Enhance - May 2010
ENTER THE DRAGON?
One side effect of the banking crisis is its possible effect on customer loyalty.
The more excitable commentators are gleefully predicting that customers, disillusioned with the role banks allegedly played in the financial panic, will leave them in droves. And where will they go? Well, according to this theory, to trusted names on the High Street who have continued to offer reliable service and value for money through the worst days of the crisis. Typical of the analysts who take this view is accountancy and consultancy firm Deloittes, whose research suggests that 51% of respondents would consider moving to an alternative banking provider.
Certainly, many retailers see it that way. In the US, Wal-Mart, the world’s largest store chain, has been trying for years to get a banking licence that would enable it to offer financial services and products to its customers across the country.
In the UK, retailers have been in the bank business since at least as long ago as 1985: that’s when Marks and Spencer launched the M&S Chargecard, signing up a million of its faithful customers in the first year.
There followed a 12 year gap, as other retailers watched from the sidelines. Then, in 1997, supermarket majors Tesco and Sainsbury both launched financial services operations. Banks were happy to support these two initiatives: clearly, they saw a retailer alliance as an effective way of acquiring new customers and, possibly, getting in on the ground floor of what they thought was going to happen anyway.
Interestingly, though, the trajectory which each retailer then followed in its banking relationships has varied widely.
In 2004, Marks and Spencer sold what had become M&S Money, with a product range including life assurance, loans, home insurance and savings vehicles, to HSBC, one of the UK’s biggest banks. For HSBC, M&S Money, with its strong female client base, represents an important complement to its mainstream marketing channels.
Sainsbury’s Finance continues as a joint venture between the supermarket chain and what is now Lloyds Banking Group.
Tesco Personal Finance went in the diametrically opposite direction: in 2008, it bought out the 50% share of its launch partner, Royal Bank of Scotland, for £950 million, and even hired senior executives from RBS to run the business, now to be known as Tesco Bank.
| Customers | In-store branches | Profitability | |
| Tesco Bank | More than 6m | 6, plus 130 Travel Money Bureaux | Trading profit 2009/10 £250m |
| Marks & Spencer | 3.8m | £25m 2008/9 | |
| Sainsbury's Finance | Around 1.5m active customers | 100 Travel Money Bureaux by Summer 2010 | £4m from its half share in the bank in 2008-2009 |
Of these contenders, Tesco is the most ambitious. Today, it is the sixth-largest credit card provider in the country, and has more than 500,000 savings customers with balances of around £4.5bn. But its plans extend to having 10% of the financial services market in the UK, making it much the same size as Banco Santander’s Abbey operation.
So what do retail customers say about these developments?
According to research from ICM commissioned by Sainsbury last September, a third of people claim to have a financial services product from a supermarket, while two-thirds say they would take one out if they felt adequately rewarded for having one.
And that last comment, about being adequately rewarded, may be the key.
Both Sainsbury and Tesco manage large and extremely successful loyalty programmes – Sainsbury through the coalition operator Nectar, Tesco through its own Clubcard service. Both have played around the edges in terms of offering points to customers who take up one of their financial services offerings. But imagine if they were to take the plunge and extend their existing rewards points to all their financial products. At a swoop, they would have accomplished what many traditional banks have aspired to do, but only a handful have dared to implement: a pan-bank rewards programme.
How should a traditional bank respond to such a threat? The first rule of course would be to ensure that its products are competitive in terms of proposition and price. But, that accomplished, it may well want to go one step further by adding value to its own financial services. In a targeted way, of course, ensuring a steady focus on profitable, sustainable services and profitable customers.
Now, although these examples of retail competition happen to be taken from the US and the UK, there is every reason to think that the same phenomenon could be repeated in other countries. In regions from the Gulf to South East Asia, from Russia to Latin America, respected retail brands sit alongside banks whose reputations have, for good reasons or bad, taken a knock over the past couple of years. As food for thought, Tesco operates major businesses in 13 countries outside the UK, including the US, China, Thailand, India, Hungary and the Czech Republic.
Think of it this way: the dragon of new competition may be coming to your market. Are you prepared for it?
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