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Trends - Retailers Take Another Look at Banking

The banking crisis has done huge damage to many major bank brands and left consumers unsure who to trust. But could that create opportunities for new entrants to break into the retail banking market?

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U.K. retailer Tesco has already announced plans to ramp up its banking operations. Now Alliance Boots chief executive Stefano Pessina has said the U.K. pharmacy group might consider following suit. It could be a smart move.

True, the retail banking market has never been an easy one to break into. Historically, deposit-taking franchises have been seen as virtual licences to print money. Bank customers tend to be very reluctant to move their current accounts, so the deposits themselves are very "sticky," providing banks with a steady source of cheap, stable funding that gave them an in-built advantage over new entrants.
[Retailers Look to Banking] Bloomberg News/Landov

Alliance Boots may consider ramping up banking operations.

Indeed, the track record of new entrants to the U.K. deposit-taking and savings account markets during the boom is hardly encouraging: internet-based franchises such as ING Direct and the Icelandic banks tended to attract so-called "rate tarts", which meant they had to always offer competitive rates or risk losing their funding.

But with bank customers currently more skittish, it's clear why retailers such as Tesco and possibly Boots might fancy their chances. They have trusted brands, conveniently-located retail networks and no legacy bad debts or government shareholders dictating lending policies. Plus retailers such as Tesco, Sainsbury and Asda have long-standing consumer finance operations, giving them experience in lending and credit-checking.

For privately-owned Alliance Boots, an expansion into banking looks ambitious, given its high leverage and junk credit rating -- not an easy base from which to launch a banking operation. But Tesco Personal Finance now has savings deposits of 4.5 billion pounds ($6.6 billion), plans to open up to 30 in-store branches this year and is considering offering current accounts and even mortgages. Meanwhile, Sainsbury's Bank, a 50/50 joint venture with Lloyds Banking Group, recently reported strong growth for its savings products.

Of course, these operations are tiny compared to the overall U.K. banking market. But in an industry forced to compete hard for deposits, new entrants could add to the pressures on banks. Traditional retail deposit franchises may not be so lucrative in future.

Write to Molly Neal at [email protected]

Posted by staff at April 27, 2009 01:41 PM