Cash and carry

Cash and carry
By Andrea Felsted and Patrick Jenkins

Published: July 19 2009 20:14 | Last updated: July 19 2009 20:14




In a kiosk in the English Midlands, a revolution in banking is under way.
은행업에서 혁명이 일어나고 있다.

A stone’s throw from the Coventry City soccer ground, in a 450 sq ft unit beside the 44th check-out in a giant Tesco hypermarket, the supermarket chain is pioneering in-store banking.
테스코가 점포내 은행업을 하고 있다.

The new branch in Coventry is one of 30 that Britain’s biggest retailer will open this year in an aggressive assault on the financial services industry. But this is just scratching the surface of the presence Tesco could build in the sector. Within the next two years, it plans to offer a current account and mortgages.
테스코는 코벤트리에서 금융업에 중점을 둔 점포를 개설한다. 이는 시작일 뿐이다. 2년안에 테스코는 계좌개설과 모기지 상품을 제공하겠다는 계획을 발표했다.

The reputations, and ability to lend, of traditional banks have been hit hard by the financial crisis, opening up big opportunities for retailers with strong brands and financial clout.

Some banks are dismissive of the group’s chance of playing anything more than a niche role – but, if it is successful, the retailer will hurt them just as they are getting back on their feet.

Likhit Wagle of IBM Global Business Services warns: “Tesco’s skill at customer analytics is better than anyone in financial services. That ought to keep a number of the retail banks awake at night.”

Bain & Co estimates that, within a decade, retailers could have won 10-20 per cent of the European mass banking market. “It will be quite a battle for the banks. The value at stake is very high,” says Philippe De Backer of Bain’s European financial services practice.

Current accounts and mortgages are at the heart of most customers’ relationships with their banks – but they are not usually found alongside soup and soap powder. With Tesco pushing the boundaries of retailers’ banking businesses, shopkeepers around the world are watching its progress closely.

“If there ever was a time that is favourable for retailers to get into banking it is now,” says Michael Lafferty of Lafferty Group, a retail banking research house. “And we are not just talking about limited financial services such as credit cards, but retailers actually getting into a broader range of financial services including the current account, the main relationship account. That is the big one.”

Retailers have long dabbled in financial services – from the Co-operative Group and Harrods in the UK to Migros in Switzerland. Tesco entered a joint venture 12 years ago with Royal Bank of Scotland to offer insurance, credit and savings.

The idea of applying retailing skills – brand, supply chain efficiency, competitive pricing – to banking found its poster boy in Andy Hornby, a senior manager at Wal-Mart’s UK unit, Asda.

Mr Hornby went on to deploy the pile-them-high-sell-them-cheap philosophy of supermarkets at Halifax Bank of Scotland, the major mortgage lender he headed until its rescue by Lloyds TSB. He has now retreated to retail as chief executive of pharmacy chain Alliance Boots.

Now it seems that it is retailers’ turn to make the symbiosis work. While bank brands are bloodied by blame for the financial crisis and multibillion-pound bail-outs, retailers have emerged largely unscathed.

This represents a once-in-a-lifetime opportunity to move from being sellers of food and fashion to the friendly face of finance.

Robert Jones of brand specialist Wolff Olins says retailers have the mass-market appeal that banks have lost.

“They are down to earth. They are more convenient. They are much more price conscious and, yes, they are more trustworthy,” he says. “All of that means an opportunity to go into financial services in a much more serious way than they have done.”

Sir Terry Leahy, chief executive of Tesco, has pledged to transform the supermarket into the “people’s bank”, to capitalise on public anger.

He is not the only one harbouring such ambitions. Retailers including John Lewis, Marks and Spencer, Asda and Alliance Boots are all looking to exploit Britons’ greater trust in them by expanding their involvement in financial services.

For Tesco, there is another reason for its assault on banking. With its core UK grocery market – in which it has a more than 30 per cent share – maturing, it must look elsewhere for expansion opportunities.

Additional services – from banking and insurance to mobile phones – as well as moves into overseas markets, offer valuable engines of future growth.

