UK supermarket giant Tesco is preparing to take
on UK high street banks at their own game, after buying out the
personal finance joint venture it set up with Royal Bank of
Scotland (RBS) for £950 million ($1.85 billion).
In a move that emulates that of US retail giant
Wal-Mart, which has expanded to become a major non-bank retail
financial services provider, Tesco is planning to turn its Tesco
Personal Finance (TPF) venture into a full-service offering,
including financial services, telecoms and internet banking
In 2007, TPF made a profit before tax of £206
million, and Tesco expects the unit to make over £240 million in
2008. Tesco states that TPF could bring in up to £1 billion in
profit a year, compared to £400 million currently.
When compared to overall Tesco group profits of
£2.8 billion last year, it’s clear to see how much emphasis is
being placed on retail financial services as a profit driver.
The prospect of Tesco becoming a full-service
retail financial services provider is an unsettling one for UK
banks, for a variety of reasons.
TPF already has over 5.5 million customers in
the UK and currently offers a range of financial products including
credit cards, personal loans, and insurance. Tesco wants to
increase TPF’s presence in stores across the UK and plans to extend
its product range to include savings products and possibly a
current account in the future. It already incorporates over 2,700
ATMs located at Tesco stores nationwide.
In relation to credit cards, TPF has a 6.9
percent share of the market with its Tesco credit card, has total
credit card receivables of £1.9 billion and 1.3 million active
TPF boasts a high quality low-risk credit card
book, a high proportion of loyal Tesco customers which the retailer
says are a lower credit risk, evidenced by the low level of credit
card arrears. Just 0.4 percent of balances are in three months of
arrears or more.
Tesco’s store card offering, the Tesco
Clubcard, has been in existence since 1995 and is the world’s most
successful store card product, giving Tesco more than £100 million
of incremental sales each year, and more than 10 million
Through this, and its credit card offering,
Tesco has built an enviable database of customer spending data and
analysis, enabling it to offer tailored financial services to
It was the Clubcard’s success that spurred
Tesco into looking at expanding its presence in financial services,
and proved that the retailer could recruit new customers in-store
at a fraction of the cost of recruiting through other channels such
as advertising on TV or press, giving it a major advantage over UK
banks struggling to increase market share.
It’s no secret that the major UK supermarkets
have the potential to take market share away from the UK banks.
With millions of consumers visiting stores each week, Tesco is
expecting that shoppers will find it more convenient to open
financial products while doing their shopping.
It was previously thought that UK banks had a
considerable advantage over non-bank players such as Tesco due to
the banks’ widespread branch networks, brand recognition and
multi-channel distribution portals.


But with Tesco planning to offer ‘mini-branches’
inside its stores, alongside offering services on its website, many
of these logistical hurdles have been removed, making large
retailers like Tesco a tangible threat.

Cost efficiencies are also not likely to be a
problem for Tesco, given that it is one of the most profitable
companies in the world.
The timing of the deal is fortunate for both
Tesco and to some extent RBS. UK banks, battered by the credit
crunch and bad publicity over overdraft charges and credit card
fees, have seen trust in their reputations eroded, while retailers
like Tesco have gained a reputation for offering simple and
transparent services to consumers.
For RBS, it anticipates a profit on disposal on
completion of approximately £500 million. RBS will continue to
provide “certain commercial services” to TPF post-completion of the
deal, which is subject to regulatory approval but which is expected
to take place before the end of 2008.
The services to be provided by RBS will
include, among others, the operation of customer contact centres,
account establishment and management, card issuance, back-office
processing, and collections and recoveries. However, these
arrangements are expected to cease in between two to seven