After more than a year of crisis, the banking sector has in the past few weeks reaped the whirlwind of its exposure to sub-prime lending.
Whether investment giants such as Lehman Brothers, retail banks such as HBOS or former building societies such as Northern Rock, few have escaped the force of the storm. This week it was Bradford & Bingley that was expected to undergo emergency surgery, perhaps following HBOS into a shotgun marriage with a rival.
But consumer banking and financial services are no longer the preserve of traditional specialists. For a decade, retailers, led by the supermarkets, have been muscling into the market and providing current accounts and loans alongside food and drink.
So what does the banks’ turmoil mean for the store sector’s banking operations? Does it spell opportunity for retailers, or is the sinking of some established financial names more likely to drag down their ambitions to diversify?
The question looks pertinent for Sainsbury’s in particular. The fallout from the planned emergency merger between HBOS and Lloyds TSB may well have ramifications for – among many other things – HBOS’s joint venture operation with Sainsbury’s Bank. While most believe it is unlikely that Lloyds TSB would want to sever its relationship with Sainsbury’s if a merger between the banks went through, the grocer could do without any upheaval in its financial services arm.
“It’s much too early to tell what will happen to Sainsbury’s Bank as the merger of HBOS and Lloyds TSB would not be completed until next year, if it goes through,” says Bernstein senior analyst Christopher Hogbin. “There’s not much reason not to continue the relationship, but Sainsbury’s has not progressed as much as Tesco in its financial services arm and its operation needs attention.”
Sainsbury’s and Tesco both ventured into the banking market in 1997, but Tesco has since steamed ahead of its rival. Sainsbury’s Bank has hovered around the break-even point for years.
“Sainsbury’s could do without the turbulence of the HBOS crisis,” says Planet Retail global research director Bryan Roberts. “Like a number of things, it has not done as well as Tesco in financial services and any added pressure on any of its businesses is extremely unwanted in the difficult climate.”
Sainsbury’s Bank is “an important part of the group” the grocer said in its last set of preliminary results. Following the creation of its 50:50 joint venture with HBOS in February last year, the service was integrated into the core supermarket offer later that year. As a result, the bank was relaunched with a shake-up in products, including the launch of an internet savings facility.
In its results the grocer stated that “under the new joint venture arrangement with HBOS, Sainsbury’s is reporting a small loss of£3 million for the full year”. It also maintained that under Sainsbury’s Bank chief executive Rob Walker – who retired in May – the bank “has made real progress and is now in a much stronger position for the future, with more products and revenue streams and significantly reduced underlying bad debt”.
A Sainsbury’s Bank spokeswoman says HBOS’s share of Sainsbury’s Bank will pass to its new owner. “We look forward to continuing to grow Sainsbury’s Bank with Lloyds TSB, providing great value financial services to our customers,” she says.
For Tesco, the opportunity in financial services was highlighted when it bought out its joint venture partner, Royal Bank of Scotland (RBS), in July in a£950 million deal.
At the time, the grocer said Tesco Personal Finance (TPF) could deliver£1 billion in profits per annum – more than double the present level of just under£400 million a year. Tesco chief executive Sir Terry Leahy said then that “services are bigger and faster-growing markets than food” and “as consumers look to make every pound work harder, it is a good time for Tesco to expand its presence”.
In a clear sign that Tesco is committed to its finance arm, it recruited former HBOS and RBS retail chief Benny Higgins to run the new wholly owned TPF arm, reporting to chief executive of retailing services Andrew Higginson.
Many observers believe that big retailers stand to benefit from the lack of confidence in traditional high street banks. “Retailers with banking arms will have their own concerns about their partners, but in terms of their customers the waning trust in high street banks could present them with an opportunity to win a greater share of the sector,” says Roberts.
Hogbin agrees. “Everyone is reading the same newspapers and I wouldn’t be surprised if they [consumers] were thinking about whether or not their money is safe. They could put it under the mattress or they could put it with a brand they trust,” he says.
This point is crucial: the key to retailers gaining customers for their banking arm is shoppers trusting their brand. Alongside Tesco and Sainsbury’s, other retailers to enter financial services include Co-operative Group, upmarket department store Harrods and Marks & Spencer.
And these retailers all have a distinct edge in terms of brand values – Co-op is highly regarded for its strong ethical stance, Harrods’ customers have the assurance that they will receive a personalised service for their business and, while Marks & Spencer may be suffering a blip this year in terms of customer perception, it remains one of the nation’s most trusted brands.
“The recent turbulence in the banking market has eroded some of the trust in traditional banks,” says Rune Gustafson, chief executive of brand consultancy Interbrand London. “If that trust unfolds further over the next few weeks and months, then it is an opportunity for those retail brands which are often seen as more approachable.”
Tesco and Sainsbury’s banking arms offer a limited number of products such as savings accounts, insurance and credit cards which, according to Gustafson, ensures they are able to deliver on their promises.
“High street banks have to be totally transparent and if they aren’t able to deliver everything they say, customers lose trust,” he says. “While retailers will keep adding extra services, they need to keep it simple in order not to disappoint. If they started offering mortgages, for example, and then hiked up the rates, they wouldn’t be any different to traditional banks.”
He points out that offering a limited number of products makes the offer easy to package and accessible for shoppers. “The grocers’ banks don’t offer a lot of advice, but in an age where shoppers are getting more advice from the internet anyway, this doesn’t seem to matter,” he says.
“And research we have carried out shows that customers want a different experience from their financial services provider than they have currently. That experience could be the one that is offered by supermarkets, as consumers will often be more comfortable walking into a supermarket than a bank.”
Retailers also benefit from the growth in online banking because they do not have the same outlets as high street banks. Roberts says: “Some shoppers may not have set foot in a bank for years, so dealing with a retailer’s bank would be no different to online banking. Consumers are much more confident dealing with queries over the internet as they find it more accessible than going into a bank.”
The grocers will probably not just settle for online banking, though. Tesco is already trialling a TPF store at its Extra shop at Silverburn in Glasgow and Higginson said at the time of the RBS deal that there is scope for about 200 personal finance desks in its Extra superstores.
Hogbin says it is likely supermarkets will roll out banking branches in stores. “Having a desk in stores will make the grocers’ financial services even more accessible and the footfall through the shops will give it great visibility,” he says. “In the US, banks in supermarkets are quite common – but they will have to work out whether it’s the best use of space.”
The grocers – especially Tesco – have diversified into multiple sectors and will compete on any level they can. The dissatisfaction and anxiety felt in the banking sector could mean some consumers switch to a retailer’s bank at least in the short term and, if they receive good service, they may well stay.
“There have been enough headlines to make people worry about the security of their money in high street banks,” says Pali International retail analyst Nick Bubb. “If Tesco launched a huge advertising campaign for its financial services products and consumers believe in their brand, then it could encourage some savers to switch to their offer.”
Tesco’s campaign last week to become Britain’s biggest discounter reinforced that it does not do things by halves. If the grocer wanted to wage war on the banks, it could probably make a dent in some of their services – as it has done in so many other sectors before.