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June 27, 2014 7:48 pm
Challenger firms are stepping up their assault on the UK banking market as established lenders from Barclays to Wonga become embroiled in new scandals, further eroding customer trust.
During the past two weeks, Tesco Bank has entered the current account market; a big peer-to-peer lender has teamed up with Santander UK and Marks and Spencer and Sainsbury’s Bank have expanded their services as they try to break the dominance of the country’s biggest lenders.
The government and regulators have been pushing for greater competition and choice in the industry by making it easier for new banks to start up. With their size, huge customer bases and customer-friendly access, supermarkets are among the best positioned to shake-up the market, say industry experts.
“One big advantage in banking is scale,” says Margaret Doyle, head of financial services research at Deloitte. “Supermarkets have huge branch networks, long opening hours and they don’t have the legacy IT problems banks have.”
Supermarkets tend to have a deeper understanding of their customers than the banks, as they have access to data collected through loyalty schemes such as Tesco Clubcard and Nectar. This means they are able to reward banking customers with offers on their shopping and target them with suitable financial services products.
Tesco, the first British supermarket to offer a current account, will give customers Clubcard points when they use their debit card. Likewise, Sainsbury’s which this week beefed up its travel money operation, said 85 per cent of foreign exchange customers were using their Nectar cards to obtain loyalty points and access some preferential rates.
The UK’s practice of offering free current accounts to customers who are in credit – often at a cost to the provider – is a significant obstacle to new entrants. But for retailers with large balance sheets, the costs can be more easily absorbed.
Tesco admitted that its entry into current accounts this month would slow profit growth at the bank in the short term. It expected it to take “a modest number of years” for the service to break even in its own right.
Neither Tesco nor M&S, which entered the current account market in 2012 but only launched a free account last month, are expected to take significant market share from the big banks.
It has taken Nationwide, the UK’s largest building society four years to increase its share of the market from 4.7 per cent to 6.2 per cent.
“Supermarkets have made a difference since they started in the mid-1990s but have not succeeded in taking a major share yet,” says David Sayer, global head of banking at KPMG. “Customer inertia rivals regulation as the greatest driving force in retail banking. Very few customers move bank despite all the recent changes to make that easier.”
He says supermarkets are yet to be recognised as prominent banking brands, while an increased move towards online shopping means footfall to their stores – where they often market banking services to customers – will decrease.
Also, while the supermarkets finally move into mainstream banking, other, new types of challengers are fast entering the market behind them.
Peer-to-peer lending, for example, which enables consumers and businesses to lend money to each other at often cheaper rates than the banks, is growing rapidly.
Funding Circle, one of the biggest peer-to-peer providers this month struck a deal with Santander UK for the bank to refer small business customers to its site. In turn Funding Circle will promote the Spanish bank’s current account and cash management services.
Peer-to-peer lending accounts for just a fraction of the overall market – Funding Circle, for example has helped about 5,000 businesses borrow £290m since it started four years ago, while Santander UK lent £1.1bn to small and medium-sized businesses in the first three months of this year alone.
Ms Doyle at Deloitte says that should be little comfort for the banks. “You don’t need to have a single one of these institutions grabbing market share to create problems for the banks,” she says. “Collectively they can still damage the banks’ business models, which rely on economies of scale and cross-selling.”
But as Mr Sayer points out, the big-banks can still rely on inertia as a way of holding onto their customers. Despite the launch of a government-backed initiative last September aimed at simplifying the process of switching current account providers, the number of people moving is very low.
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