Will it be a happy walk down the aisle if bank customers get hitched to supermarkets

Supermarkets are set to step-in as the public deserts high-street banks. But will the union be fruitful?

Supermarkets have been cashing-in for some time on financial services, picking off particularly lucrative areas of general insurance or savings, and, by-and-large, offering eye-catching rates and deals.

Meanwhile, the public’s faith in banks is at an all-time low following the banking crisis and multi-billion pound bail-outs of the likes of Northern Rock, NatWest/RBS and Halifax Bank of Scotland.

But are the supermarkets ready to start offering current accounts and providing full-service banking to the public?

Murmurings of dismay with the high-street banks have been evident for some time – the Co-op has reported an increase in people switching their bank accounts to it from the Royal Bank of Scotland and others. There are calls for the Post Office to be turned into a “People’s bank,” and now, most worryingly for the banks, the supermarkets are poised to muscle in on the act.

While there’s no doubt the retail banking sector is due for a shake-up, why should the supermarkets do the job any better? For the most part, they will probably tie-up with larger financial institutions to offer banking services anyway.

M&S Money is a joint venture with HSBC, Sainsbury’s Bank is a joint venture with Lloyds Banking Group. Meanwhile, Tesco has gone it alone, buying out RBS’s 50% stake of Tesco Personal Finance last year.

And the figures speak for themselves. Sainsbury’s Bank has 1.5 million active customers and £3.5million on deposit. Last month Tesco said would expand with Tesco Bank branches in 30 stores by the end of 2009 – and it already has more than six million customer accounts.

Andy Higginson, chief executive of Tesco retailing services said its new bank will take a conservative, old-fashioned approach.

“Some banks have grown up using practices that are the opposite of Tesco – we encourage customer loyalty, but many banks punish loyalty. They get people in with low rates and then make money.”

But perhaps the biggest threat to the old guard will be Virgin Bank – a new internet bank from Virgin Money.

Apparently, Virgin is in talks to get a banking licence to start taking deposits and offering mortgages. Virgin’s offset mortgage product, Virgin One, was sold to RBS in 2003. More recently, Virgin has been topping the best buy tables for its 0% balance transfer credit card.

Sir Richard Branson told The Times in March: “We are going to get back into the mortgage business and we will become a bank either by acquisition or by getting our own banking licence. You will see us become a consumer bank within the next couple of years.”

But will the public be attracted by the undoubtedly lavish marketing offensives which the supermarkets and Virgin will lay on?

The challenge is to offer a real alternative when it comes to good customer service and security for people’s money. In the last year people have become so distrustful of the banks, that 20% are keeping their cash under their beds.

But much more of a challenge than that will be to get customers to switch their current account. The truth is that once a customer has a current account with a provider, it’s virtually impossible to lure them away. A massive 67% of customers haven’t switched their bank account in the last decade.

Alliance & Leicester has had some success encouraging people to switch current accounts with a £100 cash sweetener and some very good overdraft offers.

Finally, the supermarkets will also have to win the war for hearts and minds. How will supermarkets get round the nagging doubt in many people’s heads that concentration of too many of our hard-earned pounds in the supermarket’s hands will not be a good thing? 2008 figures found that £1 in every £7 of retail sector money was spent at Tesco.

People have grown used to fighting local council plans for new supermarkets, and there is a burgeoning “think small, think local” movement not just among the affluent middle classes, but sweeping throughout society. So what will it take for the supermarkets’ to tip scales in their favour?

Well, the supermarkets will offer the following: Price-driven marketing campaigns with juicy incentives to get people switching. Supermarkets have a massive amount of data about their customers thanks to loyalty cards, and would be wise to tailor its offerings based on what they already know. And we’ll no doubt see a cool campaign from Virgin, attempting to make banking hip.

The supermarkets also have unrivalled access to local shoppers. One thing that has had communities taking to the streets over the last few years has been closure of local bank branches. There’s little danger of the local Sainsbury’s or Tesco hypermarkets disappearing. And people will be able to do their banking alongside their shopping. Who needs the high-street anymore?

Finally, the supermarkets are virtually blemish-free when it comes to some of big causes of annoyance among banking customers.

The bank charges court case is rumbling on, with banks defending their right to impose charges when people break the terms of the account by going overdrawn. But if this is hastening the end of “free” banking, a charge-based current account system could help the supermarkets.

David Banks from financial research company Defaqto argues that under this scenario supermarkets could cross-subsidise their operations by offering free, full-service current accounts to those that spend a certain amount in their stores each month.

“This would assist the effective ‘lock-in’ of such customers to buy the majority of their groceries with that supermarket, and also incentivising people to switch to their current account.”

Already Tesco’s 0% purchases credit card gives shoppers four loyalty points instead of one when they purchase their shopping on it. And at Sainsbury’s you can put money into your savings account at the same time as paying for your shopping using its SaveBack scheme for its savings customers..

The tie-ins between shopping and saving are many, and are set to be fiercely exploited. This will be a fascinating courtship.

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