Since the credit crunch took its hold last year, there has been at least one clear winner: Tesco. Profits are up 10 per cent and, in its banking arm, Tesco Personal Finance, profits have almost doubled from £2.5bn to £4.5bn.
These figures set the context for Tesco’s decision to open a customer care centre in Glasgow, employing 800 people, which Andrew Higginson, head of Tesco’s financial services division, described as a ‘significant step’ towards offering a full banking service. Certainly the mass exodus from the high street banks was a cry for a viable alternative, beyond stuffing money under the mattress. National headlines proclaimed that the supermarket giant was on its way to becoming a bank and for some consumers, it was the brand they turned to.
The options for businesses
The Co-operative Bank, part of the Co-operative Group, tells a similar story, claiming that corporate deposit balances increased by 27 per cent and corporate lending balances increased by 23 per cent during the financial crisis. The bank now has around 65,000 corporate and business customers. As the public turned away from the PLC banks, the Co-operative Bank, a mutual, was promoting a ‘good with money’ themed advertising campaign, based around the notion of ethical banking. The cash came flooding in.
But where else can businesses, small and large, go if they want to lend or borrow, in these economically straitened times?
A Cheshire firm, going by the name of Bigcarrots.com, is launching this month, offering peer-to-peer lending, which cuts out the banks, allowing businesses to borrow from other businesses and the man in the street. Such schemes are not new, but with real obstacles to obtaining credit from the traditional lenders, it’s likely that they will proliferate.
However Steve Hughes, economic policy advisor at the British Chamber of Commerce, believes it’s not a lack of alternative sources of funding for businesses that is the problem, but rather how easy it is for businesses to access these and how well advertised they are.
With the Tesco example in mind, Hughes believes it would be harder for a business bank to set up given the ‘huge’ market share of the ‘big four’ business banks (RBS, Barclays, HSBC and HBOS), and the amount of bureaucracy that businesses have to go through, in order to take advantage of their services. “A small, nimble player could challenge this, but it would have to offer a competitive product and for that would need the technical know-how,” he says.
Opportunities to serve SMEs
“Certainly it would be hard for a non-banking brand to set itself up as offering corporate banking,” adds Sholto Lindsay-Smith, managing director at UffindellWest. “But perhaps SME banking is closer to consumer banking. I can actually see a non-traditional banking brand serving SMEs, but you’d need the capital to set it up.”
Telecoms companies have also set their sights on financial services, with O2 partnering with NatWest to introduce prepaid Visa cards and Phones4U launching similar schemes with Newcastle Building Society. They may not be offering bona fide banking just yet, but a future in which mobile operators offer banking services does not seem so far off. “Telecoms companies can offer an enhanced direct proposition that the banks can’t deliver on,” explains Lindsay-Smith. “Offering business banking down the phone or internet could represent a legitimate extension of their business.”
The need for real value
Tesco is not likely to play on its own in-house technology, but rather its customer insight, reach, and value for money messaging, embodied in the ‘Every little counts’ strapline. Jim Prior, managing partner at The Partners, believes the experiment could really pay off: “There’s a fundamental marriage between what they are good at and what the market needs, which leads me to expect that they will deliver market-leading rates. If they do deliver, then they might change the game for everyone.”
Whether Tesco’s primary goal is profit or reach is unclear, but as long as the exercise is carried out effectively without damaging core values, it is clear to see the appeal for the brand. “It might be about having a relationship with as many people as possible, even if they only reach a break even point on the banking,” speculates The Read Group’s Mark Roy. “We have seen some success stories – Virgin, M&S Financial Services – the more you do with people, the more you will do with them. It’s about cross-selling.”
And brands are indeed transferable – we need only look at the Virgin example. Yet bold moves like Tesco’s latest strategy will always attract sceptics. Not everyone will feel safe using non-banking brands for banking services.
This said, the widespread erosion of trust in the banks certainly leaves space for a reaction, if not from the banks themselves, then from somewhere else. “Few other industries have ever shot themselves in the foot so comprehensively as bankers,” says Jeremy Baker, affiliate professor at ESCP Europe Business School. “This creates opportunities for a brand which is well-known, trusted, low price and obviously competent.”
“Tesco is already good at financial services such as travel insurance,” he adds. “And in our online world, a telecoms brand could also enter the banking market with a flying start.” Banking at the checkout, and banking on the train. We may not realise, but we’re pretty much there already.
