Barclays goes to the phones in profit drive

Barclays, the recession-hit clearing bank burdened with huge bad debts, is preparing to launch a full telephone banking service as part of a shake-up of the group's operations aimed at improving its falling profits and cutting costs.

The move will intensify competition between the high-street banks to attract customers and could transform the personal banking market by the end of the decade as other banks are forced to follow suit. Within a few years, some banks believe, millions of customers will no longer ever need to visit a high- street branch.

The new Barclays service will be similar to First Direct, launched by Midland in 1989. First Direct offers low-cost banking by telephone 24 hours a day for 365 days a year. Customers will have access to current and savings account services, personal loans and mortgages by dialling a central office, probably outside London.

If Barclays follows the First Direct model, customers will hold their accounts with the telephone banking company and not at a high-street branch.

The service is likely to be offered to all of Barclays's 6 million personal customers, although the aim will be to poach more customers from other banks.

'We believe telephone banking is the way forward,' a Barclays spokeswoman said. A project team is putting the new service in place, but the bank said that it was not ready to announce its telephone banking initiative to coincide with its half-year results this week.

The creation of the new service follows a period of strategic heart-searching by Barclays, which is suffering more heavily in the recession than most of its competitors. Telephone banking will help to cut expenses as it can be run cheaply by a relatively small staff from inexpensive offices.

It is likely to coincide with a reduction in Barclays' costly branch network, although the bank denies strong speculation that it is planning to close half of its 2,500 branches.

Barclays is expected to report half-year profits on Thursday down more than pounds 250m, at around pounds 100m, after bad-debt provisions of about pounds 1bn. It has been particularly heavily hit by its large exposure to the property and construction industries.

Barclays entry into telephone banking is likely to force National Westminster to launch a similar product within months. NatWest is already running a trial service called ActionLine with 9,000 selected customers. It is due to make a decision on whether to offer it to its 6 million customers later this year.

Bank customers have so far been wary of telephone banking, just as they were of credit cards when they were introduced in the 1960s and early 1970s. Midland has taken three years to attract only 250,000 customers to its pioneering First Direct service despite spending millions of pounds on advertising. The advent of the two largest banks, however, is likely to turn the market into a new focus of competition for customers.

There are already signs of growing public acceptance of a service that abolishes the need to go into bank branches or argue with a bank manager. First Direct is now adding 10,000 new customers a month and expects to be show its first profit by the end of this year.

As part of its continuing efforts to cut costs, Midland is planning to cut a further 600 high street branches - nearly a third of its network.

For bank customers, telephone services mean lower bank charges and an end to queueing at bank branches. They can also gain access to the service at any time of the day or night.

Midland's research indicates there is a potential market of 6 million customers in Britain for telephone banking. The main target is affluent people aged between 25 and 44, although First Direct's experience suggests the market may be considerably larger, with substantial interest shown by older customers.