Tesco’s expansion has been progressing like a juggernaut for the past decade – it has moved from its roots in food into clothing, telecommunications, property and garden centres.

“If you define yourself as a UK grocer that is all you will ever be,” says Andrew Higginson, chief executive of the group’s retailing services arm, which includes Tesco Personal Finance.

Now, having bought out RBS’s 50 per cent share in its financial services arm for £950m ($1.6bn, €1.1bn) last year, Tesco is preparing to offer a current account. This would give it “a reason to interact with [customers], and that creates a bit of friction, or stickiness”, says Mr Higginson.

Officially, the retailer is still evaluating whether to enter the mortgage market but the product is clearly in its sights.

“It does look like being an area where we feel we can add a bit of value to customers,” says Mr Higginson. But, he acknowledges: “It is not something you can rush into.”

Tesco has pledged to increase its profits from all the services that it provides to customers – including banking and insurance, online shopping and mobile phones – from just under £400m in the year to February 2008, to £1bn within a decade.

Although it has offered a savings account for several years, it has recently enjoyed a spike in applications. Deposits almost doubled from £2.5bn in mid-October, when trust in the banks was shattered, to about £4.5bn today.




But selling banking services is not as simple as putting sausages, or even sweaters, on shelves. Indeed, the record of retailers in financial services up to now has been mixed. Some industry observers question whether they will have the financial clout to compete effectively in banking.

Tesco had overall assets of £46bn at the end of February, of which the financial services arm, which has its own balance sheet, accounts for £6.2bn. But this is still dwarfed by the mainstream banks – even some of the high-profile casualties of the credit crunch. RBS, for example, has assets of £2,400bn.

Mr Higginson insists that Tesco does have the requisite strength. As the business moves into new areas, such as mortgages, the balance sheet will swell.

However, he says, the group will not let the desire to expand drive the sort of behaviour that contributed to the banking crisis. Mr Higginson is hopeful that the retailer will be able to fund a “good chunk” of mor­tgage lending from customer deposits.

But he acknowledges that, “realistically, if you are going to build a sizeable [mortgage] book, you have got to start thinking about wholesale funding”.

It is possible the company’s financial services arm could seek its own rating from the credit ratings agencies, which would enable the subsidiary to use so-called wholesale funding. Today, however, such funding – borrowing directly from the market – is very hard to come by.

“We will take the lessons learnt by some others, most notably Northern Rock, in the way we think of wholesale funding, but I do see it as part of the funding mix required,” says Mr Higginson. The British lender collapsed and was taken into government ownership after its strategy of borrowing heavily in short-term funding markets fell apart.

Tesco Personal Finance has been hiring industry veterans, including Benny Higgins, the former RBS and HBOS executive, to beef up its team. Still, some analysts and observers question whether there is enough banking expertise at board level.

Although the group has tinkered with financial services for more than a decade, taking on the high-street banks will expose it to significant new risks, such as the management of capital and liquidity – not the natural skills of a boardroom comprised predominantly of consumer product specialists.

Mr Higginson plays this down, stressing that Tesco Personal Finance is regulated by the UK’s Financial Services Authority and its board is stocked with experts from the sector. As well as expanding the executive and senior management team, the financial services business has hired four heavy-weight non-executive directors.

It is also possible that Tesco’s main board could beef up its financial services competence.

Tesco has had a banking licence since 1997, and the FSA has given it the go-ahead to expand its finance operations. However the regulator will keep a close eye on developments – stress-testing the business model and checking it can operate profitably while treating customers fairly.

It will also want the business to comply with strict new rules governing minimum levels of capital and liquid assets, even though those rules have yet to be implemented for incumbents.

Mr Higginson says that there are three people responsible for his business at the regulator, “which keeps us on our toes”.

The financial services arm will soon be having its first so-called Arrow visit – a full assessment of its riskiness by the regulator.

If the group wants to make acquisitions – some observers suggest Northern Rock is the most obvious candidate – Tesco will need the regulator on its side.

