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BANKING – “Would you like any cash back, sir? Or life insurance? Or

The fact that supermarkets are offering savings accounts as well as frozen peas may seem no more than convenient to the average man in the street, but it is viewed as a serious and unwelcome development by Britain’s retail banks. In the 12 months to last November, the likes of Sainsbury’s and Tesco, as well as several other new entrants to the banking market, such as some of the major insurers, have managed to scoop up more than 1% of gross annual customer inflows to the banking system. Now, 1% of anything may not sound like a life-threatening amount, but in this case it translates into £6bn. A Deloitte Consulting research report on the future of retail financial services warns that as much as 25% of the major banks’ profits are at stake over the next five years. “Globally, 64% of senior bank executives expect that competition from non-traditional players will have a major impact on the industry,” says John Harrison, a Deloitte partner. The survey also shows that banks have been slow to react to the new challenge. They have seen five years of record profits and many still have conservative cultures. They are also hindered by legacy IT systems, which do not enable them to benefit from the new technologies that might increase their ability to understand and respond to their customers. At the same time, only about 30% of a bank’s customer base provides profits. These are the sophisticated clients who use more than one of the bank’s products. A shift of 5% or 10% in this base would have a disastrous impact on profits, and it is this customer segment that is being targeted by Egg, Virgin One and the like. “The new entrants represent part of a wider process whereby banks and insurance companies are encroaching on one another’s areas,” says Ben Dutton, financial services analyst at market analysis group Datamonitor. Dutton believes it is reasonable to expect the new competitors to boost their share of personal deposits to more than £20bn by 2003. “Perhaps the most visible expression of this fierce competitiveness is Prudential’s Egg,” he says. The aggressively marketed Egg offers deposit and individual savings accounts, as well as mortgages and loans, and it guarantees that its interest rate on savings accounts will be higher than or equal to base rate until 1 January 2000. One wonders how the Pru expects to make any money on this new venture, but the best guess is that it is relying on the investment performance of its fund managers to make it profitable. “By setting up a separate branch, the Pru segregates its three core businesses of life and pension, Scottish Amicable, which markets through independent financial advisers, and Egg, a direct channel distributor, which has branded itself to appeal to the younger customer,” says Dutton. Sainsbury’s has been by far the most successful of the new financial services providers, having attracted £1.5bn in deposits, followed by Standard Life’s £1bn and Prudential close behind with £959m. Meanwhile, the list of new trespassers on the banks’ turf grows almost daily: Scottish Widows, Safeway and Legal & General are just the start, and perhaps the only obstacle that has so far kept giant industrials such as ICI or General Motors out of the fray is the difficulty of obtaining a full banking license and the restrictions this could put on other areas of their business. But the threat facing the banks is highlighted by the fact that several of these operators have already demonstrated an aggressive determination to expand outside their traditional business areas by doing deals. For instance, Safeway and British Petroleum agreed to set up a chain of mini-supermarkets in about 100 BP petrol stations. Almost immediately Tesco retaliated with a similar deal struck with Esso. Obviously, with non-traditional competitors entering the market there are more people offering the same products. Customers no longer have to go to banks, and the supermarkets and insurers have priced their products competitively. And it’s worse for the banks because this increased competition is coming at a time when cash is becoming less important, and it is becoming easier to move money around. Since the banks are not about to be forced out of the liquid retail savings market, the process is likely to accelerate industry consolidation in two or three years’ time. This is especially the case for the erstwhile building societies, which lack the depth of customer base and product mix of most of the high street banks. But the empire knows how to strike back and Britain’s retail banks have been in the business of taking on competitive threats for many years. The banks may in fact be in a position to gain from the entry of others through partnerships, as Lloyds TSB has shown with its Asda initiative. The TSB half of the Lloyds group, which has a customer base closely aligned with Asda’s, has rented space in several of the supermarket’s premises to sell its financial services products, while the bank’s mortgage lending arm, Cheltenham & Gloucester, has personal advisers on the ground. TSB opened its first Asda shop a year ago and plans to have 12 outlets up and running before long. “We have a deep understanding of the risks of disintermediation,” says Ian Peters, NatWest’s head of retail marketing and sales. “A lot has been said over the past 12 months about a haemorrhaging of balances. But our savings balances have actually grown in this period.” Yet the biggest threat to banks is not so much in the scale of deposit poaching but in what is happening to pricing. The banks are refusing to accept a cut in margins on their deposit-taking business and this is good news for the new entrants, which have been offering higher rates of interest, with the expected pressure on their margins showing through. Despite this, since 1996, when banking became more than a gleam in the eye of Sainsbury’s and the others, the average deposit account margins of the high street banks has actually increased, raising the value of the banks’ capital base as customers failed to receive the benefits of high base rates. Jules Stewart is a freelance journalist.

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