Is the future bright for the UKs Supermarket Banking Groups?

A recent survey of Bank Executives in the UK indicates that around two thirds of those polled see Supermarket Banks as a major force in the future. Against this background John Kirkbright looks at the development of three of the UK’s principal supermarket banks and investigates how their business model may need adapting to enable them to become major players in the Personal Financial Services Market.

Supermarket banking is not a new phenomenon . It has existed in some form or other for over 25 years in the USA. In the UK market Banks such as the Cooperative Bank have had some form of representation in supermarkets for 20 years or more. However, the first major supermarket to open a bank was Sainsburys, back in February 1997. Shortly afterwards, Tesco launched Tesco Personal Finance in July of last year. However, it must be remembered that another major food retailer in the shape of Marks and Spencer launched its Account card 16 years ago and started offering Personal Loans back in June 1989.
The launch of these supermarket banks brought about considerable fanfare and speculation from the industry and financial media and commentators that the new model being introduced by these banks, involving a convenience retailing approach to financial services with lower cost products, could potentially take a substantial market share.
Not everyone was convinced and I remember the CEO of one major UK Banking Group remarking at that time that there was little of chance of these banks creating long-lasting customer relationships.

So, how are they doing and what does the future hold for their banks? Have they got their model right and what does the future hold for them?

First of all, lets review progress thus far:

Marks and Spencer’s Financial Services is fully owned by Marks and Spencer plc It has 6 million accounts and customers and 265,000 Personal Loan customers (as at 31/3/2001). It offers Charge card, personal Loans, Life Assurance, Unit Trust and Insurance products. It has around 80,000 pension customers and just over £1,000 million total funds under management. Profits before tax were £96.3m in 2001.

Tesco Personal Finance has over 2.5 million customers and is a joint venture between Tesco and the Royal Bank of Scotland. It offers Credit Cards, Personal Loans, Life and Personal Insurance and also offers customers and Internet based Mortgage Lender Service. In 2002 it launched a credit card in Eire. Profits before tax were £40m in 2001.

Sainsburys Bank has just over 1 million customers and is jointly owned by Sainsburys (55%) and the Bank of Scotland (43%). It has attained deposits of nearly £2 billion with a product range that includes mortgages, loans, credit cards and more recently insurance products. The Bank made an operating profit of £12 million in 2001 compared with £9.0m in 2000.

Each of these banks has focused on a predominantly direct delivery and value for money (low cost) approach with a focus on convenience, simplicity and quality customer service. Such an approach was heralded as the winning combination for success in the UK financial services market. However, by any standards the impact has not been as dramatic as was planned and hoped for. So what has prevented the Supermarket banks from fulfilling their potential and what does the future hold for these banks?