Mr Higginson is tight lipped on whether the group is interested in the bank. Big acquisitions, he says, are “not the Tesco way”.


Perhaps the biggest question, however, is whether retailers will be able to retain the trust of consumers.

There is probably a limited window of opportunity to capitalise on anger at bankers’ bonuses and bail-outs – and to fill a gap in the market for products that traditional banks have pulled away from, such as mortgages.

This creates an inherent tension for retailers. Although they have ready-made distribution, building the right information systems is time-consuming and costly.

“For the very biggest [retailers], they may be trusted, but I’m not sure – I’m thinking of Tesco in particular – they are liked,” notes Mr Jones of Wolff Olins. “They are seen as big and ubiquitous and probably slightly alarming in their scale.”

There is also a danger that if retailers start behaving like banks – repossessing houses at the most extreme – they will be equally reviled.

“There is a very subtle and very important difference,” says Olann Kerrison, head of research at Lafferty Group. “The retailer gives you what you want, and the bank is the one that makes you pay for it. If the retailer makes you pay for it, will you like the retailer as much?” The old adage that the customer is always right does not work in banking, where businesses sometimes have to take a tough line.

Mr Higginson says that, while Tesco will treat its banking customers fairly, it will be no pushover. “If people turn up at a check-out and don’t have any money, we don’t just give them the food on the basis we want to be their friend. You have to pay. That is the contract. That will be the way for financial services,” he says.

If retailers can surmount these difficulties, the opportunities offered by moving into the banking sector could be immense – and the consequences for the finance industry far reaching.

Back in Coventry, Tesco’s banking customers do not seem unduly concerned by the potential pitfalls of the supermarket’s move into banking.

One, Helen Ashby, has recently opened a savings account with the company.

For the mother of three, convenience – she can pay in her money at the check-out – and the security of the brand are the main attractions.

With the supermarket giant, she says, banking is simply “better than anywhere else”.


Pioneers who sell banking services alongside the groceries :


Tesco might be dominating the debate over retailers’ expansion into banking but it is far from the first to make such a move, write Patrick Jenkins and Andrea Felsted.

Latin America has been the crucible of such activity in recent decades, as an aspiring population has found itself able to afford credit, but unable to secure it from the traditional banks.

Groups such as Elektra – the Mexican retailer of everything from computers to cars – saw a gap in the market. Elektra’s banking subsidiary, Banco Azteca, set
up less than 10 years ago, now boasts close to 10m borrowers, though recent credit defaults
have weakened its position.

US supermarket giant Wal-Mart has also expanded into Mexico, with 38 in-store banking outlets and plans for up to 150 more this year alone. Wal-Mart has long harboured ambitions to offer banking services in the US but has yet to secure a licence in its home market, restricting its US operation to services such as money transfer, cheque cashing, bill payments and the pre-paid cards used to purchase goods.

Earlier moves by retailers into banking were pioneered in Europe. Harrods, the upmarket department store owned by Mohamed Fayed, has had a bank, serving business and private customers, for the past 100 years. Britain’s Co-operative Group has been selling banking services as well as groceries since 1915, while in Switzerland, Migros Bank, part of a broad co-operative group that includes a retailer, has been in business since 1958.

All three of those groups have benefited from customer nervousness about mainstream banks in recent months. Migros, for example, says it attracted net new money last year of SFr2.6bn ($2.4bn, €1.7bn, £1.5bn), up 147 per cent on the year before.

The Swiss group has one
message for retailers with banking ambitions – the notion of cost synergies from creating in-store branches is misplaced.
“Consultation rooms . . . cannot be created within a supermarket,” it says. “Therefore Migros Bank has its own chain of 55 branches [across] Switzerland.”

Compared with them, Tesco is a newcomer – it struck a partnership deal in the UK with Royal Bank of Scotland to offer credit, savings and insurance 12 years ago but only now is it going it alone with opportunistic plans to expand and steal market share from the troubled traditional banks.
Copyright The Financial Times Limited 2009

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