SMASH AND GRAB

Jumping on the bank wagon: Tesco (top) is in bed with NatWest for its Clubcard Plus scheme; an ad budget of 30m for British Gas’ (centre) new venture; Volkswagen (bottom) is one of the largest providers of non-bank financial services

Volkswagen, Tesco and even British Gas are all following what they hope is a late 20th century goldrush into the world of financial services.

But of the trio, only Volkswagen has any background in offering financial products. It now has plans to translate its knowledge in the German market into creating a full banking operation across Europe.

Tesco is in bed with NatWest to develop its Clubcard Plus scheme, originally planned for June but understood to have been delayed until the autumn. Meanwhile, British Gas is creating a completely new company and brand with its anonymous US banking partner to develop a range of products that will “stretch financial services to its limit”, according to one inside source. An ad budget of 30m has been talked about for the new range of products which are scheduled to be launched within three months.

But sceptics suggest the schemes may never reach fruition, or if they do they may be severely watered down because of a combination of the amount of investment required and a move into a regulatory minefield that will be tighter than most have ever encountered before.

The trio are embarking on a well-trodden path with brand owners as disparate as General Motors, Cellnet, Marks & Spencer and Virgin already in the market. The majority of newcomers are involved with co-branded credit or affinity cards and branded PEPs – for many it has the appearance of a toe in the water. The language is of alliances and partnerships or conduit marketing – a means to getting closer to consumers via an added-value service.

But what was a steady trickle is becoming a flood raising questions about the motivation – and in some cases the wisdom – of brand owners jumping into one of the most competitive and over-supplied markets in the UK. Most would argue that they are entering the market to collect more information on customers and boost loyalty to the core brand.

The Telegraph newspaper’s decision to enter the financial ser vices market highlights one of the dangers (MW February 16). Telegraph Enterprises sees an opportunity to cash in on 10bn of maturing PEPs and Tessa schemes this year but according to sources is facing hostility from advertisers to its plan to undercut rivals.

The GM Card from Vauxhall was launched by the car company two years ago as an add-on marketing device to attract non-Vauxhall drivers but 80 per cent of the cardholders still do not drive Vauxhalls. Recent speculation that the card was to be pulled is denied by the company which claims to be on schedule in its five-year plan.

“There is a lot of diversification fever out there,” says one banking observer. “I would argue that wherever a company specialises is the place for it to stay and it is very dangerous for a brand if it gets it wrong in an area as sensitive as financial services – it could undermine the core brand activities.”

Ironically, the arrival of non-financial services companies into the market comes as the high street banks are re-assessing their own core activities, especially current accounts which at best offer a wafer-thin profit and are more likely to be nothing more than loss-leading.

It costs high street banks more than 2bn each year to handle cash transactions, which account for less than one per cent of their annual turnover. It only costs an extra 2.5bn to handle all other cheque and automated transactions accounting for the vast majority of turnover. The money in banking is not to be made in cash.

The banks are learning how to make more money while reducing their presence on the high street – more than 4,000 branches have closed in the past ten years. The trick the banks are trying to perform is to convert the more than 19 million non-profitable current accounts into more profitable areas like mortgages.

“Banks are trying to get out of some product areas,” says Henley Centre associate director and financial services specialist Peter Mills, “but they are not getting out of current accounts, they just need to make them more profitable. The motivation for retailers and manufacturers is information and more frequent contact with customers”

But with Barclays set to charge for administering current accounts other companies see an opportunity.

“The banks are now talking about charging for current accounts,” says Volkswagen Financial Services (UK) managing director Malcolm Hill. “Now is the right time to move in because the banks have taken a position that the market does not like.

“The UK is the most mature market in Europe for financial services, which is a plus point. But it is also saturated and anybody entering the market would need a major USP and we have not made any decision about expanding into the UK yet.”

Volkswagen already owns a bank in Germany, which means it would not need a UK banking licence, and a string of financial services divisions across Europe. Volkswagen Financial Services AG with assets of 10.7bn is one of the largest non-bank providers of financial services in Europe and so the car maker is better placed than any of the other brand owners to enter the financial services sector.

It plans to create a Europe-wide banking operation with a full portfolio of products, ranging from current accounts to credit cards, pensions and insurance. But it is moving cautiously on a country-by-country basis. The Czech Republic and Italy are top of the list, the UK well down.

“Where finance is being offered as a relevant extension as in car finance there is a lot of consistency, and probably works very well,” says Abbey National marketing director Ambrose McGinn. “But when companies such as VW stretch their brands into pensions and savings it is beyond belief. Even classic brands like Marks & Spencer have found it difficult to sell pensions products.

“In the credit cards and mortgages market it’s war. It is difficult enough for financial services, let alone any one else. They (non-banks) need to take a good hard look before they enter because they are going to get slaughtered.”

To avoid that carnage the newcomers will have to develop credible reasons for being in financial services. Some believe they will try to take a “pick and mix” approach to the market in their dealings with financial partners.

“I think that you will see that retailers will treat financial services companies much as they do fmcg,” says Barclaycard commercial director Shaun Powell. “Rather than tie into a single bank they will offer a range of products from different financial services organisations and have them compete for the best deal and the best price for their customers.”

First Direct changed the face of financial services in 1989. The impact of the bankless bank is still reverberating today. But that only serves to underline how difficult it is to make financial services work for you. It should act as a cautionary tale for the huge number of companies expanding into the area. It is not enough to have a me-too product, there has to be real value and the jury is still out on those products already launched. Brand owners want information on consumers – they also want to be assured that the information is not over-priced.