

The service is open 24 hours a day every day but is still cost- effective because it is run from a single, large out-of-town office with fewer staff than is required in a network of costly high street branches.

The big banks now look as if they are about to move seriously into this field instead of just dabbling. It may take time to catch on with the public, however, just as it took years for credit cards to become accepted in the 1970s. Midland has taken three years to gain just 250,000 customers for First Direct, but that could snowball once all the banks start selling a similar service. Midland estimates there is, at least initially, a potential market of 6.5 million customers for telephone banking.

The physical delivery of cash to the public will remain a basic banking service. As branches disappear, cash machines will become a more common sight. At that stage, there will be no reason why a customer should ever have to go into a bank branch. There will still be a need to make deposits by cash or cheque, but much of that can be done through the post or, again, through machines.

At the same time, cash should become less important thanks to the growth in cashless shopping. The introduction of debit cards - where payments are charged straight to the user's current account - was the main new banking initiative at the end of the 1980s. It is an important source of cost savings for the banks, since electronic payments are cheaper to handle than cash or cheques.

The only question is how fast it will catch on with the public. After a slow start, debit cards are already widely accepted in shops around Britain. Last year card-holders spent pounds 2.3bn on debit cards instead of using cash or cheques. Debit cards may be the normal method of payment in shops by the year 2000.

Apart from finding new ways to cut costs, banks will continue to look for ways of boosting their income from fees and charges - a source of profit that grew rapidly in the 1980s. They all offer life assurance, for example, usually from their own life companies. Yet they have hardly begun to exploit their enormous captive customer base in selling these services.

TSB Group is way ahead. It has achieved a 40 per cent penetration of its banking customers for its other financial services such as life assurance. Lloyds is the next most successful with 15 per cent. Barclays and National Westminster have achieved less than 10 per cent.

The banks have big advantages over most other financial institutions. They hold a remarkable amount of information about each of their customers. Skilfully used, this should enable banks to target customers with particular financial products.

To make the most of this resource, however, products need to be sold direct to customers by mail or by a salesforce. Simply making financial services available in bank branches is pretty ineffective by comparison. The pressure, therefore, is again to bypass the branches and find other methods of reaching the public. In 10 years' time the man from the Pru may find that he is being shouldered aside by a man from Barclays or Lloyds.

Lending money must remain at the core of banking business. While personal lending can be done by telephone, the more complex process of business lending will still be done face to face. Most banks have already concentrated corporate lending activities into regional centres, a process that is likely to continue as branch numbers dwindle.

But whether this will improve the quality of bank lending, or any of the other heavily criticised services they offer business customers, is anyone's guess. Barclays admitted last week that up to 40 per cent of its pounds 1bn bad debt provision for the first half of this year was the result of bad lending decisions (the rest was due to the recession). That is a pretty sorry record, but probably much in line with the other banks.

On the other hand, if Barclays is right when it said last week that borrowing was not likely to pick up much even when recovery comes, the next few years could provide a golden opportunity for the banks to concentrate on quality rather than quantity, to hone their banking skills. We may end up not only with fewer bankers but with better bankers.

(Photographs omitted)