The news that two of Germany's biggest banks are discussing a link-up of their retail services has delighted the stock exchange and unsettled trade unions and bank customers.

The talks between Deutsche Bank and Dresdner Bank, which were confirmed at the weekend, fall well short of plans for a full merger, but they form part of a trend in commercial banking which looks set to leave European customers with far fewer financial institutions from which to choose.

The driving force behind the talks is the need to cut costs and make personal banking, where margins are relatively small, more profitable. Bank branches are expensive to maintain and require a relatively large staff, unlike automated, direct banking services accessed by phone or through the Internet.

"Why should all banks offer the same services? It requires expensive capacity and, with a small market share, does not produce the desired profits," said Ms Natalie Grasegger, a banking analyst at Munich's Hypo-Vereinsbank.

The situation is especially urgent for Dresdner Bank, which is Germany's third largest commercial bank with six million accountholders.

To maintain its position in the market, the bank will have to offer new services to customers and invest in expensive information technology. The board of Dresdner Bank is considering six options, including co-operation with Deutsche Bank, to keep customers happy without bearing the full cost of new investment.

Deutsche Bank has already started rationalising its retail services so that from September 1st, the bank's personal customers will find their accounts moved to Bank 24 - formerly a direct banking subsidiary.

Any link-up between the two banks would lead to thousands of job losses and the closure of numerous bank branches. Deutsche Bank currently has 2,400 branches with 49,000 employees. Dresdner Bank employs a similar number in just 1,500 branches.

Despite these figures, the two banks account for less than 15 per cent of Germany's personal banking market. More than 50 per cent of Germans prefer to keep their money in local savings banks, which are partly government-owned and are geared almost exclusively towards the personal customer.

Some banking analysts fear that if every second Deutsche Bank and Dresdner Bank branch were to close, many customers would take their business to the savings bank. Sacking thousands of employees could also prove hazardous and expensive in view of Germany's progressive labour laws.

Most experts predict that a retail link-up would lead inexorably to a full merger between the two banks, a prospect that could prove hard to swallow for the smaller, Dresdner Bank.

"If a full merger were to follow the retail banking co-operation, it would basically mean that Dresdner would be taken over and cease to exist independently. I find it unlikely that there is a consensus at Dresdner for such a scenario," said Mr Volker von Kreuchten at BHF Bank in Frankfurt.

Dresdner Bank's problem is that if it repels Deutsche Bank's advances, it is likely to be swallowed up by someone else before long - perhaps under less favourable conditions for top managers and employees.

"The merged bank would become so strong that it would be able to finance possible acquisitions when it comes to the next wave of European banking consolidation. These banks may also become themselves, at some point, takeover targets and a merger would reduce such a risk," according to Mr Konrad Becker of Merck & Finck Bank.

Deutsche Bank is currently the world's largest bank but it is set to lose its position if Japan's DaiIchi-Kangyo Bank, Fuji Bank and the Industrial Bank of Japan go ahead with a planned merger. Merging with Dresdner Bank would restore Deutsche Bank to its place at the top.

Regardless of the outcome of the talks between the two German banks, there is little doubt that more European bank mergers are in the offing. In its latest quarterly report, the Bank for International Settlements predicts that the number of banks will get smaller while the average size of institutions grows.

For the banks and their shareholders, the takeover trend could mean lower costs and higher profits. For the customer, it will mean less choice, poorer service and the end of a personal relationship with your bank manager.