The arrival of the fourth player into a market is always less interesting than the first. But when that player is coming in with a proposition to undercut all its rivals, and is taking on some of the biggest names in banking and retailing, it is bound to make waves.
According to well-placed sources, supermarket chain Asda is nearing the end of negotiations with the Royal Bank of Scotland and “another possible partner” to launch a range of financial service products (MW January 10). It has discussed setting up a bank but that idea is believed to have been shelved in favour of a “Tesco Clubcard Plus-style” loyalty scheme.
Cut-price banking, which was to be Asda’s central idea, would fit in with its core value-for-money price proposition but runs against the tide among high street banks, which are all trying to shed unprofitable current account holders.
And while Asda chairman Archie Norman has made great play in the past of his crusade against book publishers, drugs companies and other vested interests for alleged over-charging, he would not launch the company into a head-on collision with the banks unless he thought that Asda could win.
It is simple. Asda wants, like all the supermarkets, information. It has looked at the deals already struck and is now assessing how much it has to invest to get a database of all its consumers. It wants to offset some of that investment by bringing in the Royal Bank of Scotland, or another financial partner, but whichever way it does it, Asda will enter the market.
Tesco, Safeway and Sainsbury’s have all announced plans for launching financial services. Sainsbury’s has gone as far as hiring M&C Saatchi to develop a launch campaign for its own-branded bank. But Asda is only now putting its toe in the water dividing observers between those who believe it is too late entering the market and others who believe it has learned from the mistakes of other rivals.
Significantly it is estimated that as many as 30 per cent of Asda customers do not have bank accounts and so the opportunities to sell insurance, PEPs and other financial products could be limited. That is understood to have been a factor in its decision not to launch a full banking operation.
“Asda is evaluating the benefit of a loyalty scheme,” says one insider. “It has looked at all angles and is talking to people about something close to the Clubcard Plus scheme. But it will not launch a bank.”
However, it clearly investigated the option and had talks with high street banks, including Midland, to launch a cheap, no-fee operation.
“We went to see Asda last year,” says a senior source in a rival bank which discussed the project. “Asda made it clear to us that it had a bank in mind. It wanted it to be a joint venture, not own-label banking like the Tesco and Safeway deals. It wanted a bank that would match its Asda price proposition.
“All it wanted to talk about was price. It wanted the lowest APR on credit cards and no fee. Definitely no fee. It also wanted the highest interest rates for saving and lowest interest rates for loans. We saw it as completely unworkable.”
The Asda source says that the supermarket could even decide to stay aloof from the scramble. “There is a virtue in being different. Asda could come out saying we don’t offer dry cleaning or PEPs, you don’t need a card or to spend 100, we just offer honest prices on groceries.”
But it cannot afford not to be involved. There is a momentum, in-spired by Tesco, which is forcing all the supermarkets down the same route.
“It (Asda) has to decide if not having a list of its customers will create long-term problems or whether the cost of getting and using that list is too expensive,” says the source. “If it decides that not having the list will leave it way behind in developing its marketing then it will have to go down the loyalty route. That is the internal debate.”
As significant as the supermarkets move into financial services is the long-term damage these deals are inflicting on financial service companies and their brands. The retailers want to supply own-label financial services and some people seek to draw a parallel with those manufacturers which previously provided own-label products for the supermarkets, only to become dependent on the retailers.
“Financial services people are desperate to get to consumers through different distribution points and the supermarkets want financial service partners to offset the costs of launching loyalty cards,” says one industry observer. “For the financial services companies it is the equivalent of selling the family silver.”
Asda will make its decision within the next four weeks and the autumn has been earmarked as the most likely launch date. But the thinking at Asda provides a significant insight into the future of supermarket financial services. “You can pull out of a loyalty programme and replace it with home delivery, catalogue schemes and other devices but you can’t pull out of a bank that easily,” says the Asda source. “I think retailers will get out of financial services and loyalty cards within three years. By then they will have the lists.”
Asda will follow its rivals. It will launch a loyalty programme and will attempt to put together a list of its 8 million customers. When it has that it will then presumably pull out of the financial services market, leaving any financial services partner to mull over why they ever got involved with the notoriously cut-throat supermarket chains.