Supermarkets’ links with banks a mixed bag

The noise of recent days around Musgrave’s interest in providing financial services highlights the need for more lending in the economy, especially with the impending withdrawal of ACC Bank and Danske from the market.

Latest statistics from the Central Bank of Ireland show that Irish residents owed €291 billion in loans to their lenders in September, down €42 billion on a year earlier.This is due to a combination of people furiously paying down debt; lending from departed institutions such as Bank of Scotland (Ireland) not being replaced; and existing players lending less as the economy struggles for air.

On Sunday, Musgrave said it had "no plans to launch a bank" but was in the "early stages of looking at providing services such as insurance products to our customers".

“Musgrave is exploring the financial services space after receiving customer feedback that this is one of a number of services they would like to see offered by our retail brands,” the Cork-based wholesaler said, adding that it would not be offering personal or commercial loans.

“Nothing will be launched in the short to medium term.”

It is unlikely any Irish retailer would look for a full banking licence. There are too many regulatory hoops to be jumped through these days to make it worth the hassle. Better to partner with an existing financial institution to provide a suite of services. On paper, big grocery chains are ideally placed to offer financial services. National distribution? Tick. Large customer bases? Tick. Trusted brands? Tick. Experience of cash management? Tick.

Yet the experience of Irish supermarket groups and financial services has been mixed at best.

Superquinn's attempt
In 1999, Superquinn launched a banking joint venture with the old TSB Bank (now part of Permanent TSB) called Tusa.

It lasted about two years before being shuttered. In that time, Tusa had signed up a paltry 10,000 customers, of which just 500 had mortgages. Its losses in year one amounted to about €4 million. Tusa offered competitive rates at the time but it could not overcome customer inertia.

Ironically, Superquinn is now owned by Musgrave and will be rebranded as SuperValu from February next.

Before the crash, Dunnes Stores held extensive talks with Permanent TSB about a banking partnership before eventually pulling back. Dunnes is a big brand and has one of the largest customer loyalty programmes in the country, which you would think should be ripe for cross-fertilisation.

But bankers will tell you that cross-selling financial products is tricky, and the industry has a sketchy track record. Tesco is the best known of the grocery chains here for its financial services products. It is a fully-fledged bank in the UK, offering everything from current accounts to personal loans. In Ireland, a tailored offering is available. Tesco Ireland will give you a credit card but it has a modest credit limit of €1,500. It will also sell you car, home and pet insurance underwritten by RSA Insurance Ireland. No statistics for these services are publicly available.

In the boom years, Tesco quietly dipped its toes in personal loans here but pulled back after only a year or so due to a lack of scale and high levels of administration. It wasn’t worth the hassle. It was a time when mainstream banks were throwing money at people. It was far easier for punters to accept the offer of a loan that had come through their letterboxes from their bank.

Nowadays, with so many people struggling to make ends meet, Tesco would probably be inundated with loan applications from hard-pressed customers. There’s the rub for a retailer.

In the current economy (let's not forget that unemployment is still 12.8 per cent in spite of the positive mood music from the Government), the likelihood is that a retailer offering personal loans would probably have to turn down a majority of applications in the name of prudent lending. This would risk the goodwill that customers have for the brand and push disgruntled punters into the welcome embrace of rivals such as Lidl and Aldi.

Tesco is finding the going tricky enough in Ireland (like-for-like sales in the year to February 24th were down 0.3 per cent) without potentially alienating any of its customers. By contrast, Bank of Ireland and AIB don't have any such worries. The public already hates them after being taken for €64 billion to bailout the sector.