Big stores set out stall to bag more bank customers

As the image of high-street institutions falls into disrepair. Chiara Cavaglieri and Julian Knight look at moves by supermarkets to expand their range of financial products

(JASON ALDEN )

As if things weren't bad enough already for the high-street banks – with their huge debts and their collective reputation disappearing down the plughole – they are now under renewed attack from the lean, mean supermarket sector.

The big stores have been offering basic banking services such as savings accounts and loans for well over a decade. Some, such as M&S Money, owned by HSBC, have even expanded into investment funds, while Tesco has grabbed a sizeable chunk of the travel insurance market. But the recent fall from grace of the banks has given the supermarkets a golden chance to steal yet more market share, and it has been widely reported that Tesco is about to start offering current accounts and even mortgages. This would mark a major assault on the core business of the established players.

If Tesco does go down this path, it may be able to exploit a rich seam of public anger towards the banks. A recent survey by Asda Financial Services found that 73 per cent of consumers feel banks act irresponsibly by lending too much money. And while 40 per cent agreed that individuals should take most of the responsibility for their borrowing habits, 81 per cent called for more information to be shared between banks to prevent customers amassing unsustainable debt.

In the past, consumers have been reluctant to switch their accounts. But with the reputation of banks in tatters, could brands that they trust, such as their favourite supermarkets, persuade them to make the move?

Supermarkets, unlike banks, usually do well in a recession and there's every chance that their future is bright. Asda, for one, defied the credit crunch, registering a 7.2 per cent jump in like-for-like sales for the fourth quarter of 2008, up from 6.9 per cent in the third quarter.

There also seems to be a great deal of confidence among the supermarkets that they will be able to capitalise on the current ill feeling towards banks. Only last year, Tesco bought out Royal Bank of Scotland's 50 per cent stake in Tesco Personal Finance for £950m, and there are plans to develop the chain's financial arm further.

"The acquisition of Tesco Personal Finance is part of the strategy to grow its share of financial services," says Matthew Dransfield, head of communications at the company. "We believe such services could deliver £1bn in profits per annum – more than double current levels of just under £400m."

Sainsbury's also has high hopes for the future after enjoying a recent uplift, says Helen Cook, the head of savings at Sainsbury's Finance. "We are seeing sales well above our forecasts and it's fair to say there has been a knock-on effect with our financial products. We want to bring the same level of service to the financial products."

Along with a trusted brand, the big stores are offering customers well-priced products and the opportunity to earn loyalty card reward points, "While the supermarkets don't pay the best rates, they are becoming increasingly competitive and people are responding to the brand and the fact that they can find information in-store," says Michelle Slade from financial information service Moneyfacts.

For example, M&S Money is currently offering the highest-paying account among all the supermarkets, with a rate of 3.1 per cent, while Sainsbury's Internet Saver was given a Moneyfacts consistency award, having come top in the firm's league table of online accounts over the past three years.

When it comes to credit cards, all of the supermarkets offer APRs that fall below the sector average rate of 17.7 per cent. "If you shop in a specific supermarket then having its credit card could be a good idea as they all offer points or vouchers which can be redeemed in-store," says Ms Slade. "All the cards have reasonable deals on introductory purchases and balance transfers, with Tesco once again being very competitive in this arena." In addition, some cards will allow shoppers to earn extra reward points when used in a store.

Supermarkets have more than held their own on special offers and cashback deals. Sainsbury's, for example, is currently offering a 25 per cent discount to customers who purchase both buildings and contents insurance (plus a further 5 per cent if they buy online), as well as £30 worth of shopping vouchers and another £30 of vouchers upon renewal after 12 months.

Supermarket finance is far more than just an add-on to the core business. Sainsbury's, the first of the big stores to open a bank – in February 1997 – is jointly owned by Lloyds Banking Group and has around 1.5 million active customers. Tesco Personal Finance, which followed closely behind, has more than five million customers across 28 products, with 500,000 savings account customers and 2.7 million insurance policies. All the big players, including Marks & Spencer Money and Asda Financial Services, offer a range of insurance products, credit cards, savings accounts and loans. Tesco also has its own comparison website for insurance policies, Tesco Compare.

Many of the products, particularly in insurance, are provided by other companies. For example, Bradford & Bingley supplies internet savings for Asda, and Sainsbury's life insurance is provided by Legal & General. This points to a central principle in the supermarkets' assault on financial services – that to be successful in serving customers, they need the help of big, experienced banks and insurers.

It is not certain that the supermarkets will deliver on their promise of rapid growth in the financial sector, but if they do, it could spell big trouble for the country's banks. "There's a lot of worry because of all the troubles and turmoil at the moment, and a lot of people are looking for safety and a brand they know," says David Black, the principal consultant for banking at research firm Defaqto."It's also highly convenient," he adds. "Customers go to the supermarket once a week to do their food shopping and they can pick up financial products under the same roof.

"We're waiting to see when Tesco introduces current accounts and mortgages. I think that then Tesco will become a major threat to the established players."