European Monetary Union, adjusting technology for the year 2000 and increasing consolidation worldwide are among the major challenges facing the Irish financial institutions over the next year.

These challenges come against the background of a booming and competitive economy and an international environment where consolidation, building scale and controlling costs are seen as the keys to long-term viability.

Another challenge no longer in the background for traditional financial services companies is the arrival in their market of new competitors with large customer lists.

Companies such as Marks and Spencer, Tesco and Virgin have decided that loans, savings and insurance policies are just retail products which can be sold by anyone with a large customer base and access to technology.

Because these non-traditional suppliers already have strong customer relationships and do not have costly branch structures, they will often have a cost advantage over the traditional players.

The Irish banks will need to adjust their cost structures, including their heavy dependence on paper transactions (cheques), to a different and more competitive environment.

As EMU looms, the Irish financial institutions could become bid targets for foreign players interested in taking a stake in a fastgrowing economy where the financial sector has proved profitable. Irish banks, building societies and insurers may see attacks on their customer bases as foreign institutions will be able to offer loans, mortgages and other financial products to Irish customers from bases outside Ireland and without currency risks for either institution or customer.

In addition to attacks on their customer bases, there are likely to be bids for some of the Irish financial institutions. There is still some debate on how interested large European institutions will be in acquiring operations in such a small market.

Historically, most foreign entrants into the Irish retail banking market have failed to make inroads into the market shares of Bank of Ireland and AIB. And some of the foreign banks who came into the market hoping to take corporate business have withdrawn.

But because the Irish banking market generates strong profits, there could be a bid for one of the main banks. Some analysts expect a bid for AIB or Bank of Ireland by the year 2005, or even a merger of the two banks, Swiss Bank Corp/UBS-style.

Mergers and consolidation are part of a worldwide trend in the banking and insurance sectors. The announcement of the Swiss Bank Corporation and Union Bank of Switzerland merger to create the world's largest commercial bank is just another sign of more to come.

In the Irish market, Bank of Ireland's acquisition of New Ireland was one example of cross-sector activity in 1997. This trend is expected to accelerate in the move towards EMU and post EMU.

Among the moves likely this year are the sales of TSB, ICC and ACC and the flotation of the First National Building Society.

TSB is expected to attract a wide range of bidders, including Irish Permanent, which settled its legal battle with former managing director Dr Edmund Farrell late last year, Ulster Bank and National Irish Bank. ICC Bank would be of interest to Anglo Irish Bank, and, ACC Bank may find a large European parent.

And then there were two. The mutual building society sector will shrink again - from four members to two - with the expected flotation of First National and the takeover of the Norwich Union Building Society by EBS.

Irish Nationwide will continue to press for changes in legislation which would allow the mutual to take a partner. EBS is the only mutual committed to retaining this status.

In the insurance sector where there has already been significant consolidation, the appointment of Mr David Went as chief executive of Irish Life is a significant move. Mr Went is expected to aim to make Irish Life a broader bank assurance group and an alliance with a bank or a bid for TSB to add a branch structure cannot be ruled out.

Abbey National could come into the Irish market in 1999, through a full bid for Irish Permanent where it now holds just less than 10 per cent.

Coping with monetary union could cost the Irish banks up to £100 million initially through the loss of foreign exchange income, reductions in interest margins as interest rates converge and transition costs, the ERSI has estimated. The transition costs include staff training, marketing and public relations programmes, the cost of adjusting existing systems including ATMs and credit cards to cope with the new Euro currency notes and coins. The extent of foreign exchange losses will now be muted initially because Britain will not be part of the euro at the start. According to the Irish Bankers Federation, the currencies which will make up the first batch of euro members will account for less than one fifth of current Irish foreign exchange activity. Sterling and the dollar exchange deals, which account for the bulk of this business, will not be affected.

With the single currency apparently on target to begin on January 1st, 1999, all of the financial institutions have had preparation strategies in place for some time. With expected business opportunities in an enlarged market they are confident the ultimate cost of EMU will only be a fraction of the £100 million initial hit.

But there are concerns, such as the future for funds management and bond market trading if activity within the euro area concentrates in one or two key centres.

One of the features that emerged in 1997 was the clear distinction between the two main banks in the geographic diversification strategy. AIB has concentrated on developing its business in the US, buying Dauphin Deposit Corporation for £840 million and has expanded into Eastern Europe, taking control of Wielkopolski Bank Kredytowy in Poland.

Bank of Ireland, whose initial foray into the US was less successful, has concentrated on Britain with its £600 million sterling acquisition of the Bristol and West building society.

Bank of Ireland and the First National Building Society, since the 1996 acquisition of The Mortgage Corporation, now have a significant proportion of their assets in the difficult British mortgage market.

The domestic market was good for the Irish financial institutions in 1997 with strong demand for loans and few loan problems in a fast-growing economy. But bad debts are at historically low levels and can only increase.

As the credit union movement got the power to expand activities and increase the size of loans and deposits there was some reaction from banks and building societies. The movement is effectively a two-tier structure comprising small traditional credit unions and larger unions with significant asset balances, according to a spokesman for the Irish Building Societies Association.

"If credit unions continue to grow at the same pace and there is a significant increase in the number of credit unions with asset balances of £50 million plus, we feel in the long run the larger unions should be subject to stronger and tighter levels of control and eventually come under the Central Bank," he says.

Other moves to watch in the financial services sector this year are the proposed mergers of four of the Big Six accounting firms - which are subject to the approval of a number of international regulatory and competition authorities.

A merger of KPMG and Ernst and Young would create the world's largest accountancy and business advisory firm with fee income of just less than £10 billion sterling. A merged firm would be the undisputed leader in the Irish market in fee income terms, as long as the merged operation can retain its current level of fee income.

A merger of Price Waterhouse and Coopers and Lybrand would create a global firm with fee income of £7.5 billion sterling. But the merger proposals have been questioned by the international Association of Chartered Certified Accountants. A merger between two of the world's Big Six firms was "unnecessary" and would result in a further reduction in choice for clients, ACCA warns.