THE UK’s big retailers took a step closer to challenging the dominance of the high street banks last week when Tesco Bank finally unveiled its new current account.
The bank, which has key centres in both Edinburgh and Glasgow, said it had responded to customer feedback with a no-gimmicks product that rejected the “smoke and mirrors” approach of its high street rivals. But while Tesco aims to exploit its huge customer base, experts say the account stops short of being the game-changer that some had expected.
As it stands, more than eight in ten current accounts are provided by just five banks – Lloyds, Barclays, HSBC, Royal Bank of Scotland/NatWest and Santander. Concerns over low levels of switching and competition in the market led the Office of Fair Trading to warn last year that the market wasn’t “working well for consumers”, and it was hoped that Tesco Bank’s arrival, alongside fellow challengers including Virgin Money and the Post Office, would finally improve matters. More than six million people have bought financial products from Tesco Bank, including savings, mortgages and insurance.
The new account, launched last Tuesday, can be opened online only, although money can be paid in and taken out at some 300 stores across the UK. There’s a monthly fee of £5 for those unable to pay in £750 every month, while annual interest of 3 per cent is paid on balances up to £3,000. The charge on agreed overdrafts is 18.9 per cent and there’s a £5-a-day fee for unauthorised borrowing. Shoppers can also earn extra points on Clubcards – one loyalty point for every £4 spent on their Tesco debit card in store and one for every £8 spent elsewhere.
That compares with the M&S offer of one point for every £1 spent in-store on its new debit card.
David Black, of Consumer Intelligence, said: “It’s a competitive offering and has a potential trump card with its Clubcard points, but it’s surprising that it hasn’t offered some points as an opening inducement as this could have boosted initial demand.”
The account will appeal primarily to loyal shoppers, predicted Jafar Hassan, personal finance expert at uSwitch.com. “The 17 million Clubcard customers will be swayed by earning points on their everyday spending when they use their debit card,” he said.
But experts are divided as to whether it represents a genuine threat to the high street banks.
Black at Consumer Intelligence believes Tesco Bank has the clout to mount a real challenge in the current account market.
“Now that it’s added a current account to its banking and insurance range it will be a considerable threat to the banks, as the current account is widely regarded as being the key to build a closer relationship with customers,” he said. “Tesco will also benefit because supermarket banking customers tend to spend more in their stores than other customers. The might of Tesco and Tesco Bank’s customer base gives them massive marketing power.”
But Kevin Mountford, head of banking at MoneySuperMarket, said the account might not be attractive enough. “It’s not dissimilar to the various interest-paying current accounts that have landed on the market in the past year or so. But while its approach to overdrafts is transparent, the lack of an ‘interest free’ buffer means there may be better offerings for those who regularly slip into the red.”
However, he added that the new current accounts from some of the UK’s biggest retailers may yet combine to undermine the status quo.
While no single entrant will be a “game-changer”, the collective power of the new breed may eventually prove influential. “Increasingly it is looking like the ‘challenger’ offers are going to be more tailored to specific audiences rather than a generic, catch-all offering. The Tesco offer sits in this camp, but for those wedded to the Tesco shopper experience then it could be a meaningful alternative,” he said.
With some 17 million active Clubcard users, Tesco has the cross-selling potential to inflict damage on the big banks, he added.
“It has already been successful in its other retail banking offerings so I would expect them to be equally successful in promoting this product to Tesco retail customers,” said Mountford.
Hassan at uSwitch agreed: “We wouldn’t be surprised to see more retailers follow in the footsteps of Tesco, M&S and Sainsbury’s and use their brand image and large customer base to offer financial products that rival the traditional institutions,” he said.