Supermarkets are planning to increase the range of financial services they offer customers in an attempt to cash in on public antipathy towards banks.
Tesco, which already offers insurance, credit cards, loans and savings accounts to customers, will open 30 in-store bank branches by the end of the year, starting in Bristol, Blackpool and Coventry. Within the next two years it also plans to provide current accounts and mortgages.
But while some consumers may be seeking an alternative to traditional providers, brokers said supermarkets would need to offer more than convenience in order to compete with the high street banks.
Supermarkets could be well placed to provide competitive rates to lure new customers. The deals available from Tesco, Sainsbury’s, Marks and Spencer, Waitrose and Asda are already fairly competitive, according to Moneyfacts.co.uk, the comparison service.
For savers who are happy to leave their money untouched, Sainsbury’s internet saver account is one of the best around, paying interest of 3 per cent. The rate falls to just 0.75 per cent if money is withdrawn.
M&S has a rate of 3.1 per cent on its cash Isa, the second highest paying account available to those looking to transfer money in, beaten only by the NatWest e-Isa, which pays 3.2 per cent.
All the big supermarkets offer credit cards that charge less than the sector average of 17.7 per cent, and Tesco offers a credit card deal for balance transfers, offering 0 per cent for 14 months, which is linked to a reward scheme.
The commitment from supermarkets to focus on simple products and their desire to attract new customers means any future current account or mortgage deals could be equally competitive.
“Tesco is not going to enter the mortgage market until the timing’s right,” said Ray Boulger at John Charcol. “But once they do enter, there will be no point offering anything unless it can compete, so there could be some good deals. And don’t forget, Tesco trades on affordability. It would be bad PR for them to only offer poorly-priced deals.”
Joshua Raymond, a market strategist at City Index, agreed that the timing of Tesco’s new banking offers was clever. “From an investor’s point of view, Tesco’s share price has also proved to be a much more stable investment of late than banks,” he pointed out. “The high street has lost faith in a number of banks and Tesco has proven throughout this recession that it has a loyal and dedicated customer following.”
Supermarkets began offering financial services to consumers more than a decade ago. Banks were initially concerned that supermarkets, with their recognisable brands and large customer base, would pose a considerable threat. But the banking customer base of Sainsbury’s and Tesco has remained modest.
However, this could be the right time to expand. The collapse of building societies such as Dunfermline, which had to be rescued by Nationwide, has thrown into question the idea that societies offer a safer alternative to banks.
Tesco said it would provide old-fashioned banking with the back to basic offers that high street banks have failed to concentrate on in the past few years.
And as banks have difficulty fulfilling their traditional role as lenders, Adrian Lowcock, senior investment adviser at Bestinvest, believes it can be only a matter of time before Tesco becomes one of the main high street banks.
“They are taking a softly, softly approach,” he said. “There is a space that banks have left by having to pull in their lending and this is open for competitors like Tesco to step into and fill the breach.”
For consumers, there should be no difference in the level of security or quality of service offered by supermarkets compared with banks, as all financial services offered in the UK must be authorised by the Financial Services Authority.
However, supermarkets may not be as distinct from the banks as they would like customers to think. While Tesco Personal Finance is wholly owned by Tesco, which bought out Royal Bank of Scotland last year, Asda savings are provided by Abbey; M&S Money is owned by HSBC; and Sainsbury’s life insurance is provided by Legal & General.
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