According to Datamonitor, total spend on branch renewal will grow from $790m in 2002 to $1bn in 2005, a compound annual growth rate of 9.6% between 2002 and 2005.

Whilst the Web continues to be the fastest growing channel in terms of customer uptake, it has proved more effective as a lead generator than as a fully-fledged sales channel and has failed to overtake traditional methods of banking, says the analyst group.

In addition, both interactive TV and mobile channels have failed to generate enthusiasm and uptake has remained slow. According to the report, spend by European retail banks on m-banking products has dropped from an estimated $73m in 2001 to $49m in 2002 and Datamonitor expects that it will be slow to regain its pre-2001 levels in the foreseeable future.

A number of top-tier UK banks, notably HSBC and NatWest are shelving m-banking projects until further notice as they failed to generate sufficient return on investment, together with the fact that the technology is as yet relatively unproven.

Banks are also realising that most customers still prefer face-to-face interaction and are making it a priority to equip branches to perform high-value sales and services whilst increasing the level of self-services within them.

A key IT implication of this involves developing a next-generation, customer relationship management (CRM) enabled branch desktop, providing staff with sales and service tools and access to customer data and product information. Datamonitor expects branch renewal to be a long-term undertaking and expects expenditure will top $1bn by 2005.

Although Datamonitor predicts that the number of branches in Europe will fall from 184,442 in 2002 to an estimated 168,762 in 2005, this will be because banks are still seeking to rationalise networks and migrate simple transactions to automated channels in order to cut costs. Futhermore, some banks with large networks continue to resort to closing branches in an effort to curb costs.

The report shows that channel integration continues to be a priority as banks seek to improve service levels as well as customer retention and cross-sell rates. Datamonitor predicts IT expenditure on channel integration to total $1.5bn by 2005.

Christine Skouenborg, financial services technology analyst, Datamonitor, says while distribution channel technology spending suffered a blow following the end of the dotcom boom, channel integration and branch renewal will be the key areas of spending and it will be essential for vendors to position themselves accordingly.

"Single channel vendors will need to develop multichannel capabilities and CRM functionality is becoming evermore important. At present, Datamonitor believes that no single vendor has a complete portfolio and, as a result, that developing a next-generation branch offering will be the end-game for vendors," says Skouenborg.