Friendly banks (no, honestly)

It seems bankers have decided to become nice. After years of being the most unpopular people on the high street, they are pushing up interest rates on current accounts, slashing overdraft charges, deciding not to levy surcharges if you use another bank's cashpoint, letting their own staff call the shots and voluntarily chopping their mortgage rates. At this rate, it is just a matter of time before they are doing the shopping for old ladies and throwing picnics for socially excluded children... or perhaps not.

These remarkable developments are not altruism. 'There are far too many banks chasing far too little business,' says Phil Middleton, banking strategy head at consultant KPMG. 'The world is changing quite horribly for them. In future they will have to offer a much more personalised service.'

Now that we can all compare their rates at the click of a mouse, banks can very quickly lose business if they offer uncompetitive products. 'The biggest driver is the internet,' says John Hitchins, of PricewaterhouseCoopers.

In the past, a giant such as Halifax needed only to open its doors to attract business. But that mighty organisation is preparing to launch some of the keenest rates available, to maintain market share, when it unveils its internet arm, Intelligent Finance (IF), on Friday. IF is to offer an extremely competitive 5 per cent on its current account. Among its many fine deals is a flexible service, netting off loans against savings and paying or extracting interest on the balance. Since, as a rule, loan rates are pegged above savings rates, IF is doing itself out of profits by this move.

Halifax has been forced into this by the very attractive deals offered by the other internet banks: Egg, Abbey National's Cahoot and the Woolwich's Open Plan. Patrick Bunton of London & Country Mortgages thinks there will be rush to copy IF - to make products far more friendly and flexible.

One reason for the increased competition this year is that last year financial institutions had to concentrate their IT resources on the Millennium Bug and are now making up for commercially unproductive time. Until now, few had the resources to set savings against their loan accounts. They might have run those products through different computer systems.

Several factors are squeezing the banks - new players, from Egg to Virgin, can now cherry-pick the most attractive (that is wealthiest) customers and leave the poorer customers to the traditional banks.

Supermarkets also pose a threat. They don't cherry-pick, but they do have a cheap distribution mechanism - the checkout - which can attract huge numbers of customers. Tesco already has 1.5 million customers for its accounts. Last week, it became the first supermarket to announce banking at its checkouts. Customers will be able to pay into their accounts as they settle up for their groceries.

UK banks are under pressure to offer free banking - pressure reinforced by the Government when it urged them to drop plans to charge for cashpoint withdrawals at rival banks. Most banks have now decided not to charge.

But banks will have to find money somewhere. Middleton believes they will continue to close unprofitable branches. Banks are experi menting with management techniques. Abbey National is even piloting a scheme to let local managers work under franchise, setting their own terms with customers and - if they succeed - dramatically increasing their own pay. Middleton says that even the shape and location of banks will change. 'You could even have banks operating in the workplace - with a bank manager ready to come to advise you at your desk.

'Branches will be far more like retail stores. Those in shopping malls could start running crèches. When mothers have done their shopping, they might come back to the branch, have a coffee and talk about their pension.'