Hi, I'm British (but I bank in France)

When it comes to a mortgage, most of us don't feel comfortable relying on a foreign bank. That may s

Foreign banks now dominate banking in Britain. According to the Bank of England, more than 55 per cent of assets in the hands of UK-resident banks are held by branches and subsidiaries that are not UK-owned. Yet anyone looking down the high street (rather than around Canary Wharf) could be excused for thinking that British banking is still the preserve of British banks.

And so it is, at the retail level. For the time being at least, foreign supremacy is restricted to the worlds of wholesale and investment banking.

For well over a decade, there has been a "single passport" system that allows EU banks to set up in other EU countries with a minimum of fuss. In theory. But there is more to succeeding in cross-border retail banking than merely being allowed to operate. The real problems are legal, economic, technical and cultural.

UK banks have been more adventurous in Europe than their Continental cousins, though with limited success. They testify to the legal and operational disparities.

"In reality, European legislation is not that consistent," says David Dunsmore, the director of European operations at Abbey National, which has banks in both France and Italy. "If you want to sell mortgages, you need to have different documentation, a different manner of calculation of interest, and there are different legal requirements."

On the face of it, the UK has the most attractive retail banking market in Europe, with twice the average return on equity generated on the Continent. Yet those same handsome returns give British high street banks the financial muscle to fend off newcomers.

Combine those superior returns with the advantages of entrenched positions, established distribution networks, familiar brands and local knowledge - and then throw in the intrinsic conservatism of retail customers about their banking relationships - and the high street becomes a hard nut to crack, as even locally based supermarket and internet banks have found.

On top of that, Continental banks have been too preoccupied with domestic consolidation over the past decade to pay much attention to UK opportunities. They have been too busy privatising, searching for domestic economies of scale, creating universal banks and becoming combined bankers and insurers. In the past two years, converting their systems to handle the euro has absorbed considerable resources.

So the exceptions proving the rule that European banking remains national have, in the UK retail market, tended to be American. But even US success has been limited to specific products, such as credit cards and wealth-management services. "Very few people have managed to build a business that gets in at the fundamental level of the salary credit," says Tim Jones, a former NatWest retail banker, now managing director of Purseus, which is developing a multi-currency payments service. "That is the core of a retail banking relationship. It is the fount of excess money and the natural home for savings."

If you can't build it, you can always buy it. But it is difficult to build a business case for cross-border retail banking mergers, Jones argues. For one thing, there are no economies of scale to be had from merging IT systems. "Banking in different countries is sufficiently different at a very banal software level that you can't chop out costs that way," he says.

Other obstacles may be structural, such as the entrenched positions of savings, mutuals and co-operative banks and post office banks, particularly in countries like Germany and Spain. They can be a matter of policy. Foreign banks wishing to acquire substantial stakes in European bank privatisations have often been deliberately ignored in favour of local interests.

Nevertheless, there has been some movement. Belgo-Dutch Fortis and Belgo-French Dexia are arguably both now truly transnational universal banks - though migration to a common software platform, at least in the case of Fortis, has taken much longer than the formalities of the acquisitions and mergers on which the new bank is based.

Barclaycard has 900,000 credit card customers in Germany (despite its lack of a retail banking presence) and a small retail banking operation in France concentrating on major cities and better-off customers. Deutsche Bank has more than 250 branches in Italy, thanks to a series of small acquisitions. Last year, HSBC bought CCF, a French commercial and retail bank.

CCF provides access to corporate and a middle- to high-income retail clientele. Here is a clue to what drives most cross-border retail banking deals: the attraction is not bread-and-butter retail banking, but personal asset management as these countries roll back state-funded pension entitlements.

The greenfield route is, if anything, more difficult than acquisition. Distribution networks must be built from scratch. Cultural divides and attach-ment to existing brands run deep, as UK mortgage providers such as Abbey National and Woolwich have found in Italy. "It's been tough," concedes Dunsmore of Abbey National. "Italy has a big growth potential, but we're having to take a 'slowly, slowly' approach." The newcomers' innovative products and practice of approving mortgages in days rather than weeks have not been enough. Italian homebuyers, accustomed to fixed-rate mortgages, are suspicious of variable-rate products.

The internet doesn't offer much in the way of salvation. Banking proves that success is harder for the "pure plays" - those offering exclusively electronic services. "People don't want internet banking," says Jones. "They want everything banking."

Having a branch to fall back on is part of this, but "they want a reassuring brand presence and they clearly want a call-centre as well". Some years ago, there was widespread expectation that, once the euro arrived, French banks would lose current account business to remote banking. Because they are not allowed to pay interest on current accounts, there seemed to be an opportunity for foreign banks offering remote services.

It hasn't happened, except in a few border areas with significant numbers of cross-border commuters. Even without customer conservatism, any bank would think twice about entering such a cheque-oriented market, where cheques must be provided free and the cost of clearing all this paper must be absorbed in revenue from other services. Only the British and Irish come anywhere near the French in writing cheques.

Foreign banking may yet catch on in Europe. The "virtual" euro has been slow to take root in the retail bank customer's consciousness. Once they have the real euro notes and coins in their pockets, they may be more willing to buy their banking services cross-border. What is certain is that Continental banks, after a decade of domestic focus and with the cost of the euro behind them, will start to look abroad more seriously.

Marion Bywater is editorial director of Euro Impact magazine