Net startups threaten big banks' profit

Europe's 'bricks and mortar' banks will have to cut costs to maintain profitability in the face of increased competition from online rivals, according to a report published today by US investment bank JP Morgan.

The report predicts that the number of Europeans using the internet to manage their bank accounts will almost triple in the next three years, raising the value of online financial services to 440bn euros (£275bn), some 15 per cent of the market.

JP Morgan estimates that increased competition, caused by online banks targeting the most affluent customers, could cut more than 7bn euros from the profits of Europe's largest banks.

The report forecasts that the number of Europeans banking on the internet will rise from 20 million this year to 55 million by 2003. A third of new savings business would then be done online, with a value of 158bn euros. For mutual funds, online sales would be worth 192bn euros, just under a fifth of the total.

Internet startups will focus on the banks' most valuable customers, who bring in double the profits of the average account. If they prove successful in grabbing a sizeable chunk of the high-value savings business, traditional banks could be left with the comparably unprofitable current accounts, plus costly overheads in the form of branch networks and sales forces.

The report also says that European banks have a poor track record when it comes to making savings. Only half those listed have managed to reduce their costs as a proportion of income over the last three years, and then only by marginal amounts.

However, the report does acknowledge that internet-savvy high-street banks have advantages over startups, including trusted brands, data about customers and branch networks.