Comment: Banks face a bruising battle

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Are we about to see the banking equivalent of a price war? It's been a long time in coming and we've had many false declarations of hostilities before. But that was certainly the implication of the very competitive interest rate announced yesterday by the new Sainsbury's Bank on instant access deposit accounts.

Once upon a time the main banks used to charge us to deposit our money with them. Things have changed a bit since then, but not by much. The rates of interest paid on outstanding balances in standard accounts are still so low they are almost not worth having (almost, but not quite). The position is not much better with building societies. Even the interest on 90-day notice accounts is nothing to get excited about in most cases.

Sainsbury's rates, together with those offered by the other supermarkets, look so much better by comparison that the traditional banking sector must surely respond.

Sainsbury's still has a way to go, of course, before it can match the big banks in terms of customer service. So far it has only launched a savings account. With no overdraft facility, no cheque book and no add- ons like standing order and direct debit options, it is for the time being probably more of a threat to building societies than banks.

But a full Sainsbury's bank account will come later this year, providing a powerful test of the assumed inertia of banking customers. Perhaps in practice people will indeed prove too lazy or care too little about their interest rate to change their accounts. But the market is changing. Unencumbered by the high overheads of a branch network, supermarkets are in a position to offer such dramatically better terms that they may begin to shift this inertia.

At the same time there is the coming battle between building societies which have taken the conversion route and those that are sticking with mutuality. The Nationwide is already running comparative advertising inviting customers to check its rates. More campaigns like this will follow.

The real fun is likely to start after the Halifax and Woolwich flotations in the summer. According to Save & Prosper, up to a tenth of depositors could migrate once they've got their free shares. The outflow could be even worse if deposit rates are uncompetitive. The upshot is that both banks and converted building societies are facing a long, bruising battle against a new set of competitors that are not used to losing. It couldn't happen to a nicer bunch.