FEAR OF FINANCE

The mighty Pru will make an almightly splash when it leaps into banking. The banking pool is already looking distinctly overcrowded with a new generation of telephone banking services competing with old-fashioned branch operations.

The Pru is starting with deposit accounts and own-brand mortgages financed from its own resources, but current accounts, credit cards and personal loans will surely follow.

Where the Pru leads, Legal & General and other big life insurance companies will surely have to follow. The Pru alone has six million insurance clients and they are prime targets for its banking services. Most bank account- holders also have, or will need, an insurance policy or investment plan, which will make them attractive targets for the insurance companies.

Both the banking and insurance industries have become overcrowded as a result of deregulation and the opportunity for building societies to offer a full range of banking services.

More recently, the explosive growth of telephone banking and insurance selling has brought a range of new entrants like First Direct and Direct Line into both the banking and insurance industries.

As a result, established banks, building societies and insurance companies are being forced to offer telephone-based operations of their own, which only adds to the over-capacity.

The big banks have also moved into insurance in a big way, setting up their own "bancassurance" companies, selling life, motor and household insurance policies to their banking customers. They cannot complain if the insurance companies seek to reverse the process and diversify back into banking. The surprising thing really is that it has taken the insurance companies so long.

Insurers are, however, under growing pressure, caused by consumer resistance to buying big-ticket insurance and investment products. That in turn is the result of the recession, reluctance to take out long-term commitments and the bad publicity over mis-selling.

Banks have had some equally bad publicity, caused mainly by their ham- fisted efforts to cut costs and centralise services. Traditional loyalties are being undermined.

But it is easier for banks to persuade established customers to buy more sophisticated financial products than for insurance companies to integrate their business backward into banking. Insurance firms have little choice but to make the effort, however, and there is no doubt that in the process they will add enormously to the capacity in the banking industry.

The fact Prudential has decided to grow its own banking services rather than buy a building society is, however, bad news for middle-of-the-range insurance companies and building societies.

They may be too small to provide comparable services, and too big to downsize painlessly into a niche where they can provide more expensive and sophisticated services comparable with those provided by private banks and personal services stockbrokers. Further rationalisation in the financial services industry is sure to come and it may not all be bloodless.