More competition is welcome, but the benefits will not be immediate, reports Siobhán Creaton

Bank of Scotland (Ireland) has promised much in terms of injecting a fresh dose of competition into Irish banking. This week, it signalled that it was about to square up to the major Irish banks to take them on in their core business, retail banking.

Within the next 12 to 18 months, it has pledged it will give Irish consumers another choice when it comes to their banking needs, putting Bank of Ireland and AIB under renewed pressure.

Bank of Scotland Ireland, which is part of the Halifax Bank of Scotland group (HBOS), intends to beef up its presence in the Irish mortgage market, to start selling savings products, offering credit cards and eventually to move into operating current accounts for Irish customers.

It is the type of news that many people have been waiting to hear for some time.

Irish consumers do not believe that they are paying a fair price for their banking services. It would take a mammoth change in public perception to convince the public that financial institutions are not ripping them off.

Bank of Scotland's entry into the Irish mortgage market in 1999 was much acclaimed. The bank started to sell mortgages to selected Irish customers from its base in Edinburgh at prices that were significantly below those charged by the main Irish banks.

It started a price war and for the first time delivered tangible benefits for Irish borrowers. The bank won recognition as consumer champions and has cleverly sought to capitalise on that image ever since. The reputations of the other banks have been damaged in the process.

While Bank of Scotland initially basked in this warm glow of admiration, it took some time before it actually managed to start to win significant mortgage business in the Irish market.

Many individuals who met the Scottish bank's criteria, which tended to favour those trading up and not seeking maximum mortgages, quickly sought quotes from this new competitor to gauge just how much cheaper it might be to take out one of its mortgages. They then usually went back to their own bank, and - surprise, surprise - it could suddenly match the lower rate of interest.

AIB, Bank of Ireland and Permanent TSB have fought hard to maintain their market share in this market. Bank of Scotland has shown, though, that it managed to capture 4 per cent, worth €2 billion, last year and there seems no reason why this could not rise to 15 per cent by 2007.

The bank refused to disclose the level of mortgage business it was writing in Ireland, making many people sceptical. Its competitors suggested the bank was all talk and no action. It has now claimed that, in 2002, it lent less than €300 million to Irish mortgage customers. The following year, this figures increased to €410 million, with more than 60 per cent of its mortgage business being generated by brokers.

It can be argued that it was the fat profit margins enjoyed by Irish financial institutions that first attracted the Scottish predator to start selling in this market. In the months after it rolled out its cut-price offer, all of the lenders learned to live with tighter margins.

AIB in particular has aggressively chased new mortgage business and has since replaced Bank of Scotland as the cheapest lender, something that contributed weaker profits at Ireland's biggest bank last year.

Yesterday, in a note assessing Bank of Scotland's latest move, Davy Stockbrokers' financial analyst Mr Scott Rankin concluded that while the bank's profit margins on mortgages did tighten for a while, once the difference between the European Central Bank rate and the rate passed on to Irish consumers was taken into account, consumers were not better off today than they had been before Bank of Scotland's arrival four years ago.

During that time, interest rates have fallen substantially, reducing the cost of monthly repayments for everyone.

By using Central Bank data Mr Rankin, suggests that the margin charged on to mortgage customers on a standard variable rate mortgage was around 1.42 per cent. Surprisingly, he points out that the 10-year average margin was even smaller, at 1.31 per cent.

He argues that consumers have benefited from a structural change in the market rather than from competition. They have seen cheaper, tracker-type mortgages, which are proving highly popular. Improved efficiencies and cost-cutting in these businesses have also contributed to cheaper deals for consumers.

Davy says that, even at new lower rates, Irish banks are still making handsome profits from selling mortgages.

Bank of Scotland has said that when its mortgage book was transferred from Edinburgh to Dublin in July, its level of services would improve and that it would be happy to lend to a much broader church, including first-time buyers and investors.

Mr Rankin believes it is in these markets that it can have most impact.

While credit-card interest rates are high in Ireland, there is evidence to suggest that many people clear their monthly balance and that the return to the banks is less lucrative overall.

The Government levy on cards will also act as a deterrent for consumers to switch their cards unless they have a sufficient incentive.

The Irish savings market is fairly well served but the bank is likely to begin to offer popular products already sold in Britain by the Halifax.

The real test of whether Bank of Scotland can be regarded as a force in Irish retail banking will be the speed with which it begins to offer current accounts to personal customers. The bank envisages that its customers will conduct their banking over the internet or over the phone rather than through a branch.

Most analysts believe that this strategy presents the bank with an enormous challenge in building up a business that is big enough to be a commercial success.

In previous research, Davy estimated that AIB and Bank of Ireland together control 80 per cent of all current accounts and earn more than €150 million a year from these products, despite having always claimed this was a loss-making, or at best a break-even, venture.

The Competition Authority and the Irish Financial Services Regulatory Authority are both focusing on ways to enhance competition in current accounts. There are signs that future changes could hand Bank of Scotland and others an opportunity to share in this business.

There are certainly signs that banking is becoming more competitive here. It will just take time to feel the benefits in our pockets.