Supermarkets rush headlong into banking

As financial services join the products in shopping aisles, Clifford German looks at the credentials of the new contenders

Supermarket banking is now a reality after the opening of Sainsbury's Bank on Wednesday. Customers can get credit cards for their shopping, instant access and savings accounts paying better rates than banks or building societies for their cash and, once the service is fully operative this year, they will be offered current accounts, personal loans, mortgages and insurance products over the telephone.

Tesco has also announced plans to extend its banking business and start selling financial products, and Safeway customers will be able to open bank accounts by the end of this month. Only Asda remains grimly determined to stick to its knitting.

Retailing and banking have been getting closer for some time without establishing a proper crossover, but the quantum leap is not only feasible but close.

The process can be traced back at least a quarter of a century when powerful trade unions roamed the earth and refused to let bank branches open on Saturdays. The Co-operative Bank began experimenting with opening banking kiosks in Co-op retail stores to provide a banking service.

But the idea did not catch on because other banks invented cash dispensers to provide customers with the opportunity to withdraw cash at all hours of the day and night and not just on Saturdays. Supermarkets have, however, been cosying up to financial services for some time. Accepting credit cards and debit cards was a useful way of reducing the amount of cash they were left with at the end of every business day, as well as shortening queues by speeding up the payment process for customers with cheques.

From there it was an easy step to offering customers cash-backs so they could pay the weekly shopping bill with a card and walk away with cash to finance the rest of their weekend's activities.

It was therefore quite logical for Tesco to set up a basic banking service in June last year, allowing customers who already had loyalty cards (introduced two years ago in February 1995) to open a deposit account with up to pounds 500 that they could draw on to pay their shopping bills and earn a handy 5 per cent interest in the meantime.

The service coincided with an upturn in Tesco's trading performance that has persuaded many analysts that supermarket banking is a slick and trendy thing to do. Certainly Sainsbury's, which was caught napping by Tesco's successful loyalty cards, is determined not to be caught again. Its banking service shows all the signs of being launched in a hurry to catch the tide, and initially it has only a limited range of services.

Sainsbury's Bank is a joint venture between the store and the Bank of Scotland, which offers shoppers an instant access account paying 5.75 per cent gross interest on any amount. Customers can also open a Christmas savings account earning 2.5 per cent plus a 3 per cent bonus if the money is left untouched till then.

All account holders get a cashcard, which from 24 March they can use to draw cash from Link cashpoint machines - although for the time being the bank account cannot be used directly to pay for the groceries.

Creditworthy customers at Sainsbury's will get a choice of plain or luxury credit cards, which are fee-free for the first year and charge less than average interest rates. The cards can be used to pay for goods and they earn extra Reward Points in any shop, even in rival supermarkets.

Meanwhile Asda, the Leeds-based supermarket group, has set its face against going into the banking business. Its customers are more interested in value in their shopping, a spokesman said this week.

The shopping statistics seem to back that up, because the group increased its share of the market from 10.1 per cent to 10.6 per cent in the six months to last December.

But Safeway, the third-biggest supermarket group, is certainly convinced that supermarket banking is the way of the future.

Last week it linked up with Abbey National to offer customers an ABC Bonus account,

building on the brand name of its ABC loyalty card. Customers can put up to pounds 600 into a Bonus Account, which will earn 5 per cent gross interest. They will get an Electron debit that can be used to pay the shopping bills at Safeway stores and is also acceptable at 70,000 British outlets. It also doubles as a cash dispenser card at 21,000 sites throughout the country.

Account customers earn interest on the credit balance, plus 500 ABC bonus points (worth about pounds 5 against selected goods) for opening an account and double ABC points on goods bought with the card for the next 12 weeks.

Hard on the heels of the Safeway announcement, Tesco relaunched its Clubcard account last week without its erstwhile partner, NatWest, and linked up with the Royal Bank of Scotland, Direct Line and Scottish Widows. Clubcard Plus now offers the group's 9 million shoppers an account that pays 5.5 per cent gross interest on cash balances and charges them 9.9 per cent APR on borrowings.

This account has to be fed monthly by standing order and, although the Clubcard can only be used as a debit card to pay for shopping at Tesco stores, cardholders can borrow up to the amount they put into the account each month. The card can also be used to draw cash from NatWest dispensers. A credit card will be launched in a few months.

Sainsbury's and Tesco both have plans to start selling a range of financial products, including personal loans, mortgages, pensions and insurance. This is not entirely new either. On the back of its reputation for quality and service, Marks & Spencer has been selling plain and simple PEPs and pensions for some years now.

In order not to be entirely left behind in the publicity storm, M&S is planning a new High Income personal equity plan and a guaranteed capital PEP between now and the end of the tax year. Marks & Spencer, however, is not a bank. It has no intention of going into the banking business on the grounds that it is a labour-intensive and low-margin activity compared with financial services.

Tesco and Sainsbury's both seem committed to providing full-service banking.

Who is right remains to be seen. But customers will have another set of choices to make before they go out shopping, arrange their banking and credit facilities and plan their financial futures.