Cost savings are driving the AIB/ B of I joint venture on information technology, writes Siobhán Creaton, Finance Correspondent

The ground-breaking joint-venture agreement between arch rivals AIB and Bank of Ireland is a novel and innovative way to reduce costs in a relatively small market.

The Irish Bank Officials Association (IBOA) is naturally concerned about the impact the new arrangement will have on its members and it seems certain that at least 80 jobs will be lost over the next three years through natural attrition and voluntary severance.

There is no doubt that this is a cost-cutting measure, with Bank of Ireland under more pressure to trim its overheads than AIB. It is also a clever way around the cost pressures on both banks by virtue of the relatively small marketplace in which they operate.

By coming together, the two institutions will be able to yield substantial cost savings by processing much larger volumes of transactions more efficiently. Neither side will state just how much the joint venture will cost at this juncture but there are indications that they expect it will result in cost savings in the order of €20 million annually.

The IBOA believes this is the first move towards closer integration of the two banks in line with Bank of Ireland chief executive Mr Michael Soden's ambitions to merge with AIB. He contends it is better for the Irish economy to have one large bank than a number of relatively small institutions that can easily be taken over by foreign predators.

Uniting the two banks with a single information technology support system could also partly be a defensive measure to complicate any imminent takeover of either organisation by another institution.

Any new owner would have to merge the banks' systems with its own in any event but would first have to separate them from the new structure.

Both banks insist this development does not advance the eventual merger of both organisations but neither will rule out any further joint ventures in the future.

Discussions to form this joint venture opened last October, just as Mr Soden took over at Bank of Ireland and began to publicly raise the prospect of a merger with AIB.

His comments at that time were initially viewed as opportunistic, coinciding with the difficulties facing its nearest rival as a result of the $691 million (€728 million) fraud at its US subsidiary, Allfirst.

AIB chairman Mr Lochlann Quinn and chief executive Mr Michael Buckley have dismissed the notion of a merger between the two organisations, making strong statements about remaining an independent Irish bank.

Mr Soden's argument has some merits but it raises some serious issues for competition in the Irish market.

It took the arrival of foreign banks to break the cosy cartel that had operated between the main Irish banks. It would be difficult to reassure consumers that such a merger would be in their best interests.

What impact the merger of their information technology services will have on competition will be examined by the European Commission, which must formally sanction the move.

And it will be interesting to see how much of the substantial cost savings will be passed on to consumers through cheaper bank charges and more competitive products.