When the British supermarket chain J. Sainsbury plunged into financial services in 1997, it was guided by a simple observation: "People didn't have one good thing to say about banks," says Richard Chadwick, deputy chief executive of Sainsbury's Bank. "There was a huge opportunity there."
For close to two years now, the giant grocer and its largest rival, Tesco PLC, have been hawking everything from savings accounts to personal loans to credit cards. Together, they have captured some $4 billion in deposits-without investing in a single bank branch.
The programs, which are delivered mostly over the telephone, are the most visible among a slew of banking offerings from newcomers to the United Kingdom's financial services market. Seven nonbanking companies, ranging from supermarkets to insurers, captured 2.1% of all money that flowed into British deposit accounts in 1998.
"Banks got quite complacent about the way they treated their customers," said Matthew Walker, a financial services analyst with Datamonitor Europe in London. "They were very rigid in the way they enforced their rules."
The grocers' push into banking is forcing Britain's oldest banks to revisit their approach to customer service and to beef up their own 24-hour telephone banking operations. And it is providing a chilling reminder to U.S. bankers that in today's environment, competitors can emerge from practically anywhere and quickly take market share.
The message couldn't be more timely. In 1998, U.S. companies as formidable as State Farm Insurance and Nordstrom Inc. mapped ambitious plans to enter the U.S. retail banking business. State Farm is looking to offer a gamut of consumer deposit and loan products through a national network of 16,000 offices.
"Banks are so close to losing their franchise," said Donald Taylor, president of FISI Madison, a Nashville consulting firm. Supermarkets may not be a threat in the United States, he said, but brokers, insurers, and consumer-savvy technology companies definitely are.
In the United Kingdom, Datamonitor Europe projects that nonbank entrants to the market, as a group, will control some 5.4% of British deposits by 2003, up from 1.5% today. That would easily place the group among the market's top 10 players, where they would rub elbows with the likes of Abbey National and Woolwich, two of England's most established building societies, or thrifts.
"They are a great competitive threat," said Brendan Cook, head of market development for Midland Bank PLC. "The key to all is a brand name and a link to customers."
The invasion actually started more than 10 years ago, when the venerable retailer Marks & Spencer began offering a range of financial products-minus savings accounts-to its customers. But the pace has picked up considerably in recent years amid a big a shift in the country's banking landscape.
Once firmly entrenched in their own segments of retail banking, the United Kingdom's building societies, commercial banks, and insurers now regularly compete in one another's backyards. That has prompted consumers to "unbundle" their financial services, picking the best products from a growing array of providers.
"The checking account is still the cornerstone or core relationship," said Mr. Cook of Midland. "But there is a growing awareness that you can put funds elsewhere."
Increasingly, "elsewhere" is a nonbank. Seeking to leverage tremendous brand equity into retail banking share, companies ranging from Richard Branson's Virgin empire to venerable insurer Standard Life have recently entered the telephone banking fray.
In October, Prudential Insurance launched a high-profile account with notably high rates. Dubbed Egg, it offers 8% interest on savings, and attracted more than $1.5 billion in deposits in just two and a half months. Automotive companies such as Volkswagen and BMW are also studying the market.
Why are all these companies able to grab business from banks? According to the supermarkets, it is banks' failure to serve their customers well.
"We started with a belief that we could do it better than banks," said Stuart Sinclair, chief executive officer of Tesco Financial Services. "We can offer simpler products, fewer charges, and be more clear."
Also helping the new players: low cost bases, which translate into higher rates for savers. Tesco and Sainsbury's both launched their savings accounts in 1997 with an interest rate of 6.75%-2 percentage points higher than their bank competition. What is more, the supermarkets have no minimum deposit requirement. They open accounts for savers with as little as one pound to sock away.
"We can afford to do that," Mr. Chadwick said. Without brick and mortar to support, the grocers can acquire a new account for less than $30, compared to $160 for a British bank. The chains also keep their costs low by shunning mass marketing and advertising, choosing to communicate with their customers in their stores instead.
Unlike American grocers, the U.K. stores are national in scope and enjoy strong brand recognition. Some 12 million Britons carry a Sainsbury frequent shopper card; nine million carry Tesco's.
"With such a vast customer base, even if you can only get 10% of your customers, that is a lot," Mr. Walker said.
"For Tesco and Sainsbury, awareness is high and they are associated with quality," agreed Mr. Cook of Midland. "But in financial services, there is less of a degree of confidence" in their abilities.
