When supermarkets burst on to the finance scene a decade ago, the traditional banks quaked. Suddenly the competition was coming at them from all angles and in many guises. With a ready-made infrastructure of stores keeping start-up costs to a minimum, the promise for consumers was chea- per, better banking.
That promise appears to have been broadly upheld, but there is a chink in the armour. When you load sometimes complex financial products into your supermarket trolley, you are buying without first taking advice. So if you later find the deal is the wrong one for you, there is no comeback.
The big two supermarkets – Tesco and Sainsbury's – have been consistently active in the personal finance market, offering lending, savings and insurance products, credit cards and even mortgages. Tesco's financial know- how comes courtesy of Royal Bank of Scotland; Sainsbury's Bank is more autonomous but works in alliance with HBOS.
The third main supermarket in this arena, Asda, doesn't have its own banking business as such but instead puts its name to products from third parties and takes a commission on sales.
On the face of it, their products and prices appear mainstream, with the rates charged by Asda, Sainsbury's and Tesco on credit card borrowing varying only marginally – between 15.9 and 16.9 per cent. Lisa Taylor, spokeswoman for financial-comparison site Moneyfacts, says standard rates in this market average just over 16 per cent.
But that doesn't tell the whole story. The introductory rates and balance-transfer deals offered by the supermarkets have attrac-ted shoppers by the million and can still offer great value to newcomers.
For example, Ms Taylor says Tesco's interest-free period of 13 months for balance transfers puts it firmly in Moneyfacts' "best buy" tables, while Sainsbury's at 10 months and Asda at nine are respectable enough. So far, so competent.
The killer punch for supermarkets, though, is their loyalty schemes, which they exploit to the full. Sainsbury's offers four points for every pound spent with the business by shoppers using its credit card alongside a Nectar card. Tesco offers five points for every pound spent with it. Both also award points each time their credit card is used elsewhere, bringing customers right back to them at bonus time.
It works because for so many shoppers, loyalty is a price worth paying. Those points can pay for family outings, air miles, holiday vouchers, car rental and gym membership. So with rates no worse than the main banks, and bonuses aplenty, no wonder millions have succumbed.
Kevin Mountford, spokes- man for price-comparison site Moneysupermarket. com, says Tesco and Sainsbury's have thrived in the banking world because they had good, solid products and a great understanding of their customers.
"The supermarkets have a big opportunity, with their ready channels to market and the ability to cross-sell to their own customer base. The challenge now is for them to be meaningful players in the open market."
Sainsbury's has started already. It ran a prominent campaign after the launch of its internet savings account (which pays 6 per cent gross) in June 2007. The account remains one of Moneyfacts' best buys. In fact, Sainsbury's has been voted the comparison site's most consistent savings provider over the past 18 months.
Ms Taylor says consistency is important because not everyone wants to spend hours on the internet comparing providers; they simply want to know which products are reliably good performers.
The supermarkets have also refined their business model, allowing far greater scope for cross-selling, as Mr Mountford explains. "You can see promotions at petrol pumps for car insurance, and they make great use of the checkouts, where people have more time to browse. But they have also become clever at communicating outside the supermarket environment, whether that is through loyalty points, for example, or external advertising."
But be warned: if the products you buy – particularly insurance policies – turn out to be problematic, don't cover you the way you expected, don't pay out or are otherwise unsuitable, it's your problem. Buying without advice means you are afforded no support from the Financial Ombudsman Service.
Asda is the one supermarket that offers protection policies only through an independent financial adviser, Lifesearch.
Matt Morris, policy adviser for Lifesearch, adds: "When buying from supermarkets, customers should be aware that they are tied to just one provider, so their product range is very limited and not particularly competitive on price either.
"Important products like income protection and family income benefit are not offered, nor will they offer to write the cover into trust [to reduce inheritance tax liabilities]. And if consumers buy the wrong product, they can't complain to the ombudsman because, without advice, it's the customer not the seller who is responsible."