Comment: How Tesco played the wrong card

It is all very well for a bank to help a supermarket develop plastic payment and credit cards, a bread and butter processing service that can be done under anyone's brand name. But it seems to be quite a different story if a supermarket strays into banking heartland, by setting up branches in its stores and eventually applying for a banking licence. This is what tipped NatWest into withdrawing its co-operation from Tesco, whose phenomenally successful Clubcard service the bank had helped build up.

Prompted by Sainsbury's decision to set up a bank jointly owned with Bank of Scotland, Tesco is now thinking of doing exactly the same itself, in a game of financial services leapfrog with its closest rival. Tesco will not be applying for a banking licence, yet, there is little doubt about where its plans are leading.

Even if NatWest had been more co-operative, it is hard to fault the decision by Tesco to switch to Royal Bank, which, like Bank of Scotland, has such a small share of the English and Welsh markets that the conflict of interest is insubstantial. As part of a streamlining of retail banking services, NatWest yesterday announced it would be sticking its fund management, private banking and life insurance operations into a single unit. In part, these moves are a response to tougher competition of exactly the sort that Sainsbury and Tesco are bringing to the banking market.

So it would have been a nonsense to continue the relationship. Indeed, eyebrows were raised when it was first announced, though at the time few realised what a threat the supermarkets might become to the banks. What neither side has yet admitted, however, is the likelihood that this will be a zero-sum game. Banking is not a marketplace that will expand easily as new entrants arrive. The main impact of the supermarkets, therefore, will probably be to reduce the profitability of the banking market. There could be a quite vicious price war and smaller players will find it hard to survive. No wonder Lord MacLaurin was made to feel so uncomfortable in his position on the NatWest board. He's about to take a knife to the bank's soft underbelly.

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