Strategy & Operations » Leadership & Management » BANKING

The only mystery surrounding Sainsbury’s decision to add mortgage lending and Visa cards to their product range is why they waited so long to take the initiative. After all, supermarkets have all the necessary ingredients to perform any retail bank service that does not require a bricks-and-mortar operation. They are sitting on a gigantic interest-free cash flow so they don’t need to raise deposits, they sell products for a living and they are used to paying cash out. In fact the only advantage of having a branch network is the ability to pay cash in and out, but not forever as cash inexorably gives way to plastic.

The Sainsbury’s link-up with the Bank of Scotland should come as less of a surprise: it makes sense for a regional bank with national aspirations to use Sainsbury’s as a springboard into the Home Counties, especially since its risk in the venture, which will require minimal start-up capital of about u30m, is limited to providing telephone banking expertise.

Sainsbury’s, in fact, could not have chosen a more suitable partner to break into retail banking. Bank of Scotland’s telephone banking business, known as Centrebank, is based at its low-cost Edinburgh headquarters and boasts a 30% cost-income ratio, about half that of some of the big clearers.

The operation will be in the hands of what Bank of Scotland’s chief executive Peter Burt defines as “Presbyterian Scottish bankers with very deep pockets and very short arms”.

Another matter is whether the British public is ready for American-style supermarket banking and how much damage Sainsbury’s can be expected to inflict on High Street banks’ margins. On these key issues there is a division of opinion.

“Would you like a cheque book that says Sainsbury’s Bank?” asks Panmure Gordon’s banking analyst David Poutney. “It sounds a bit downmarket, doesn’t it. As for eroding the banks’ margins, this is another example of what’s been going on for the past 20 years and is likely to continue in the future.”

But Poutney warns that the trend for non-banks to muscle in on the lucrative retail end of the business is not to be taken lightly. One needs to be more concerned, however, about what giants such as Prudential and Standard Life are up to, not to mention the threat of BT coming into the telephone banking market once it manages to obtain regulatory approval to do so.

The British public may not yet have embraced the razzmatazz school of banking with the same enthusiasm as the folks in Palo Alto, but it is only a matter of time until they do so: the mystique of banking is a thing of the past.

A recent survey showed banks to be this country’s most disliked institution after British Rail.

Supermarket banking in the US has had a significant impact in terms of the business it has managed to pinch from the commercial banks, to the point that many banks have stopped operating branches and replaced them with supermarket outlets. Interestingly, the US banks hit by the supermarket offensive are still reporting a widening of margins, probably because the impact has not yet been hard enough.

Certainly in terms of telephone banking the threat is real enough, be it from supermarkets like Sainsbury’s or diversified commercial holdings such as Virgin.

“Customers may come to believe that they need banking but they may not need banks to provide them with those services.” Chilling words, all the more so when one considers they come from a report commissioned by Barclays.

And this from NatWest: “The effects of these changes is that our best customers are being targeted by competitors with lower cost bases than ours.”

Small wonder then that NatWest has struck a deal of its own with Tesco, by which it holds and administers the supermarket chain’s ClubCard Plus accounts, which pays 5% gross annual interest on deposits. This is as much as 20 times higher than the rates offered by the high street banks and leaves one wondering how they can make money given the administration costs involved.

The real challenge to traditional banking, then, is not about supermarkets or compact disc emporiums providing a cheaper rate on plastic cards or a wider array of products in lower-cost premises. It is the route Sainsbury’s has taken by linking up with an experienced telephone banker, and it is part of a trend that one day is likely to make the bank branch obsolete.

“It is already fast going the way of the dinosaur,” says Schroders’ European banking analyst William Vincent. “You have only to look at Direct Line to realise how little, if any physical contact you need with customers in this business.” What started out a little over a decade ago as Royal Bank of Scotland’s hugely successful motor and household insurer has just added travel insurance to a list of services that includes PEPs, savings accounts, mortgages, life assurance and personal loans.

The broader context of this phenomenon is the rapidly moving retail financial services market in what was thought to be a basic core business. It is the cross-over from old to new lower-cost delivery systems. But technology is only one side of the equation. The other is the concentration of the industry in fewer and larger hands.

In the space of a little over two years, for example, Lloyds Bank has come up from the bottom rank among the top four High Street clearers to dominate the industry with a market capitalisation of a staggering #22bn.

Lloyds’ takeover of Cheltenham & Gloucester Building Society and its merger with TSB Group has made Lloyds TSB the country’s number three mortgage lender, the second biggest credit card issuer and fifth largest insurer.

“They are redefining critical mass in the industry,” says Lehman Brothers’ analyst Robert Law. “There is a strong chance that retail banking will be dominated by a small number of large players with big market positions.”

It is no coincidence that Lloyds TSB, in the vanguard of this trend, has quite unsentimentally begun leasing out part of its branch network at auction. Apart from a capital-raising exercise this is evidently part of the split with the bricks-and-mortar operation that has been British banking for the past 300 or more years.

Not many tears should be shed in the process. Only 20 years ago Williams & Glyn’s thought it appropriate to provide a goldfish bowl and potted aspidistras in one of its London branches, which one could admire while queuing to make a withdrawal. Surely few would prefer that to performing the same operation in seconds over the telephone.

Jules Stewart is a freelance journalist.

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