Dial direct for a quiet revolution

Amid the hubbub elsewhere, a quiet revolution continues. This is the gradual incursion into the financial services industry of the telephone distribution network. Yesterday's announcement by TSB that it is extending its telephone banking service to a 24-hour basis might seem insignificant when set against the pre-Budget macro-economic debate or the seismic shift taking place in the television industry. Yet 10 years from now, it may well seem more important than either.

For 20 years and more, the financial services industry has sought to find new ways of delivering its personal products. The result has been a generation of experiment and change: the growth of the direct sales force to sell insurance; attempts at computer banking; the use of the branch networks of the banks and building societies to sell products rather than simply collect deposits. But of all these innovations, the current 'hot' one in both the banking and insurance industries is telephone delivery.

In banking, the hot product is Midland's Firstdirect; in insurance, Royal Bank of Scotland's Direct Line. But there are others and the number of competitors will grow. They will grow because as has now been demonstrated quite clearly, telephone service is not only the lowest-cost method of 'manufacturing' the product, it is for many people the preferred method of delivery.

Manufacturing and delivery mesh together. In theory at least, it has always been possible to create a better-value product if the delivery system is cheaper. If an insurance company does not need to pay either commission to an intermediary or the salaries of a large field force, it ought to be able to deliver a lower premium for any particular risk. If a bank does not have a branch network, it ought to be able to pay higher interest rates on deposits, or offer cheaper loans. But in the past, the alternative delivery systems have tended to generate lower-quality business.

Therefore, people who took out mortgages from the centralised suppliers tended to be more likely to default than those who went to a local building society. Financial institutions that sought to gather personal deposits by bidding up the rates have found that the money they buy tends to be particularly mobile: customers who shop around for the highest rate will not renew deposits if they can get a better deal elsewhere. In addition, for many years loans sold by direct mail have tended to be taken up by less creditworthy customers, despite the elaborate scoring and screening that are supposed to take place.

The really new thing about operations such as Firstdirect and Direct Line is that the quality of business seems actually to be better than average: Firstdirect customers tend to be richer than the broad mass of bank customers, while as far as one can judge, Direct Line seems to have been successful in attracting high-quality business too - or at least that is the basis from which the group is now turning to gather lower- quality (ie higher risk but higher rate) business.

What seems to have happened is that not only is a telephone delivery system cheaper to run, it has particular attractions for the people on relatively high yet stable income who the financial services industry wishes to attract.

These people put a high value on being able to do their financial service transactions when they choose. They will tend to be busy. And as any busy person knows, there is an enormous attraction in being able to use the odd 10 minutes between meetings, before supper is ready, or even when stuck in a traffic jam, to tackle such transactions on the phone.

This element of time management is the unique selling point of the delivery mechanism. There is no other way of delivering a financial service that is so efficient in the use of the purchaser's time: no need to log on a computer as the computer banking systems require; no need to make appointments; little need to write letters.

The success raises the intriguing question: how far will telephone delivery systems go? At some stage they will reach saturation. What no one knows is whether this will be when, say, 20 per cent of the banking market is serviced over the phone, or when the proportion reaches 50 per cent or more.

It is perfectly plausible that most personal financial services - the ordinary run-of-the-mill banking, insurance and, for some, share-dealing services - will be delivered over the phone as a matter of course. Only when people want a particular service that requires a face-to-face contact will they go to a branch office or meet sales or advisory staff. One could envisage a world where transactions were divided into two types: 'commodity' services that would be done by phone; and 'bespoke' ones that would be done face-to-face.

For most people this would mean their day-to-day banking, insurance and savings would be over the phone, while big items like their pension provision or their mortgage would be done face-to-face. The obvious parallel is shopping: people go to supermarkets for ordinary products, but they buy their clothes (certainly their more expensive clothes) face-to-face with a sales assistant.

If this analogy is right, then the financial services industry would be in much the same position as the food retailing industry was in the late 1950s, when the trend towards supermarkets was clear but still very much in its infancy. The moral for the established financial service providers, the building societies and life offices as much as the banks and insurance firms, is 'if you can't beat 'em, join 'em'.