Our mutual friend

In 1995 you might easily have had a bank account at the TSB, a mortgage with the Cheltenham & Gloucester and a life insurance policy with Abbey Life or Scottish Widows. Five years on nothing much has changed: except that they have all been gobbled up by what used to be Lloyds Bank (now Lloyds TSB) in its seemingly ceaseless quest for corporate expansion. The latest acquisition was this week's £7bn purchase of Scottish Widows. What once was a well-balanced portfolio of financial interests would have been replaced by monolithic ownership by Lloyds. The question is - does it matter?

For Lloyds, the expansion policy appears to have done nothing but good, since it is regarded as one of the best run banks with an enviable 33% return on equity capital last year. And shareholders of Scottish Widows are hardly likely to take to the streets since they could receive a "windfall" bonus on demutualisation worth an average of £6,000. This is what they stand to gain from cashing in the wealth accumulated during a period of 184 years by previous generations who never even dreamed that such an option was open to them.

Just as Lloyds' takeover of Cheltenham and Gloucester in 1995 caused a wave of demutualisations among remaining building societies, so too is the bid for Scottish Widows likely to do the same for mutually owned life offices. Part of the rationale of the bid is that the government's plans for affordable stakeholder pensions with "capped" expenses underline the need for companies to get bigger to benefit from economies of scale. Yet, ironically, the sale of affordable pensions at low profit margins ought to be tailor made for mutual societies since they do not have to pay dividends to shareholders. Instead, what we are witnessing is the disintegration of the mutual sector, notwithstanding all the pious promises that the new Labour government has made to preserve it. Mutual companies have proved to be formidable competitors to publicly quoted companies. Their demise will reduce competition, diminish personal choice, erode plurality and quite possibly lead to higher prices for the consumer.

Lloyds is, of course, free to choose how to spend its own money. But others are also free to make alternative suggestions. Banks still have a very bad reputation for lending money to new start-up companies. If there is one overriding microeconomic priority it is to get more internet companies launched to challenge the Divine Right of the Americans to run the information technology revolution. Time and time again budding internet entrepreneurs report that British banks turn them away because they are ignorant of hi-tech businesses or simply not prepared to take a risk. Instead Lloyds is prepared to spend £7bn taking over a company like Scottish Widows that is already running pretty efficiently. If it had set aside a mere 10% of that amount to help web-based companies get off the ground, then it would be doing a service for the economy and for its future shareholders - even if the returns won't happen within the all-too-brief time frame of most City investors.

If companies like Lloyds don't take a grip on the internet, they may find that it will take a grip on them. Most of the activities that Lloyds currently does, including selling life policies, can be done much more cheaply on the internet (or soon will be). Established companies often find it impossible to embrace radical new technologies that will rapidly erode their core businesses - yet not to do so could prove to be the road to decline by another route.