Cashing in at the checkout

Just a year ago the nearest a supermarket ever came to being a financial institution was offering a Christmas club savings scheme.

Now so quickly has the concept of supermarket banking taken off that the Government has singled out the supermarket as an integral element in a radical new savings system encompassing shares, life insurance policies and cash deposits. They will also include more sophisticated investment vehicles such as open-ended investment companies and convertible preference shares.

The new scheme is called the Individual Savings Account (ISA). The Government says that when the ISA is introduced in April 1999 it will be a partial fulfilment of its manifesto promise to promote savings to people on low incomes.

But there is an inherent problem in encouraging saving among low income groups. This is especially true when the incentive is tax-free savings for a target market that will not be paying tax in the first place.

The ISA will be one account through which people can invest in shares and put money into insurance policies as well as depositing a maximum of 1,000 cash in any one tax year – with all gains being tax free.

Last week the Paymaster General, Geoffrey Robinson, launched a consultative document outlining the proposed make-up of the ISA, saying that supermarkets could well have a role to play in allowing people to pay in at “supermarket checkouts with swipe cards”. He also suggested petrol retailers as a possible distribution point, which presumably opens the way for other retailers to get involved.

The motivation for retailers is to gain access to consumers and cross-sell products from groceries to other financial services.

But just how far the ISA will actually persuade the quarter of all British adults who currently have no relationship with any financial institution – whether building society, bank, insurance company or friendly society – to start saving is dubious. Chancellor Gordon Brown highlighted the fact that 50 per cent of the population have no savings in his pre-Budget statement two weeks ago (MW November 27) but painted a convincing picture of its necessity in the future.

More uncertain still is how the supermarkets will get involved. If people with low or no income start to save money through this new savings account, they are likely to have very small sums to deposit.

Tesco has gone on the record as saying it wants to work with the Government in developing the ISA. But given that low net worth customers are precisely the people that banks and indeed building societies have been trying to ditch for years – because the margins on their business are too small – how can the supermarkets operate such accounts profitably without damaging the brand?

Banks and supermarkets are reticent on detail, although both say they “welcome” the initiative.

More fundamentally, why should anyone on the margins of poverty trust what little amount they can save to an industry which mis-sells pensions?

Simon Ellis, sales director of fund management group Henderson Investors, says: “What I fail to understand is why anyone who has not been persuaded to start saving with a building society – which have a reputation for being secure – should be persuaded by this product which is very complicated.”

There is little in Robinson’s ISA proposals which will specifically help the first-time investors with little money. The consultation period of only two months – the Inland Revenue says it wants comments on the consultation document before the end of January 1998 – leaves little time for banks and supermarkets to come up with additional features and work out the logistics of operating these accounts.

Vital issues, such as how savers will be offered advice, are not even mentioned. But the Government is determined to have the scheme in place within 16 months.

To encourage the first time investor, the ISA should offer a bonus for non-tax payers who do not benefit from the tax-free nature of the returns, and a promise that all or part of the ISA should be ignored when savers claim Social Security benefits.

However, unlike the tax exempt special savings schemes [or Tessa] which has been successful in enticing smaller savers, the ISA does not lock in the investor for any minimum length of time.

One source says: “The ISA as it stands assumes a level of discipline that many people do not have. Unless consumers are obliged to put money aside regularly, they will not change their habits to do so. What’s more, many people are earning money on the black economy. The last thing they are going to do is to invest in an accountable form.”

Besides, as Ellis says, the bottom line is that the poorest people in this country do not earn enough to put money aside each week – 14 million people live below the unofficial poverty line, according to figures from the Low Pay Unit.

But if the money can be found, Verdict Research chairman Richard Hyman thinks supermarkets are the perfect distribution channel. “Low earners often feel alienated by the whole idea of banks but everyone likes food stores. If the Government really wants the ISA to be the son of PEP and Tessa then the supermarket is the obvious conduit to reach ordinary people.”

He adds that supermarkets are used to handling small amounts of money through the tills.

