BANKS will have to reduce their branch networks and invest in technology to improve services for customers, a forum on World Financial Services in the year 2010 was told.

Retail banks are facing the challenge of reducing the scale of their branch networks, the financier Mr Dermot Desmond told the forum at the Michael Smurfit Graduate School of Business yesterday.

Banks have become locked into an uneconomic cost structure from which it is difficult to escape, according to the chairman of International Investment and Underwriting.

"Banks may find competition too severe in the "virtual" world we are entering where the bank's branch network, regulation and customer loyalty will no longer be an advantage and, in the case of the branch network, is an expensive cost."

International banks have begun replacing brick and mortar with other forms of services, he said.

Advances in technology offer the banks an opportunity, but they will only win if they utilise technology in the best interests of their customers, he said. If banks give customers the right products at competitive prices they can compete against non banks, he said, warning that banks need to invest now to put themselves in a position to compete with non banks in 2010.

Banks will be judged on price and value and competition from non banks and from other direct/telephone providers will be a danger and a force to reduce their cost structures, he said.

Banks are "endangered by new and agile players" who are able to come into the traditional banking market because the cost of technology has fallen. Direct banking is a threat, he said, explaining that direct operations have cost income ratios of less than 40 per cent compared with traditional ratios of 60 to 70 per cent in the industry.

Banks will have to be more market driven because they will no longer be able to depend on customers to come to them, according to the chairman and chief executive of the Bank of Montreal, Mr Matthew Barrett. Imperfect knowledge and limited choice were the advantages behind which traditional banking developed, he said.

Advances in technology have eroded these advantages for bankers. The year 2010 "will be a good time to be a bank customer but "a bad time to be a banker", he suggested. Banking will survive because core banking functions such as credit and savings will continue to be essential.

Some banks will prosper in the new environment, he said. The banks that prosper will be those that [become "whole hearted professionals and whole hearted marketers.

The cost of transition will be high in terms of investment in technology and training and there will be "stubborn resistance" to change from customers, employees and governments, he warned.

The Bank of Ireland group chief executive, Mr Pat Molloy, said the banks that will survive and win in the future will be those that "excel in meeting customer needs" and are flexible enough to respond rapidly to changes in the marketplace. "The day of the five year project is gone," he warned.

There will be more polarisation of the market into specialist and full service banks, he predicted. To be winners full service banks will have to be outstanding at meeting customer needs and will have to be very good at everything else, he said.

There will be greater use of self service devices such as automated teller machines and telephones. Home based banking and electronic [transfers will replace paper and there will be fewer branches run along different lines, he said.

Supermarket branches, which can be run at a fraction of the cost of a traditional branch and are largely sales outlets, will increase.