Financial services companies are threatened by competition from food retailers, airlines and telecoms companies because they have failed to develop effective customer loyalty schemes, a new report from the business consultancy company, Prospectus, states.

"Customer Loyalty and Retention" finds that the Internet is being under-used as a means of improving customer loyalty and retention, although it could have the same dramatic impact on financial services marketing as direct marketing.

"The advent of digital TV, which will allow a far wider group of consumers access to the Internet, will open up considerable opportunities to reward loyalty through the Internet in the future and reach a far wider audience," the report states.

Mr Owen Purcell, a director at Prospectus, said other sectors had evolved sophisticated customer retention strategies because they had encountered competition, falling growth rates and increased customer choice much earlier. "This poses a real threat to the banking and insurance sectors as these non-traditional competitors enter the financial services market," he said. He said the European financial sector in general had been caught wrong-footed because it had been protected by regulation and market buoyancy.

"The situation is no different in Ireland where the only certainty is a decline in the volume of traditional players through mergers and acquisitions and an increase in new competitors from food retail and other sectors." The report, written by Prospectus's head of research, Mr Simon Glancy and published by FT Finance, predicts a continuing decline in customer loyalty in financial services as consumer expectations and choice increases. "For all but the very largest insurers and financial institutions, most companies lack the high degree of brand recognition and equity necessary to retain and build a stable customer base in the future," the report states.

Mr Purcell said there was increasing evidence of financial institutions in Britain switching from product advertising to brand building. He gave the example of the Prudential's Egg Fund, a financial service offering competitive savings rates and loan rates on remortgage loans through the Internet and by telephone. "They just picked the brand `Egg'.

"It basically has no connotations. It is something different and striking," he said.