British supermarkets shop for traditional bank customers

Gone are the days when a trip to the local supermarket meant simply picking up the weekly groceries, or popping in for that last minute ingredient for a special meal. Nowadays, customers in British supermarkets can sign up for a home loan or a savings account while they are browsing in the aisles.

The financial services provided by the "big three" supermarkets - Sainsbury, Tesco and Safeway - have really taken off. These services include personal loans, home insurance and savings accounts at such aggressively competitive interest rates that high street banks have found themselves struggling to stay in the race to attract small and mediumsized investors.

Some financial observers are worried that the move into financial services is just another example of high street services being gobbled up by supermarkets. Others welcome the decision of the supermarkets to exploit what they see as the shoddy service offered by many banks and to provide, via 24-hour banking with no branches, a simple, if impersonal financial service.

The competition between the big three and the high street banks is partly fuelled by the supermarket price wars and the advent of loyalty cards offering bonus points and savings if you spend more money. The supermarkets also want to break the banks' monopoly on financial services. But their ventures into the sector have not been entirely independent, since all the financial packages they offer are supported by high street banks, even if the interest rates offered are much more competitive.

The choice available across the British banking market allows consumers to be more discriminating. And as the market is saturated with supermarkets and the banks offering financial services, the increased competition should distinguish the contenders from the part-timers.

"We have certainly welcomed supermarket banking because it improves competition and makes banking more convenient. Initially they offered good rates of interest to draw the customers in and nothing as yet has led us to contradict that," says Mr Rory Hegarty of the National Consumer Council.

One drawback, however, is that once the customers have been encouraged to open savings accounts with the supermarkets they have varied their interest rates to bring them closer to the base interest rate of 6.75 per cent and in turn reduced their own costs. This means that small investors, lured by uniform interest rates, no longer benefit from them and instead must make do with the lower rates.

This has certainly been the case at J. Sainsbury where some of the most flexible and varied financial services are on offer through Sainsbury's Bank, a joint venture between J. Sainsbury plc and The Royal Bank of Scotland (Sainsbury owns 55 per cent and Bank of Scotland the remaining 45 per cent). When the Instant Access Savings Account was launched in February 1997, its revolutionary selling point was that an interest rate of 6.75 per cent (gross per annum) was paid to every customer on balances from £1. It was the first major British supermarket to open a bank - in some stores customers can open accounts by picking up a courtesy telephone which links them directly to the Bank of Scotland's financial services unit - and since its launch more than 900,000 customers have deposited £1.7 billion in Sainsbury's Bank. However, from November 18th Sainsbury's Bank introduced a three-tiered system of interest rates on its Instant Access Savings Account and although in some cases the rates are double that offered by some of the high street banks, investment advisers believe customers depositing small amounts of cash have lost out.

Nevertheless, the new rates are still highly competitive compared to the average high street interest rate of between 4 and 5 per cent. For example, on savings of between £1 and £2,499 the gross interest rate per annum is 5.75 per cent, compared with 1.8 per cent on savings between £1 and £999 on the Nationwide Cash Builder Account.

Sainsbury's Bank also provides 24-hour free telephone banking and there are no charges for withdrawals or limits on the cash total or frequency of withdrawals on the ATM card.

At Safeway, its customers can open a Direct Savings Account with as little as £50 and its key selling point is based on the assumption that offering a "no-frills" service means it can offer a higher top rate of interest to its customers than Sainsbury's Bank or Tesco. Launched in January this year and administered for Safeway by the Abbey National Bank, the Safeway Direct Savings Account has already attracted close to £1 billion in deposits offering customers an interest rate of up to 7.55 per cent gross per annum (on deposits of £2,500 plus).

In keeping with the no-frills ethos, Safeway's financial services do not extend to personal loans, mortgages, personal or home insurance, but this does not seem to have put off the customers currently banking with the supermarket.

For Tesco customers, as with the other supermarkets, the key is loyalty. Tesco Personal Finance was introduced in July 1997 combining the financial expertise of The Royal Bank of Scotland, Direct Line insurance and Scottish Widows pensions. Its Instant Access Savings Account offers 6.6 per cent interest gross per annum on savings between £5,000 and £14,999 compared to 6.5 per cent offered by The Royal Bank of Scotland's Direct Instant Access Savings Account. From cradle to old age, Tesco has it covered and with 24-hour banking, no withdrawal charges and a free balance inquiry line, 700,000 customers have taken up the offer of flexible financial services.

"Historically the supermarkets got involved in offering financial services because of the recent price wars and it increases their customer base. Initially, they offered good interest rates to attract customers, but prompted by the recent cut in interest rates and trying to cut their own costs, they have reorganised their structure and they are not at the top level of the market any more," says Mr Justin Modray, investment adviser at Chase de Vere.

He advises customers that supermarkets - Safeway in particular - still offer the best rates in comparison with the high street banks. However, as competition between the high street and the supermarkets continues, it is also worth considering postal and telephone accounts. This is because the overheads of building societies, such as Northern Rock and Birmingham Midshires, in operating a central sorting office are far lower than financial institutions running high street premises and these savings can be passed on to the customer.