Banking buyout opens up Tesco and Sainsbury’s battle

Benny Higgins, chief executive of Tesco Bank. Picture: Ian Rutherford

The group splashed out £288 million to take full control of Sainsbury’s Bank from Bank of Scotland with whom it had pioneered supermarket banking in 1997.

Last week’s deal mirrored the move nearly five years ago by bigger rival Tesco to buy out partner Royal Bank of Scotland for £950m.

The two standalone supermarket banks, both based in Edinburgh, are now going head-to-head in creating a niche market that aims to turn grocery shoppers into financial services customers.

When Sainsbury’s teamed up with Bank of Scotland to launch its personal finance arm 16 years ago, the world of banking was a very different place.

Within months of the launch of Sainsbury’s Finance, Tesco followed suit by jumping into bed with RBS, and both ventures quickly proved successful in attracting customers by offering above-average savings rates.

But questions are now being asked whether the grocers will ever prove viable challengers to the mainstream high street lenders.

Clive Black, head of research at Shore Capital, said: “It’s going to be some time before Sainsbury’s and Tesco are registering on the banking Richter scale to the point that the chief executives of RBS and Lloyds are quaking in their boots.”

Sainsbury’s Bank showed its intentions last week by hiring former Barclays UK boss Roger Davis as chairman and Lloyds Banking Group Scotland managing director Lady Susan Rice as a non-executive director. It generated a profit of £59m in the year to March, up from £42m the previous year. Tesco Bank made £191m, down 15 per cent because of compensation for mis-sold payment protection insurance.

One stumbling block both Edinburgh-based firms face on their path to becoming fully-fledged banks is the fact that neither offers a current account to sit alongside their credit cards, loans and savings.

A spokeswoman said Sainsbury’s Bank – which has about 1.5 million accounts – has “no current plans” to launch an account, nor does it plan to re-enter the mortgage market, having pulled out in 2004.

However, the grocer insists that securing full ownership of its banking arm will help it win new customers. About one in 20 of the chain’s shoppers hold one of its financial products, although that lags well behind the one in five claimed by  Tesco. Both say customers become more loyal and spend more in their stores once they have taken out a product, with Tesco typically seeing a 12 per cent uplift in spending.

While Black acknowledges the benefits of customer loyalty, he said: “I don’t think that, in its own right, should be a justification for entering the banking industry. The world has drastically changed since the 1990s, when these companies were looking at natural brand extensions.”

With more than 6.5 million customer accounts, Tesco Bank moved into the mortgage market last year, but it was quickly forced to cut its rates after reductions by other lenders made its offering look less competitive. Plans to launch a current account are described as “well advanced”, although they hinge on an industry-wide service, due to launch this autumn. A spokesman said: “We plan to join the second wave of testing for this service in November, which is expected to support a launch of the product in 2014.”

However, Black said Sainsbury’s and Tesco are likely to remain niche players compared to their former joint venture partners, who have more than 54 million customers between them. He added: “If the sun is the centre of global banking, Tesco Bank is positioned somewhere around Jupiter and Sainsbury’s is at Pluto.”