Supermarkets out to feast off remains of bank bloodbath

Large customer bases lured by new initiatives to rebuild trust and combine shopping and financial needs

Asda is the latest to make a move, rebranding its financial services arm as Asda Money and launching a new credit card (AFP/Getty Images)

It's not yet a knockout, but the high street banks have taken a battering in recent weeks and the supermarkets are poised to muscle in on the opportunity to gain favour. Ed Miliband is calling for the biggest banks to sell off 1,000 branches to increase competition but the Libor-fixing scandal seems to have finally pushed the public over the edge. Hoping to avoid being tarred with the same brush, the supermarkets are attempting to capitalise on public mistrust of the big UK banks and Asda is the latest to make a move, rebranding its financial services arm as Asda Money and launching a new credit card.

"Asda is the latest high street retailer to scent blood and to move quickly to capitalise on consumers' growing distrust of high street banks," says Michael Ossei, personal finance expert at uSwitch.com. "The supermarkets find themselves in a unique position to benefit. Not only do they already have a large and loyal customer base to target, but they can also make people's lives easier – combining their shopping and banking needs together, creating a one-stop-shop and rewarding customers for it."

Asda's launch follows hot on the heels of Marks & Spencer announcing that its flagship Marble Arch store in London will be the first to open an in-store banking service, with a further 50 opening across the country over the next two years. And the Independent on Sunday understands Marks & Spencer will outline details of a new current account this week.

This year we can also expect Tesco mortgages and, by 2013, the supermarket giant says it will be offering current accounts. Asda is following suit with new branding and the launch of a cashback credit card offering 1 per cent unlimited cashback on all Asda store shopping and 0.5 per cent unlimited cashback on other shopping, as well as 0 per cent interest on balance transfers for 12 months with no annual fee. In the past six months other products and services have been developed in the lead-up to the launch, including travel money and a new energy comparison site.

The supermarkets' financial products are already stacked up reasonably well against the high street banks. At Tesco, you get interest-free purchases for 16 months with one of its credit cards at a rate of 16.9 per cent and Sainsbury's, Marks & Spencer and Tesco are always near the very top for personal loan rates. Currently, both Tesco and Marks & Spencer offer personal loans of £7,500 to £15,000 charged at 6 per cent and Sainsbury's goes one better with a market-leading rate of 5.9 per cent for loans of this size. The Marks & Spencer Advantage cash Isa paying 3 per cent also holds it own against the rest of the market.

"Supermarkets are attractive by their flexibility and access; additionally the majority of their rates appear in our best buy tables," says Rachel Springall from comparison site Moneyfacts.co.uk. "With the continuation of bad press with the high street banks, loyal supermarket shoppers may see the launch of Asda Money as an attractive alternative."

The problem, however, is that transparency is paramount and when you look behind the face of these supermarket banks, it is often the same old name behind their products. Sainsbury's Bank, which was launched in 1997, is backed by Lloyds Banking Group and Marks & Spencer Money is HSBC.

Asda has had its hands full with its multi-partner approach over its ten years which includes Santander for one credit card, but otherwise they use specialist providers such as Travelex (travel money), Creation (cashback credit card) and Lifesearch (life insurance).

Tesco was in bed with Royal Bank of Scotland (RBS) before it bought them out and went on alone back in December 2008.

However, this move away from RBS played out somewhat awkwardly with the launch of its mortgages and current accounts delayed. It seems unlikely that the other supermarkets will have the infrastructure to follow suit and become an individual bank any time soon.

Of all the supermarket banks, therefore, Tesco as a standalone bank seems to be in the strongest position to grab market share but seems surprisingly reluctant to steam ahead. There are no plans as yet to have in-store banking facilities and another year to wait for current accounts.

In comparison, Marks & Spencer seem keen to take the lead with in-store branches which they say will be open twice as long as other high-street banks. "Offering current accounts and mortgages is not quite as straightforward. However with M&S due to offer a current account soon, this may be the catalyst that sees other supermarkets following suit," says Andrew Hagger from Moneyfacts.co.uk.

Perhaps Tesco is biding its time because there are risks for both consumers and the supermarket banks themselves if they rush to push their brand behind financial services.

There is little margin for error so if these products aren't up to scratch it could be disastrous.

Consumers who vote with their feet and move away from the big UK banks to their favourite supermarket bank could end up writing off the entire supermarket brand if they continue to be unhappy with the level of service.

So, the likes of Tesco and Marks & Spencer may find that they lose their grocery shoppers as well as their insurance customers if they don't get it right. And in the meantime, it could be other providers with a more ethical or community focus who could reap the rewards.

"I'm not sure people will be leaving Barclays and NatWest in their droves for supermarket banks" says Mr Hagger. "I think there's more chance they'll opt for something more mutual based – building societies and ethical companies such as Co-op Bank and Triodos bank".

Click here to view the graphic comparing supermarket, bank and building society rates