NatWest takes own label banking route

This week NatWest Bank confirmed it is in talks with supermarket giant Tesco to develop an “own-label” co-branded credit card.

The advantages for Tesco are not hard to see. Tesco Clubcard, though ostensibly successful, provides limited information on its customers.

According to NatWest head of marketing Raoul Pinnell: “Clubcard does not offer any data on Tesco customers,” he says, “a credit card gives much more detailed information.”

Whereas Clubcard offers the name, address and what is bought, a credit card offers occupational details and credit data.

But for the financial services sector, the move reflects a strategic shift in direction. NatWest is already in advanced negotiations with mobile phone operator Orange and another international company to develop co-branded cards. And high street rival Midland, which launched the first co-branded card with Peugeot last year, is also negotiating with other service sector companies.

It is no coincidence Midland and NatWest are both shareholders in Access. The legacy of the Access relationship, where banks had three separate brands on cards – for instance, NatWest, Access and Mastercard – versus Barclaycard, effectively condemned them to be medium-sized players with a mixture of high and low-risk customers and frequent and infrequent users.

The banks have been busy developing post-Access strategies. Now that the banks and Mastercard have finally settled their differences over the price of the Access brand, the member banks will be able to fight Barclaycard on their own.

Pinnell says though NatWest is neck and neck with Barclays in terms of current accounts, at about 20 to 25 per cent of the market, in credit cards it is way behind with 2.5 million customers compared with Barclaycard’s 9 million.

The deal will give NatWest access to Tesco’s 6 million Clubcard users.

Additionally, while the banks and payment systems are fighting it out, their most profitable customers are being poached by cheaper rivals.

Next week the latest US assault on the UK credit cards market begins with the launch of People’s Bank of Connecticut credit card. This is likely to offer an annual percentage rate (APR) a third lower than the established bank credit cards. According to its new head of marketing Julia Garrett (MW last week), it will join US rivals signing affinity deals in the UK.

The US competitors – Beneficial Bank, MBNA and People’s Bank – all have tiny overheads in the UK and are able to offer much cheaper deals, making it hard for established banking giants to compete on price.

Peter Mills, financial services forecaster at The Henley Centre, says the US credit card issuers are trying to cream off the most profitable end of the market, the low-risk regular borrowers. They are most vulnerable to attack because of the higher APRs.

Access shareholder the Royal Bank of Scotland decided the best way to fight the cheap rivals was to join them. It tied up with US discount credit card Advanta at the end of last year. The RBS Advanta card is understood to be performing well.

Barclaycard’s deal with Cellnet (MW March 22) was also made in response to the cheaper rivals. However, unlike the NatWest Tesco deal, it was made to add value to its existing product, rather than to extend the brand to woo new customers.

A spokesman for NatWest says the new cards will be price competitive but “price is only part of the deal, we will offer additional benefits”. The deal will probably include use of special discounts and Air Miles.

However, ironically, the inclusion of a cheaper price could create other problems for the bank. Though co-branding involves the use of both the company and bank brands on the cards, the idea that a bank should be a supplier of financial services to a third party has obvious parallels with own-label provision in fast-moving consumer goods (fmcg) marketing.

There is the potential threat that the banks’ existing credit card customers will feel cheated. Mills says there could be problems with large-scale co-branding when NatWest customers realise they could get a better deal with Tesco.

However, Midland head of consumer marketing Mark Searles, says that though the Peugeot deal is much smaller, it has not caused an immediate problem. “There will be some cannibalisation of the brand but this has not happened with Peugeot.”

Pinnell says the co-branding deal will help both parties. “This form of brand stretching enhances the brand image, rather than detracting from it,” he says. The idea is that NatWest cashes in on Tesco’s brand loyalty and vice versa.

The problem for the former Access banks is that they are unable to compete directly against the Barclaycard brand in the mass market and unable to compete against cheap rivals because of enormous overheads.

One route that both Midland and NatWest have pursued is to improve existing products, extend loyalty programmes and waive fees. But combining this with risky co-branding could prove expensive.

A plausible, though unlikely, alternative could be to follow the lead of some US banks: give up mass-market aims, sack unprofitable customers and become a specialist provider. However, Midland and NatWest are unlikely to move down this route. As Searles points out: “In the US co-branding accounts for 50 per cent of the market, we are still on the starting blocks.”