July 2012 saw the announcement that yet another supermarket is staking its claim on the embattled world of UK retail banking. Asda is aiming to follow stalwarts Tesco, Sainsbury's and more recently M&S in a bid to capitalize on the instability of the market and the associated reduction in levels of customer trust.
The supermarket banks have positioned themselves as the 'people's choice' and the 'consumer's champion', ready to offer disgruntled customers an 'out' to a cheaper, fairer and better way to bank.
Tesco Bank, arguably the most successful UK player to date, has grown an impressive customer base of c6.5 million with a range of largely commoditized products such as car insurance, savings, loans and of course credit cards1. Tesco is operating at impressive scale but is still small compared to the big hitters of UK retail banking.
However, both Tesco and M&S are setting the pace for their peers by attempting to move into the big league, with plans to offer current accounts, mortgages and in-store branches through 2012 and 2013. However, even with the shifting dynamic in the market, some customers do not consider supermarket banks to have the same strength of brand and market presence as the more traditional offerings, and they may struggle to win share as a consequence. So why do supermarkets invest the time, resource and money, in trying to overcome such overwhelming inertia?
It comes down to the heart of their proposition: their customers. Supermarkets have a relationship with their customers which banks can only dream of. Tesco, Sainsbury's and M&S have access to millions of highly engaged customers via their loyalty programs – and these are customers who are loyal enough to walk into a store potentially two to three times a week. And as well as being loyal, customers are fundamentally more trusting of their supermarkets than they are of their banks2.
More importantly however supermarkets understand both their customers and the fact that as engagement with the brand broadens, customer loyalty deepens across the wider brand offering. As customers start engaging with their supermarket around banking products, they are likely to visit the store more frequently and consolidate their weekly spend in one place3. Similarly as more customers move into the highly loyal segments, they become more likely to broaden their banking relationship or purchase other non food product ranges.
So, perhaps in the short-term, supermarket banks will not have the scale of the traditional retail banks, but assuming they can stay true to their word and deliver on their promises of great value and great service, they can target and appeal to a highly engaged customer base who are less sensitive to price and who will become increasingly engaged with and loyal to the brand. So with the right proposition and operating model, supermarket banks will not only have the opportunity to build highly profitable Financial Services operations, they will also drive incremental profit from their core business through deepening their relationships with customers. It is a convincing business proposition, which traditional banking players may find difficult to replicate.
Yvonne Byrne, Manager, Management Consulting, KPMG in the UK
1 Tesco PLC
2 Satmetrix, 2011: NPS Score of Banks -4% v Supermarkets 22%
3 KPMG internal analysis.