Money insider: Tesco must seize chance to shake-up high street banks

While traditional banks are used to a little competition when new or overseas providers set up stall or a quirky new product is launched by a rival, in the grand scheme of things it's not usually seen as too much to worry about.

Already this year we've seen Metro Bank starting to open branches in the capital, but it's still too early to tell whether this is hurting the more established banking players.



However, there may now be a far bigger threat looming on the horizon as food giant Tesco has just announced that it will begin offering mortgages and current accounts in 2011 once regulatory approval has been granted by the Financial Services Authority (FSA).



A survey earlier this year reported that over 30 per cent of people already have a financial services product from a supermarket.



These will largely consist of insurance, credit cards, personal loans and simple savings accounts all of which are sold via cost effective telephone or internet channels.



The big decision for Tesco is whether it needs a high street branch presence or if installing banking facilities within existing stores will be the best modus operandi as it looks to challenge mainstream banks.



Currently the supermarket giant is trialling a handful of in-store branches to assess suitability and to gauge customer feedback. It could well be that it ends up deploying a mix of standalone outlets and branches within stores as part of its financial services expansion.



Tesco Bank already has over 16 million customers signed up to its Clubcard loyalty scheme, something which will play an important part when it comes to developing new financial products.



The existing range of products are all serious players in the best buy tables, including a market leading 13 month 0 per cent purchases credit card, personal loans at 7.7 per cent APR and an internet saver paying a very respectable 2.60 per cent.



To remain successful when moving to the more complex mortgage and current account markets, Tesco will need simple, transparent and competitively priced offerings. However, if it can successfully incorporate Clubcard rewards as part of the new account packages, this is where it will have a huge advantage over its rivals.



Being rewarded handsomely for brand loyalty is not something that people are accustomed to in the banking arena and could be a real differentiator and one that could help win large numbers of disenchanted customers from high street competitors.



Let's hope that by constantly rewarding customers for their loyalty that the "Supermarket Banks" may force the traditional banks to up their game and specifically the way they treat their customers.



With our banks receiving over 7,000 complaints every day according to latest data from the FSA, there'll be no shortage of customers on the look-out for a new bank account, but only time will tell if Tesco Bank can deliver the first class level of service required if it is serious about becoming a major player in UK banking.



Property perils of latest cuts



homeowners receiving certain income-related benefits are also able to claim Income Support for Mortgage Interest (ISMI) for mortgages of up to a maximum of £200,000, but many are worried that a cut to their benefit may not be the last.



The Government has reduced the interest rate payable on ISMI from 6.08 per cent to 3.63 per cent in line with the latest average mortgage rate as calculated by the Bank of England. While some will still find their interest being covered, others will now find they are faced with a potential shortfall.



This particular change will save the Government a reported £200m per annum. However, there are fears that this state safety net may be cut further as part of the forthcoming Comprehensive Spending Review.



The biggest concern is that the current 13-week qualifying period could be extended and will put additional pressure on both borrowers and lenders. Anyone forced to sell their property would be doing so against a backdrop of falling house prices and tightening of mortgage supply, a worrying combination which could mean far lower forced sale prices being achieved.



Repossession levels are at a two-year low and the latest 2010 forecast of 39,000 is a far cry from the early 1990s, when the figure peaked at in excess of 75,000.

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