As Germany’s Deutsche and Dresdner banks were announcing a &£50bn merger to form the world’s largest financial company, the British Airports Authority (BAA) chose to launch a much humbler banking venture.
The airport operator last week hired Sainsbury’s Bank marketing veteran David Noble to develop its first financial brand (MW March 9). While the largest banks and financial institutions are consolidating into a handful of global players, the sector is proving irresistible to new entrants.
Companies ranging from supermarkets to car manufacturers have launched into the UK banking sector, but never before an airport operator. BAA joins the growing ranks of brand owners which have seen an opportunity in the financial services sector and jumped at the chance.
Sainsbury’s Bank was one of the first, and most successful, new entrants, so if anyone can make a success of BAA’s latest foray, Noble can.
Observers say BAA’s move has some commercial logic since the company has an extensive database of customer information and a captive audience of passengers awaiting flights. However, some of them question how much room is left in a UK financial services sector that has been inundated with more than 30 new entrants in the past five years.
In recent weeks it has emerged that Airtours, EasyJet and Age Concern are also planning significant financial services operations.
Many of the new entrants believe they can make a better fist of marketing financial services than the unpopular banking giants – what with their cash machine charges and grey, greedy image. Add to this the &£11bn pensions misselling scandal, traditional banks’ poor customer service and their mediocre – but expensive – product ranges, and it is easy to see why the new players believe they have found their killing-ground.
The growth of the Internet means they can move into the market at a fraction of the cost of setting up a branch network.
What these entrants lack in financial expertise and infrastructure they make up for through partnerships with traditional players, which are keen to cash in on the new-style financial brands so long as they do not cannibalise their own customer base.
Many of the companies moving into the financial sector have themselves been hit by low-cost Net ventures subsequently piling into their markets. These Net ventures, such as Lastminute.com and Ebookers, have increased competition and mopped up investors’ money that would have gone into the coffers of financial sector start-ups.
But while the entrance of the new-breed of financial brands has been greeted with great fanfare, they have only captured a tiny portion of the market. Some observers believe this may actually shrink as the low interest rate loans and high savings rates many have used to attract customers become unsustainable.
Chris Gentle, a financial services consultant at management consultancy KPMG, says: “The case for the new entrants is unproven. Can you name a successful non-financial services company in this sector? They have largely come in with a one-product offer, typically a savings account or credit card. It is easy to cherry-pick a particular audience with a particular offering, but to become a mainstream player requires a full range of products and a lot of marketing dollars.”
MORI Financial Services director Alistaire Whitmore is also sceptical: “The current account is still the core product in financial services from which you can cross-sell other products. But current accounts are generally loss-making and, if you are targeting the mainstream, they require a branch network.
“Although that may change, at the moment there are only a few customers who are happy to operate a current account without access to a branch network, and they are already being catered for by the likes of First-e and Smile.”
Malcolm Oliver, a financial services consultant who has worked for both new and traditional banks, agrees that the newcomers have yet to make much money, but says: “It is early days. Sainsbury’s Bank, Tesco Personal Finance and Virgin Financial Services are already in profit, which is pretty good after just a few years.
“And I believe some of the new entrants will become leading players in financial services in the next ten years.
“These companies will transform the banking industry, in the same way that the supermarkets transformed the food industry. For example, when the Government introduced a maximum commission of one per cent for stakeholder pensions, many of the traditional insurers said it couldn’t be done. Then Marks & Spencer came in with a 0.7 per cent annual charge and showed it could. These sorts of initiatives can considerably develop markets, and have a knock-on effect across the industry.”
Oliver believes Tesco Personal Finance and Sainsbury’s Bank are well placed to capitalise on the financial sector’s weaknesses. Their companies have the databases, customer loyalty and branch networks that observers say are necessary for a mainstream player in the banking sector. The supermarket banks also offer a broader product range than most new competitors. It is too early to know whether the latter will ever be more than niche players.
With the exception of ground-breaking direct insurer Direct Line and direct bank First Direct, which launched ten years ago, the new entrants have all appeared in the past five years – many of them in the past year. Direct Line and First Direct both took several years to make a profit, and they are still tiny operations compared with the major players.
But all commentators agree the new entrants have had a huge impact on traditional financial services players through offering better products, prices and customer service.
Gentle says: “Over the past 18 months, Lloyds TSB, HSBC, NatWest and Barclays Bank have all been forced to think very seriously about their brand and the use of the Net, and all of them have improved their operations as a result.”
There are other reasons why a company might want to move into financial services. Larmer says it can have a positive impact on a company’s share price, especially if the business is distributed over the Net, because it makes it look innovative.
It can also strengthen the core brand because the more it can permeate customers’ lives, the greater their loyalty, and the greater the opportunity to cross-sell products.
But some observers believe new entrants could become victims of their own innovation. WWAV Rapp Collins client service director Mike Larmer, who has worked on new financial services brands for Sainsbury’s, M&S and Age Concern, says: “You only need to look at the number of new Net brands [which emphasise good value and customer service] the traditional financial services companies are setting up to see that the new entrants have given them a very loud wake-up call. Many traditional players now sit next to the new entrants in the ‘best buy’ tables through newly-created brands.”
By creating separate brands to counter the new entrants, traditional banks have made it much harder for further entrants to thrive. As with the Net economy as a whole, new entrants risk being lost in a sea of brand anonymity.
The 30 entrants that have seen a financial services opportunity over the past five years have still to prove their long-term worth. There are fears that BAA may be coming in at the tail-end of these developments.
If BAA makes a success of its latest launch, this assumption will clearly be wrong. If it fails, we may not hear much from the former Sainsbury’s executive for some time to come. Noble was unavailable for comment.
– Traditional financial service providers’ new brands
Co-operative Bank: Smile (current accounts, savings, credit cards, loans, ISAs)
HFC Bank:Marbles (credit card)
Abbey National: Cahoots (full service)
Halifax: eSure (insurance) and IF.com (full service)
Prudential:Egg (mortgages, savings, credit cards, loans)
CGU: Your-move (one-stop mortgage shop), Bluecycle.com (online auctioneer)
Lloyds TSB:e-bank (full bank)
Consortium including CGNU and Banque d’Escompte:First-e (current account, savings, ISAs), Saga (insurance)
– Non-traditional financial services providers
Sainsbury’s:Loans, mortgages, insurance, savings, credit cards
Tesco:Savings, credit cards, loans, insurance
Automobile Association: Insurance
British Airways: Savings, debit cards, loans
Airtours: To be announced
Thomson Holidays: Credit cards
Age Concern: ISAs, insurance, savings
British Airports Authority: To be announced
EasyJet: To be announced
Virgin: Pensions, insurance
Marks & Spencer: Pensions, insurance, loans, savings
Centrica: Goldfish credit card
Vauxhall: GM credit card
– League tables
1. Consumer lending (personal loans, motor finance and point-of-sale credit)
Marks & Spencer Financial Services- &£946m
Sainsbury’s Bank – &£300m
Tesco Personal Finance – &£242m
Goldfish – &£40m
UK industry total – &£78.8bn
2. Credit cards (number of customers)
Vauxhall GM Card – 677,000
Sainsbury’s Bank – 374,000
Automobile Association – 241,000
Tesco Personal Finance – 70,000
UK industry total – 42.04m
3. Deposit accounts
Sainsbury’s Bank – &£1.7bn
Tesco Personal Finance – &£900m
Safeway – &£900m
Virgin Direct – &£182m
UK industry total – &£460.7bn