The big trolley dash into world of banking

Supermarkets are targeting fed-up bank customers with new deals and better services. Simon Read reports
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The Independent Online

The major supermarkets are moving closer to taking on the high-street banks. Tesco Personal Finance this month changed its name to Tesco Bank, ahead of its expected launch of a current account. Meanwhile, last Monday, Sainsbury's revamped its rewards deal to help boost its personal finance business. The food rivals are clearly gearing up to battle each other for customers and, according to research published today, their timing couldn't be better.

More people than ever are looking for alternatives to traditional banks, according to business advisory firm Deloitte. Its research reveals that 51 per cent of people would consider moving to a new bank, with three out of five more concerned about the safety of their bank, levels of service and fees than they were two years ago.

"The concerns consumers have towards their traditional banking relationships are making them more likely to explore alternative options with non-traditional organisations," says Ian Foottit, financial services strategy partner at Deloitte. "When coupled with the change in the economics of banking – due to fundamental shifts in both the demand and supply side of the business – it is clear that there are real opportunities for suitable businesses to extend their offering for new entrants to emerge."

Tesco has been most aggressive in taking on on the high-street banks. A spokeswomen for the supermarket says: "We aim to extend our business from a collection of successful financial products to that of a full-service retail bank for Tesco customers, offering a range of banking and insurance services through branches, in stores and online."

Tesco has six in-store bank branches – in Glasgow, Blackpool, Long Eaton, Bristol, Coventry and Oldham – and plans to open more. It is expected to launch its current account by 2011, to add to its existing range of savings accounts, credit cards and insurance products. Indeed it has half a million savings account customers with savings balances of £4.6bn.

Sainsbury's is offering its customers double their normal Nectar reward points in its stores for two years when they take out a selected Sainsbury's Finance product. The supermarket acted after its research showed that additional reward incentives could be a major catalyst in getting people to consider supermarket banking. Its study showed that while 34 per cent of people claim to have a financial services product from a supermarket, some 70 per cent of people would consider taking one out if they felt adequately rewarded for having one.

Justin King, Sainsbury's chief executive, has stopped short, for now, of revealing any plans to launch a current account, but he is open about his ambitions for the financial services arm of the supermarket. "The development of our complementary non-food business is one of our key areas of focus and this is a significant opportunity for the bank to accelerate its future growth," he says.

Other supermarkets have also been busy getting in on the financial services act, seeing the widespread loss of trust in Britain's high-street banks as an opportunity. Gideon Ingham, head of insurance and savings at Asda Financial Services, says: "It is true that the recession has shaken consumer trust in banks. Brands like ourselves, that consumers know and trust, can provide customers with the same, if not better, service than banks. Just because we offer the same products as banks, doesn't mean we have to behave like them."

Asda offers insurance, savings schemes and loans and credit cards through its branches. "It is the responsibility of supermarkets to provide an alternative to customers where they lack trust in the established players by offering relevant, simple products backed with excellent customer service," says Ingham.

Next year marks the 25th anniversary of Marks & Spencer's move into financial services. The company was renamed M&S Money in 2003 and was taken over by HSBC Bank in 2004. Colin Kersley, M&S Money's chief executive, says the store chain will develop its banking products as more people turn to it as an alternative to the banks. "M&S is one of the most trusted brands in the UK," he says "This trust, combined with the product and market knowledge of our parent company HSBC, provides tremendous scope for the development of M&S financial products."

In the last year, M&S has launched its first regular savings account and encouraged thousands of its credit card customers to sign up to its rewards scheme, M&S Premium Club, which offers members triple points at its stores.

Supermarkets' reward schemes could be their trump card in attracting bank customers, says David Black, banking analyst at Defaqto. "New companies entering the current account market have great difficulty building up customer numbers and market share because, typically, only a small percentage of customers – maybe 6 per cent a year – switch their current account, with the majority of them doing so because of dissatisfaction with their existing provider.

"Clearly a supermarket current account provider would have significant marketing advantages in terms of customer loyalty, reputation and extremely regular customer footfall or visits to their website," he says. "The loyalty point reward schemes could be harnessed to attract and encourage new current account customers."

Black says the long battle over bank charges, which is still rumbling through the courts, could also work to the advantage of the supermarkets. "When the dust finally settles over the unauthorised overdraft charges court cases, it is looking reasonably likely that we will see the end of free in-credit full-service current accounts.

"If that happens, it could also play in to the hands of supermarkets with the possibility of discounting or waiving standard current account charges if the customer achieves a certain weekly spend threshold at the supermarket concerned. Some supermarkets offer discounts on fuel purchases on a similar basis," Black says.

Andrew Hagger, analyst at moneynet.co.uk, agrees that the reward schemes and loyalty points could be a major concern for high-street banks. "While the traditional banking players are used to a little competition when new or overseas providers set up stall or a quirky new product is launched by a rival, it's not usually too much to worry about. However there may now be a bigger threat looming as these food giants go down the loyalty and rewards route to try to tempt consumers to switch allegiance."

Adrian Lowcock, senior investment adviser at Bestinvest, says the move can't come soon enough for Britain's fed-up banking customers. "The banking crisis has done a lot of damage to the high-street names, and with their reputations in tatters, it is down to new entrants to pick up business. Change won't come overnight but in a few years' time I expect to see the supermarkets take on the traditional roles UK banks used to do so well."

Ed Bowsher of lovemoney.com is also a fan. "I welcome the growth of the supermarket banks. The credit crunch reduced the number of players in the UK retail banking market, in particular the merger between Lloyds and HBOS. An aggressive Tesco Bank could help to increase competition, and that can only be good news for consumers."

But will the supermarkets come up with attractive enough banking products to make enough of us to switch? Gemma Stanbury, head of savings, loans and debt at Confused.com says they already have done so with their existing range of financial products.

"Compared to the main high-street banks in terms of savings accounts, Sainsbury's and Tesco often offer much better rates, albeit with complicated terms and conditions. Of the supermarkets, only M&S offers a cash ISA but this is competitive – although Barclays offers a slighter better rate."

But that doesn't mean that customers should flock to Tesco's bank account when it launches, she says. "There are a number of other providers who are now big in the current account market, such as Alliance & Leicester, so Tesco will have to come up with something special in order to steal substantial business from the established market."

The rate stuff: Great offers?

Confused.com's Gemma Stanbury examines the savings and loans deals available at the supermarkets:

"The Sainsbury's Online Saver Account currently offers 3.2 per cent gross on a minimum of £1,000. But only three withdrawals can be made. After 12 months, or if four or more withdrawals are made, the rate reverts to the normal online saver rate, just 0.5 per cent gross.

"The Tesco Internet Saver is offering 3 per cent gross on a minimum of £1, but this includes a bonus of 1.75 per cent for 12 months.

"Marks and Spencer has a fairly competitive variable easy-access cash ISA, paying 2.5 per cent on a minimum of £100, but once again the rate comes with a bonus (1 per cent) that applies only until 21 July 2010 – and there are other providers offering the same rate or higher on a simpler basis.

"These providers also offer other products such as credit cards and loans. Sainsbury's has a very competitive credit card: 0 per cent for 10 months on balance transfers (with a 3 per cent balance-transfer fee), 0 per cent for 12 months and Nectar points on purchases made in Sainsbury's stores, and 0 per cent for 10 months on purchases elsewhere. Even if you aren't a Sainsbury's customer, it's one of the best all-round cards on the market."

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