Putting the retail into retail banking

Whilst perhaps still not at the level the regulators want, shopping around for better financial deals is becoming much more prevalent in the UK, particularly in the insurance, credit card and mortgage markets. As a result, there is a huge market in lead generation, with comparison websites spending huge sums on TV advertising, resulting in meercats and demented opera singers being amongst the most recognised people in the UK! It’s also led to a revolution in how these products are sold – you can go into most supermarkets and buy a carton of pet insurance at the same as you are buying their favourite tinned food. This weekend saw a number of interesting developments that raises the question as to whether we are on the cusp of another step in the retailisation of financial services, and perhaps into a very different type of universal bank. ING Direct was one of the first wave of direct banks that utilised many of the concepts from retail, from competing on headline price to viewing the products as commodities. Rumours have been circulating for a few weeks now that ING is both considering selling ING Direct in the UK, and that it has been approached about selling the stake as well. Whilst it made inroads into the market initially, some commentators believe it has been struggling for awhile, partly as the record low interest rates mean that thing margins had to get even thinner. Enter the 800lb gorilla of British Retail, Tesco. It’s been in financial services for over a decade, and long rumoured to be considering being a full service bank. This weekend saw the launch (finally) of its mortgage product. This in itself wasn’t news, and the rates they were offering mortgages at were widely considered to be “not market leading”. This perhaps is a reflection of the UK market – with a move to everything being considered on price, anything that isn’t undercutting everyone else is considered poor. Whilst not best in class, the mortgage rates certainly weren’t terrible or even unreasonable. What caught my eye, and why worthy of at least this blog, is an interview the CEO of Tesco Bank gave to the Sunday Times. Unfortunately, the Sunday Times puts all their content behind a paywall, but the couple of facts that were slipped in are repeatable here. Those of you with a Factiva type service will be able to track the original article down. Firstly, and as context, Tesco is the leader in customer loyalty programmes. I’ve spoken often about Clubcard as a model worth looking at. Whilst other retailers dropped their programmes, Tesco claimed their programme reached payback in a year, and even today is generating profit of around £50m per year just from the insights it sells to its suppliers. It’s quite possibly the most comprehensive database of the UK population, period, with 15m households. This, Tesco believes, is the “secret sauce” and allows them to offer its customers discounts of between 0.5% and 30% on car insurance based on insights from Clubcard. To put this in context, this has allowed Tesco to enter insurance a decade ago, and now be a top 10 player or better in EVERY insurance sector they operate in. Secondly, their cards business now has 3m customers. But, Tesco estimate, that these are used in 12% of all retail transactions in the UK. This creates some interesting opportunities. It’s been estimated the £1 in £10 it spent at Tesco. An interesting opportunity if Tesco can convert these transactions to “on us” transactions for example. But the figure that caught my eye is this. The Clubcard has 15m households. Therefore credit card penetration is roughly 20% or less (a household assuming to be more than one individual). If Tesco can reach the same, relatively low level of penetration of its Clubcard on average of all its products, then the CEO claims Tesco Bank would be about the same size of HSBC in the UK. And of course these new entrants are taking business from someone, and are cherry picking the business from somewhere. In the last year or so, Tesco’s rising fortunes might have faltered somewhat. But it would be a brave man to bet against someone who bought out their banking partner, in cash, for £950m. Revenues may not justify that yet, but as Tesco slogan goes – every little helps.