But the ISA carries even more risk to the supermarkets than standard bank accounts, as first time investors who have little understanding of interest rate movements and stock market fluctuations will blame Safeway or Tesco if their savings are eroded. Financial marketing consultancy Abram Hawkes managing director Paul Hawkes says: “People always have a tendency to shoot the messenger.”

Tessa Murray, communications manager at fund manager M&G, says: “Supermarkets are likely to be willing to use the ISA as a loss leader. If you get people saving with you then you will lock them into shopping with you.”

But Tesco and Sainsbury’s, however hard they protest and point to their own-label value lines, will not want hoards of people pouring through their doors to deposit 3 into a savings account. Hyman says: “Tesco should not be attracting people who are not ordinarily Tesco customers.”

Hawkes questions how the margins will be managed. “Nobody wants a load of accounts with only a couple of pounds in each,” he says.

But Henley Centre chief executive Paul Edwards thinks that the supermarkets will show the same razor sharp thinking here as they have already shown with their loyalty schemes.

“From a strict economic point of view there is a question mark over how these accounts can be operated profitably,” he says. “But it is for precisely this reason that they will make it work – they are keen to take on all the goodwill for making a success of it. It is a very Bransonesque thing to do – tell the consumer that where the banks have failed, the supermarket will champion their cause,” he adds.

However, Branson’s new bank account Virgin One is a very different animal. Virgin cunningly insists that the Virgin One customers pay their monthly salary into the account – instantly cutting out low-margin business and less active account holders.

The caveats about damaging all the trust which the supermarkets have built up, expressed when they first went into banking, still apply. Tesco and its partner Royal Bank of Scotland have already been slated in the national press for failing to open current accounts quickly enough. They must ensure that they do not take on the image of the banks.

Robinson insists that the consumer can be encouraged to make contributions to their ISAs at the supermarket checkout. However, the consultation document is short on ideas about how this may be achieved. Many may see the choice as putting 5 into a savings account that will mean something in 30 years or alternatively buying five National Lottery tickets for possibly immediate benefit.

Henderson’s Ellis is sceptical – the problem being that the 50 per cent of people who do not save already are likely to be people who cannot afford to both save and have a weekly punt on the Lottery.

“Why should people put money into a savings account where they will be earning tuppence ha’penny interest which will make absolutely no difference to them when they could buy a Lottery ticket which if they won would totally transform their lives,” says Ellis.

A concession has been made to counter this chance element. Each month, 50 names will be drawn from a free prize-draw – the prize being 1,000 put into their ISA. However, this incentive is risible when compared with the potential riches of the National Lottery.

And while the ISA does little for people who do not save already, it may actually antagonise existing Pep and Tessa investors. They will have to transfer savings plans, which could be expensive and time consuming. Moreover, those with more than the 50,000 ISA limit already invested in a tax-free plan will be faced with a tax bill on a product that was sold to them on its tax-free status.

Far from giving financial service groups a whole new market to target, the ISA risks disaffecting people who have bought their invest- ment products in the past. If the Government keeps changing the goal posts, why bother saving?

Supermarkets risk becoming seen as political pawns. Some observers are already saying that the ISA is no more than a camouflaged cap on tax breaks. Tesco cannot risk its reputation on a Whitehall whim.

The only element that will present real new opportunities for marketers is that the ISA will be the first instant access tax-free account – which will be very attractive to the financially astute provided the management fee is low enough.

Jac Hansel, joint man aging director at direct marketing agency Brann, insists that banks are in pole position to sell the products to existing customers who have a deposit or current account but do not really save.

He says: “For simple products most people still go to their bank. This is a huge opportunity for banks and if they get the marketing right it could open up a major market for them.”

The consultative period for ISA runs concurrently with consultations on pensions reform, another tool to persuade people to save – this time specifically for their retirement.

The same issues of persuading people to save on a regular basis are being discussed. The same emphasis on self-help rather than state benefits is central to the argument. And the fundamental problem is the same – the Government is ignoring the fact that people without money cannot save.