Analysis: Bank of Scotland Ireland (BOSI) has Bank of Ireland in its sights. Mr Mark Duffy, BOSI chief executive, confidently predicts that this time next year his bank will hold the the number two slot for small and medium-sized enterprise (SME) banking, writes John McManus.

BOSI, which took over ICC in 2001, says it has 19.6 per cent of this market as defined by the Central Bank's figure of €39 billion in loans outstanding to the SME sector. Bank of Ireland has 20 per cent by this measure and, with around €2 billion worth of business in the BOSI pipeline, Mr Duffy's boast may not be an idle one.

The bank currently competes in the business market on the basis of aggressively marketing its lower overdraft rates and higher interest on credit balances.

A number of developments this year should see BOSI's ability to poach business current accounts - the heart of any business banking relationship - significantly enhanced.

It expects to join the Irish Payments Services Organisation (IPSO), which controls access to the money transfer system. Access to the system is a prerequisite for any bank wishing to offer full-service current accounts and BOSI has been a vocal critic of IPSO to date, saying the price charged by the member banks for entry is not transparent and constitutes a barrier to competition that effectively keeps foreign banks out of the Irish market.

BOSI now appears to have accepted that it is a price worth paying.

BOSI also expects the Irish Bankers' Federation to introduce a code of practice for current account switching, which would greatly simplify the process of moving bank accounts.

But Bank of Ireland and AIB are unlikely to give their smaller rival a clear run and can be expected to tweak their business offerings in response.

All of this will lead to further pressure on margins, which are already on the slide across the sector, with AIB reporting on Tuesday that the net interest margin on its domestic business fell from 2.73 per cent to 2.54 per cent in 2002.

The decline in BOSI's margin last year was more modest from 1.78 per cent to 1.76 per cent.

BOSI says it is committed to taking the battle to the other banks on a broad front, but it will be interesting to see if Mr Duffy's enthusiasm for the fight remains undiminished once he is safely inside the IPSO tent.