The supermarkets disagree, pointing to their recent success in the U.K. gasoline market. Since entering that business several years ago, the grocers have amassed a 30% share.
"Financial services seemed like the next logical thing," Mr. Sinclair said. "There had to be at least a certain type of customer who would say why wouldn't I?" bank at a supermarket.
Once they decided to enter banking, Tesco and Sainsburys signed on banks as partners to provide the systems and operational skills that they did not want to build themselves.
England's big commercial banks-known collectively as High Street-stayed away from the programs for fear of cannibalizing their own customer bases. But Scotland's two largest banks saw the grocers as their passports to the hot English market.
Tesco, which had worked with London's National Westmister Bank to offer a debit card, aligned itself with Royal Bank of Scotland. The partners set up Tesco Financial Services, a fifty-fifty joint venture that employs 35. Royal Bank handles processing, credit risk and analysis; Tesco is responsible for marketing, distribution, and product development.
Sainsbury, meanwhile, hooked up with Bank of Scotland to launch Sainsbury's Bank, a 37-employee venture in which the supermarket controls a 55% stake.
"We felt it was vitally important to own 55%," Mr. Chadwick said. "These are Sainsbury's customers. We have to be able to control the button. We have more to risk if it goes wrong."
The programs' structure makes them different from supermarket banking ventures in the U.S., where banks lease space for branches within a grocer's stores.
At Tesco and Sainsbury, there is little physical evidence of their banking ambitions. Shoppers can pick up colorful brochures on Tesco financial products in its stores and they can make deposits at the cash register; Sainsbury has put small marketing stands or "bank information points" in its aisles. Neither has installed traditional in-store branches.
"That would do nothing but bring High Street to the store," said Mr. Chadwick. "For the supermarket, there is no benefit.'
Though Sainsbury and Tesco did not broadly advertise their new offerings, the initial response was overwhelming. Sainsbury's, which launched its savings product in February 1997, now has more than 900,000 accounts; Tesco, which entered the business six months later, claims 700,000. Both offer what are known in Britain as "instant savings accounts," which provide consumers with immediate access to their money.
Midland's Mr. Cook acknowledges that the new entrants have changed the face U.K. banking.
"All of the major institutions have embarked on that rate," he said of the supermarkets' pricing. Mostly, they have done it by setting up or beefing up their own telephone banking operations. "It's a cheaper channel."
Indeed, Midland is credited with offering the U.K. market's first virtual, or branchless, consumer financial institution, dubbed First Direct Bank. Last year another High Street player, Barclays Bank PLC, launched a souped-up telephone operation dubbed B2.
"All players are aware of the need to beef up distribution," Mr. Cook said. "But customers still like branches and we like having them in branches."
The supermarkets exude confidence about their strategies. The say they have much more going for them than attractive interest rates.
"I would suggest it's not about price," Mr. Sinclair said. "It's simplicity."
Adds Datamonitor's Mr. Walker: "The new entrants came in and were more willing to bend for their customers."
To that end, Tesco's personal loans carry no fees, and its pension accounts no front-end loads. Targeted at those who do not have a retirement plan at work, the pension also allows people to contribute less than $50 a month to the plan and to take a break from payments.
Further betting that consumers would rather stash their cash with their friendly grocer than with a tradition-bound commercial bank, both Sainsbury and Tesco have in recent months added new twists-such as mortgages and insurance-to their product lines.
Though some of the additions could prove more profitable than simple savings accounts, the expansion is not without risks, observers said. For example, loyal customers could be alientated if Sainsbury moved to repossess homes.
The supermarkets, however, have a powerful weapon as they move ahead: extensive knowledge about their customers. The grocers' frequent-shopper cards provide Tesco and Sainsbury with a wealth of information about customers' lifestyles, which they carefully mine to sell financial services.
A consumer that has suddenly begun to buy dog food, for example, is a good prospect for pet insurance-a product Sainsbury's Bank began peddling in June. Meanwhile, users of financial services get frequent-shopping points.
Neither grocer has yet to turn a profit in its banking endeavors, losing anywhere from $15 million to $50 million in the first year. For 1998, both chose to continue to invest aggressively in their programs rather than post earnings; both expect to break even or make money this year.
To further keep down their costs, Tesco and Sainsbury do not offer traditional British checking accounts, which, unlike most American counterparts, carry no fees. While checking accounts are central at banks, the grocers say they do not need them to sell other products. Mr. Sinclair said that 61% of personal loans in Britain are bought outside of a consumer's core bank.
"There is no core banking relationship," he said. "We are contributing to the growing trend of the unbundling of financial services."