There's lolly in your trolley

A new loyalty card may tempt some people to save with Tesco but, says Anthony Bailey, it is there to sell the brand
Single Nights ... "no-profit" petrol ... interest-bearing payment cards ... what is happening to supermarkets?

While banks and building societies talk of oversupply and look at pruning back their branch networks, Tesco, the supermarket chain, looks to be joining a growing band of non-financial firms moving into financial services.

Following the huge success of its loyalty Clubcard, which earns users discounts against their spending, Tesco is now bringing out a version of the card that offers credit interest and can be used like a normal debit card. The original Clubcard was launched last year and has 6.5 million regular users.

The most significant feature of the new Clubcard Plus is the healthy 5 per cent interest it pays on credit balances of any size.

Other supermarkets -namely Safeway and Asda - already offer basic points- based loyalty cards and there may be moves to follow Tesco's upgrading.

Elsewhere, non-financial firms are already using their brand name to sell financial products. Marks and Spencer now sells PEPs and pensions alongside underwear and ready-made meals, and also has its own credit card. Virgin, once a humble record shop but now an airline and cola supplier, has just started selling life insurance. Since last year the company has been selling PEPs.

But instead of using its brand name to sell financial products, Tesco, at present at least, is simply using a financial product to sell its brand.

It is therefore likely to be some time, if ever, before you can buy a pension off Tesco's shelves. Indeed, Tesco says it has no plans to expand further into financial services. Nevertheless, its move is unlikely to be the last.

What's so great about the new Clubcard Plus?

High interest rates are the big lure of the new scheme. Clubcard Plus is a bit like a bank account with an overdraft facility.

At 5 per cent gross, whatever your balance, the credit interest rate is much better than that on most bank and building society accounts, especially for lower balances.

To earn 5 per cent from NatWest bank, which administers the scheme on behalf of Tesco, you would need to deposit many thousands of pounds - and much of the savings market is more in line with NatWest than Tesco. Then there is the overdraft rate which has a low APR (annual percentage rate) of 9.3 per cent.

How does it work?

You fund the account by regular monthly or weekly deposits by standing order. Many people who join the scheme are likely to put in just enough to cover their regular shopping bills. Clubcard Plus users will not need both the new card and an existing Clubcard. Both earn points in the same way when you shop.

You do not have to spend your money at Tesco. You can withdraw cash from Tesco tills via its existing cashback facility or from NatWest cash machines. If you want to withdraw more than pounds 100 in-store, you have to go to the customer services desk where an ID check is completed. You would then get your money in cash rather than cheque form - not ideal for large amounts.

You can apply for an overdraft of up to the amount of your regular monthly payment.

Should I get a card?

Why not, but don't get carried away with the rates. Assuming you plan simply to use the card to pay for your shopping, you are unlikely to be running much of a balance. So even at 5 per cent, the actual interest might not amount to much. You could transfer much more of your savings on to the card. But if that means taking money out of a building society, you are potentially reducing your chance of benefiting from a windfall gain.

The 9.3 per cent overdraft rate, highly competitive though it is, is likely to prove of only limited value. Overdrafts are limited to the size of your monthly standing order. On an overdraft of pounds 200, the typical saving would be about 34p or less a week compared with many bank overdrafts. And while bank rates are generally much higher, some also offer free overdrafts within limits.

Furthermore, there is the question of whether the rates will be maintained. Tesco says the overdraft rate is fixed until the end of the year, but the savings rate is subject to change. The rates were set before Thursday's base rate cut.

How can I get the new card?

Even existing Clubcard holders will need to apply for a new Clubcard Plus. Tesco is mailing a million of its existing Clubcard holders and leaflets will be available in stores from 17 June. Or call 0800 314151.

I don't even have one of the original Clubcards. How does the points scheme work?

You must spend at least pounds 10 and for every complete pounds 5 you spend you get 1 point worth 5p. Points are administered centrally and every quarter you get vouchers to the value of your points. Since the launch in February of last year, Tesco has distributed pounds 81m worth of loyalty vouchers. In addition, pounds 120m-worth of "product-specific" vouchers have been sent out.

An average annual saving will be around pounds 30. But customers need to be wary of showing blind loyalty. A survey published by Which? last year showed that Tesco was more expensive than Sainsbury for a basket of brand- name goods but cheaper for a basket of own-brand goods. The price advantage of different stores can shift at any time, and the danger with loyalty schemes is that shoppers forget to hunt down the best value for money.

Bear in mind, too, that Tesco is hoping that customers, in funding the new card, will be encouraged to spend more.