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The battle for the high street

Retail banking is undergoing dramatic change. New delivery mechanisms such as the internet and aggressive new competitors such as supermarkets will eat into the easy profits previously enjoyed by retail banks. Can the big banks see off the threats? Rebecca Bream reports.

Retail banking has generated remarkably good profits in recent years for big banks. The UK's Lloyds TSB, for example, has become the biggest bank in the world by market capitalization, with profits for 1997 forecast at £3.2 billion ($5.2 billion), thanks largely to its focus on retail banking. So high have been the returns that a number of banks ­ for example, Barclays and NatWest of the UK ­ have sold their investment-banking arms to direct more of their attention towards this lucrative sector.

But life for retail banks is about to get a lot harder. A range of non-banking companies, lured by the idea of easy profits, are beginning to move into financial services, often with high levels of success. Technological developments ­ from sophisticated data storage to internet banking and smart cards ­ have robbed banks of their monopoly in transmitting money. At the same time, customers are becoming more demanding and are readier to switch to financial institutions that offer better rates.

This heightened competition is making life difficult for traditional retail banks. They tend to have expensive branch networks and relatively outdated procedures, and their operating costs are usually much higher than their new, more flexible rivals.

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