The report, produced with the Economist Intelligence Unit (EIU), says that banks have failed to grasp the size of change required to handle the Internet's impact.

"Most banks mistakenly see the Internet as just a futuristic delivery channel," said Angus Hislop, senior banking partner at PWC who collaborated on the report -- Creating Tomorrow's Leading Retail Bank. "What we are talking about is a paradigm quake that we believe will rattle the entire banking industry."

He noted that consumers seem very receptive to trading on the internet and are likely to find it more acceptable to be offered financial products in this way than, for example, on the telephone.

Hislop warned that European banks are generally behind their US counterparts when it comes to espousing the internet and its potential for electroniccommerce of all kinds but may have some time to prepare.

"But they don't have too much time to think," he said in an interview. "It's important to be an early mover rather than a fast follower."

The report identifies several key forces at work on the banking industry one of which is demand from consumers for fast convenient service from branches and new distribution channels.

The report says banks must espouse what it terms "virtual customer intimacy" -- the ability to take current technologies with enhanced staff, knowledge and communications to serve customers well and at low cost.

Hislop said banks must develop new strategies for gaining customers which will make money for the bank, adding that this may involve the ability to let less profitable or loss-making customers go -- something bankers have traditionally been loathe to do.

If technological development to improve revenue looks expensive, then banks must be prepared to switch the main focus of spending into the front from back office andrealise that raising revenues can increase profitability just as well as cut costs and may be more sustainable.

Hislop noted that while all banks have had to divert IT spending to the Y2K problem, banks in the euro zone have had the additional expense of the introduction of the single currency.

He said banks must speed up their reactions to change of all kinds and that this could be helped by using talent from other service-oriented industries such as retailing.