As recently as two decades ago the financial services sector was almost solely reliant upon face-to-face channels for both product distribution and customer servicing - this was due primarily to the lack of any technological infrastructure or means for other channels to exist. More recently, developments in both information technology and telecommunications have facilitated the foundation of several alternative distribution and customer contact channels.

The retail financial services industry of old, characterised by leisurely competition, regulated markets and high barriers to market entry, has virtually disappeared. In today's deregulated marketplace, new computer and telephony technology has ignited competition and has simultaneously increased consumer choice. Today's financial services sector is far removed from that of yesteryear and is now characterised by intense competition and abundant consumer choice.

In a deregulated market, new technologies and improvements in telecommunications have helped to sweep away many of the traditional barriers to market entry, helping to create a more level playing field on which smaller providers, new entrants and non-traditional providers can compete head on with even the largest financial conglomerates. With growing numbers of companies embracing new remote distribution channels, much-needed competition has been injected into what was a staid marketplace.

In terms of distribution, the full impact of the Internet has yet to be felt as the channel is still gathering momentum. Telephone-based distribution, while more established, is also rising in importance as cost and margin pressures increase the requirement for highly cost-effective distribution platforms. Collectively, the UK retail financial services industry has invested and continues to invest billions of pounds annually in developing direct channel capabilities. However, in many instances, this investment has failed to generate any increase in sales volumes and, all too often, these new channels remain underutilised.

Is the potential of direct and Internet channels being maximised?

In seeking to meet the competitive challenges from new competition and intensifying inter-industry rivalry, while maintaining profitability and simultaneously becoming more market-focused, financial providers have embraced new distribution channels and technologies. A key aim of this report is to examine what impact these relatively new channels are having on the distribution of financial products and services and to determine if the investment in new channels is justified.

Within the report Mintel examines where these channels have been most and least successful and identifies how channel usage and adoption will likely develop in the future. With the number of potential distribution channels growing and as new technologies proliferate, the importance of investing in the right channels has never been greater. Accordingly, this report is essential reading for anyone involved in the distribution of financial services.

In addition to Internet and telephone channels, some financial providers have developed interactive digital television (iDTV) and mobile commerce offerings. To date, adoption and usage of these channels has been very low, however, financial providers regard these as being channels of the future. With penetration of iDTV increasing rapidly and mobile phone penetration reaching saturation point, Mintel examines what impact these channels are likely to have in the future.

The report begins by focusing upon recent developments concerning each of the main distribution channels used by the financial services industry and highlights the general trend towards the adoption of multichannel distribution strategies. Consideration is also given to the key market factors, which have had, and are likely to continue having, an impact upon the distribution of financial services products. These include the declining number of branches, growth in ATM networks, the increase in telephone and new technology usage, rising direct mail volumes and other relevant trends such as changing consumer lifestyles and rising service expectations.

Some financial products are better suited to direct channels

With no physical product to be delivered, it has long been argued that financial services are ideally suited to the Internet and other direct distribution channels. However, it is clear that while some products are suited to these direct channels, others are not. This report examines recent distribution trends across the main financial services sectors, detailing the current pattern of distribution with regard to banking and credit products, general insurance, investments and life and pensions. Mintel also identifies the likely impact that direct channels will have on each of these sectors in the future.

Through a number of case studies, Mintel examines how providers have sought to optimise the potential of their direct distribution channels. This analysis draws upon a range of sources including interviews with representatives from each of the organisations concerned.

Direct and Internet selling and the consumer

Mintel commissioned consumer research specifically for this report, the aim being to examine both current behaviour and future intentions with regard to arranging financial products using the Internet and other direct channels. The fieldwork was conducted in January 2003, among a representative sample of 1,926 adults aged 18+ and was constructed with the following objectives in mind:

· to examine how frequently consumers use the Internet

· to identify the types of product that consumers have researched online

· to determine the channels used by consumers to arrange financial products

· to examine consumers' perceptions of and attitudes towards using the Internet to arrange financial products

· to identify the factors that have influenced consumers to arrange financial products online or over the telephone

· to examine the likelihood of consumers adopting new channels such as iDTV and WAP to arrange financial products in the future.

This research gives an accurate picture of how important the various direct and Internet channels actually are in the distribution of financial products and services and provides useful insight into how these channels are likely to develop in the future. This research will be of particular interest to anyone involved in distribution strategy, channel development or distribution marketing of financial products and services. The report concludes with an evaluation of the likely future for direct and Internet sales channels.

Abbreviations

3G	Third Generation
AOL	America On Line
APR	Annual Percentage Rate
ATM	Automatic Teller Machine
BBA	British Bankers' Association
BT	British Telecom
CD	Compact Disk
CEO	Chief Executive Officer
CRM	Customer Relationship Management
DVD	Digital Video Disk
GPRS	General Packet Radio Service
GSM	Global System for Mobile Communication
GUI	Graphical User Interface
GWP	Gross Written Premiums
HBOS	Halifax Bank of Scotland
HTML	Hyper Text Markup Language
iDTV	Interactive Digital Television
IF	Intelligent Finance
IFA	Independent Financial Adviser
IMAG	Independent Market Assistance Group
ISA	Individual Savings Account
ISP	Internet Service Provider
ITC	Independent Television Commission
iVR	Interactive Voice Response
MDA	Mobile Data Association
MORI	Market Opinion and Research International
NMRA	National Market Research Agency
NOP	National Opinion Polls
OEIC	Open-ended Investment Company
PC	Personal Computer
PDA	Personal Digital Assistant
R&SA	Royal & SunAlliance
RBS	Royal Bank of Scotland
SMS	Short Messaging Service
TGI	Target Group Index
VoIP	Voice over Internet Protocol
WAP	Wireless Application Protocol

04/2003