Supermarket banks have around 5.8 million customers* but this could rise to 14.43 million by 2008

A new report from IBM Business Consulting Services claims that one in eight people aged 16 and over have a product from a supermarket bank, and that retailers have the opportunity to become a major force in the financial services sector. The report, which was commissioned by Sainsbury’s Bank, claims that over the next five years the number of supermarket banking customers could increase by 149% from 5.8 million people today to a staggering 14.43 million by 2008.

Despite research for the report showing that Sainsbury’s Bank for example has among the most competitive products in the marketplace, IBM warns that for supermarket banks to realise their full potential, they need to provide a more customer focused and interactive proposition in the stores themselves. This might mean providing more face to face advice for customers in stores or facilities to deposit cash into savings accounts. They also need to develop a better insight into their customers and use this to differentiate their propositions, especially in the area of customer service and convenience.

Despite this, the report identifies the strong value proposition provided by supermarket banks which it claims are the result of three main factors which underpin their propositions:

1. The strength of their retail brands
Supermarkets have very strong and trusted brands with a large number of loyal customers who are open to being offered financial services products by them. In many cases supermarket brands are stronger than those of traditional financial services companies.

2. Low operational costs resulting in high competitive products
Because of their focused business model, the operational costs of supermarket banks are around 25% of those of an average financial services company. This saving can be passed on to customers in the form of more competitive products and services. Indeed, according to market research company Direct Excellence, the cost of car insurance from Sainsbury’s Bank and Tesco is around 11% below the average for the market as a whole. With regards to annual travel insurance for example, there is a similar saving of around 12%.

3. Strong access to a large customer base
Sainsbury’s, Tesco and Asda supermarkets are each visited by more than 11 million people a week. This provides their banking arms with an opportunity to engage with these customers at various times during their shopping experience, from banking areas when they enter and leave the supermarket to product leaflets at the checkouts.

Ewan Puckle Hobbs, Managing Consultant,IBM Business Consulting Services said: "Supermarket banks already have a significant share in the retail financial services market and the potential is there for them to grow dramatically and become a real force in the industry. They have the strength of brand, an excellent relationship with the millions of people who visit their stores every week and efficient operating models which enable them to offer highly competitive financial propositions through convenient distribution channels. Despite this, there are still some challenges which they need to overcome in order to realise their full potential."

Derek Bottom, Deputy Chief Executive, Sainsbury’s Bank said: "In 1997, J Sainsbury’s was the first to offer a supermarket banking proposition. We now have 1.7 million customers and our business is growing at a rapid rate. Our latest published financial results show that when comparing the first six months of 2002 with 2001, we saw our customer acquisitions grow by 90%, insurance sales increase by 63% and our personal loans book double in size. There is no reason why we cannot continue with our rapid expansion."

This view is supported by an independent study into the bank’s products by the financial services research company Defaqto Ltd. It concluded: ‘When compared to the market as a whole, Sainsbury’s Bank’s product range is largely good for both price and cover and in some cases, they could be described as market leaders.’ An example of this is the Sainsbury’s Bank Advantage Credit Card which is one of only two in the marketplace that offers an introductory rate of 0% on purchases, balance transfers and cash withdrawals.

However, for supermarket banks to achieve their full potential, IBM’s report outlines three major challenges that lie ahead:

Proposition differentiation
Supermarkets need to be more effective in differentiating their propositions from those of other providers. This could include a move from just offering financial products as commodities towards more integrated offerings – focused on life events such as buying a car or moving home. There is also an opportunity to do more for loyal customers, perhaps exploiting the reward and loyalty schemes which are so prevalent in their retail propositions.

Customer insight
Retailers have more in-depth and detailed customer data than the traditional financial services companies and already make excellent use of this in managing their traditional business; however, there is still an opportunity to extend this knowledge and make better use of it in their financial services operations. This should include developing a better understanding of the needs and preferences of customers and using this to offer more sophisticated propositions. As consumers increasingly see supermarkets as convenient places to buy a much wider range of items, the opportunities for selling financial products are growing.

Here, one area that needs addressing is developing a greater physical presence in the supermarkets themselves. IBM research shows that over 60% of banking customers continue to use branches, with one of the main reasons for this being a desire to have physical contact with the bank. In a recent survey by J Sainsbury’s, 55% and 71% of its supermarket and banking customers respectively said that they would be more likely to use the Bank if some form of counter service was available in store.

Service excellence and convenience
People’s service levels expectations often depend on which industry they operate in. Supermarket banking customers expect to receive the same service they enjoy from the retail brand itself. As supermarket banks expand, this could become increasingly more difficult to achieve, and the way that they manage their partnerships with their parent companies and suppliers will become even more critical.
Derek Bottom concluded: "Supermarket banks have already accomplished a great deal. Indeed, the financial strength of the sector, which has been achieved over such a short space of time, is impressive. However, much of the foundations are now in place and the real test of supermarket banking will be whether it can fully capitalise on this and become a major player in retail financial services. At Sainsbury’s Bank, we believe we can achieve this."

Ewan Puckle Hobbs concluded: "This industry is definitely one to watch. There are still some issues which need to be addressed before its true potential can be realised, but in a fast changing industry coupled by the fact that peoples lives are becoming busier, the supermarket could become a major distribution channel for retail financial services products.

"It may be too soon to say that we are seeing a revolution in the way that banking services are delivered – but where better to ferment a consumer revolution than in the haven of consumerism – the supermarket."

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