As with most aspects of financial services and, indeed, life in general, what was once innovative has now become commonplace. It was only in 1988 that Direct Line became the first major financial services organisation to make a success of direct selling over the telephone, and a year later that First Direct revolutionised the current account proposition by establishing a branchless, telephone-based alternative to traditional high street banks. The telephone was rapidly adopted as a means of buying and servicing all kinds of financial products, from shares to bank accounts to household insurance.

While telephone sales have become the dominant channel in the motor insurance market, consumers are still very much wedded to the branch network when it comes to banks, generally using telephone banking to supplement the facilities offered over the counter. The high street banks, despite the success of First Direct, are still the dominant players in the market, and the big five have in excess of 8,000 bank branches between them - hardly a sign of a dying distribution channel. For these providers, offering telephone banking has not so much been a case of replacing existing distribution channels, but simply adding an extra option.

With the advent of the Internet came a fresh set of innovative competitors and fresh challenges for the high street banks. Rather than just a single bank competing with traditional institutions, a raft of new providers entered the market. The likes of Smile and Egg launched in a blaze of publicity, offering market-beating rates. First Direct, too, has adapted its product offerings to present a major challenge to the high street institutions.

Nevertheless, adoption has been slow. Many are simply reluctant to change their current account, highlighting the considerable inertia that providers must fight against when looking to increase market share. A more fundamental issue is a widespread reluctance among many to provide personal or financial details online thanks to, perhaps largely unfounded, security fears.

This report examines the factors driving the growth of direct banking services, covering both telephone and online channels, and pure-play and the so-called 'bricks and clicks' providers. Further examination is paid to the size of the market, and the mix and pricing of online and telephone-based products offered by the various providers. The initial costs of creating a brand identity led many pure-play operations to spend heavily on advertising and promotion, and the role this plays in the market is examined.

With most online providers offering better rates than the traditional banks, it is vital to understand what is preventing a widespread emigration to direct channels. In order to do so, Mintel commissioned exclusive consumer research, in which a representative sample of adults was questioned as to channel usage and attitudes towards online and direct banking channels. Finally Mintel investigates the possibilities for future development within this sector and forecasts the level of usage over the coming years.

Definitions

Socio-economic group

Socio-economic groups are based on the head of household or chief income earner and are defined as follows:

Socio-economic group	Occupation of chief income earner
A	Higher managerial, administrative or professional
B	Intermediate managerial, administrative or professional
C1	Supervisory or clerical, and junior managerial, administrative or professional
C2	Skilled manual workers
D	Semi and unskilled manual workers
E	All those entirely dependent on the state long term,
	through sickness, unemployment, old age or other reasons

Retired persons who have a company pension or private pension, or who have private means are graded on their previous occupation.

Students in Higher Education living at home are graded on the occupation of the head of the household. Students living away from home are graded C1 (no account is taken of casual or vacation jobs).

Lifestage and Special Groups

In addition to the standard breaks, Mintel also analyses the consumer research in the following manner.

Lifestages are derived from analysis of the exclusive consumer research and are split into four main groups:

		% of
		population
Pre-/no family	aged under 45 who are not parents	28
Family	any age with at least one child aged under 16 still at home	28
Third age	aged 45-64 with no children aged under 16	25
Retired	aged over 65 with no children aged under 16	20

As part of an ongoing policy to find new ways of analysing data, Mintel has created Special Groups of consumers to typify consumer habits in the early years of the 21st Century. Unlike the lifestage groups, these groups represent only sections of the population and do not account for all adults.

		% of
		population
ABC1 Pre-/no family	ABC1 socio-economic group and in the Pre-/no family lifestage	16
ABC1 families	ABC1 socio-economic group and in the family lifestage	13
ABC1 third age	ABC1 socio-economic group and in the third age lifestage	12
ABC1 retired	ABC1 socio-economic group and in the retired (65+) lifestage	9
Two full-time earners	Couples where both partners work full-time	17
One-person households	Aged under 65 and living alone	9
under 65
Internet users	All Internet users at home, work or elsewhere	39
Broadsheet readers	Read Daily Telegraph, Financial Times, Guardian, Independent or The Times	19
Mid-market tabloid	Read Daily Express or Daily Mail	22
readers
Popular tabloid readers	Read Mirror, Daily Sport, Daily Star or The Sun	33
Satellite/digital TV viewers	Have satellite/cable/digital TV	45
Mobile phone users	Have a mobile phone	68

Other reports relevant to this area of financial services include:

- Direct & Internet Selling, Finance Intelligence - UK Report, April 2003.

- Bancassurance, Finance Intelligence - UK Report, February 2003

- Private Banking and Wealth Management, Finance Intelligence - UK Report, December 2002

- Customer Retention, Special - UK Report, November 2002

- Deposit and Savings Accounts, Finance Intelligence - UK Report, September 2002

- Credit and Debit Cards, Finance Intelligence - UK Report, July 2002

- Packaged Account Banking, Finance Intelligence - UK Report, June 2002

- Branch Automation, Finance Intelligence - UK Report, February 2002

- Personal Loans, Finance Intelligence - UK Report, January 2002

- Interactive Money Transmission & Banking, Finance Intelligence - UK Report, November 2001.

Abbreviations

APACS	Association for Payment Clearing Services
ATM	Automated teller machine
BBA	British Banking Association
BMRB	British Market Research Bureau
BoE	Bank of England
BoS	Bank of Scotland
CHAPS	Clearing House Automated Payment System
FSA	Financial Services Authority
iDTV	Interactive Digital Television
IF	Intelligent Finance
MBBG	Major British Banking Groups
MORI	Market & Opinion Research International
NMR	Neilsen Media Research
NOP	National Opinion Polls
RBS	Royal Bank of Scotland
RPI	Retail Price Index
WAP	Wireless Application Protocol
WWME	Wales, West, Midlands & East Anglia

04/2003