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Who’s afraid of Tesco Bank?

Just back from Athens at a conference on retail banking with the star attraction being yours truly … well, I thought I was the star attraction until the post-lunch heavyweight speaker Sir Terry Leahy, Chief Executive of Tesco, turned up …

Terry Leahy

I remember hearing Tim Mason, Tesco's Marketing Director, back in 1997 talking about internet deliveries and their vision for the future. That was the year Tesco became bigger than Sainsbury which, when you think about it, is quite remarkable.

For example, Terry became CEO in 1992.

Back then, Marks & Spencer was Britain’s biggest and best retailer and Sainsbury were the country’s largest food retailer.

Back in November 1992, their market capitalisation was around twice that of Tesco’s, with each valued at around £9 billion compared with Tesco’s measly £4.5 billion.

At the time, the Times had a view that: “if you want quality shop at Sainsbury, if you want price shop at the discounter. Tesco is stuck in the middle so who needs to shop there?”

Well something happened, and the answer is Sir Terry and his team.

Today, Tesco’s market capitalisation is a phenomenal £33 billion, compared with Sainsbury and Marks & Spencer who are worth less today – around £6 billion each – than they were in 1992.

As Sir Terry said, “this is regarded as the greatest transformation in British business”.

He then went on to state his ten lessons for management which I’ve put as the next entry in the blog.

One lesson he left out is a key one that Tim Mason shared a decade ago: for every strategic initiative, know what your next move will be.

Most firms run strategies that say, “let’s get from A to B”.

Tim taught me a lesson back in 1997 which is that, like a chess player, plan a strategy that assumes you will get from A to B and calculate what reaction that move will create amongst your competitors.

Then plan moves B to C, C to D and, if you can, D to E and beyond.

That’s how Tesco crushed Sainsbury and M&S.

Anyways, after Sir Terry gave his general thoughts and position, what was far more interesting was the panel debate with various Greek banks (we are in Athens) debating the customer-centric model of banking.

A few choice comments from the bankers included:

“Banks are not customer-centric, they are human-centric.”

“I don’t believe we have a crisis of trust with our customers, we have a crisis of insecurity. Banks and their customers are insecure and uncertain about the future.”

“Any strategy that has pricing of the product at its core will fail.”

“As the cost of risk is our greatest cost, this has become one of the most important factors in our pricing mix.”

“If the law forces us to price our customers based upon risk, then a large group of customers will be forced to leave the banking system.”

Sir Terry was allowed to interject on three occasions and, each time, his words fascinated me because it gives a great insight into how Tesco Bank is thinking.

Here’s what he said:

“In our move from retailing products to bank retailing, it amazes me that the current incumbents reward the new customer rather than the existing one. That encourages promiscuity and commoditisation. If you can reward the existing customer more than the new one, by learning more about them, then you can price your products better. For example, our Clubcard (their major loyalty program) data allows us to price our products 15% more accurately than the Royal Bank of Scotland for any particular risk type by customer segment. This means we can be the best at risk-adjusted pricing.”

Wow! I always thought that Tesco would get to the stage where they would know if you purchased whisky and cigarettes regularly at the checkout, then they would price their financial products accordingly … and there you go, Sir Terry has pretty much made it clear that they will do just that.

Here’s his next interjection comment:

“It must be frustrating for those banks that have performed well before and during this crisis to be lumped in with the ones that anger the public. It’s frustrating but you have to live with it, as this crisis is all about leverage and the mispricing of risk. I don’t think that this needs more regulations to resolve the issues – we have enough regulations as it is – but it does require a return to traditional banking methods and practices. And that is what we are doing. We are focusing on the existing customer base – in our case, that is the Clubcard base – and offering them targeted products that meet their needs and are priced appropriately. The fact that we know the customers well means that we can then focus on the supply chain, and that means quick approvals and fast delivery of products and services. Equally, by going back and pricing things effectively, it means there will be more profitability because we are right pricing.”

As I listened to this, I’m not only thinking that Sir Terry understands banking, but also that he has a clear insight into how to differentiate. Finally, he pipes up with:

“On being too big to fail? That question has been asked of Tesco many times, but our customers buy more from Tesco because we are trusted by them. The more we are trusted, the more they buy; and the more they buy, the more loyal they become. The bottom line therefore has to be: closer relationships, more realistic pricing, more thoughtful and helpful approaches to customers and better use of data. Those four factors will improve the state of banking overall.”

Ye Gods my banking friends. With these simple words, along with Terry’s Ten Commandments for Effective Management which follows, means that banks should be a little nervous about Tesco’s entry into banking.

But nervous is not a strong enough word. Banks should be scared.

This is because, after his speech, I got some one-to-one time with Sir Terry whist waiting for our flights – he also flies on regular airlines, not private jets – and so I asked him how they could price so effectively.

He stated that they use their Clubcard data to see what customers are buying through the checkouts and use this to look at, for example, car insurance quotations. This is why they are 15% more accurate than Direct Line or Churchill, the insurance divisions of Royal Bank of Scotland. It is because they know how healthy or unhealthy the customer’s lifestyle appears.

So yes, I guess Tesco will be pricing financial products based around whether you buy lots of alcohol or medications through their tills.

I wondered how he had chosen Benny Higgins as the new CEO of Tesco Personal Finance, as they might have considered a retailer to run banking rather than a banker. Sir Terry stated that they have plenty of retail experience, but Benny was their main anchorman at Royal Bank of Scotland through the years of their partnership – he was head of RBS Retail Banking from 1997 to 2005 – and so his appointment made perfect sense.

And I double-checked their interest in opening new branches, such as buying up Northern Rock’s assets when they come to market. His answer was a categorical, we don’t need any branches. He would rather focus upon customers and it is quite clear that they will use their in-store reach, Clubcard information and client knowledge to really differentiate the Tesco financial services from those of rivals, with a clear focus upon data mining to add a little twist.

This last little twist however is a key one.

For example, the data mining system built into the Clubcard database comes from a firm called Dunn Humby.

Dunn Humby built this capability from scratch for Tesco and it is so effective that it means Tesco can produce a personalised magazine for every Clubcard holder every quarter. The magazine knows what you like based upon what you buy and then targets products specifically to your purchasing and lifestyle preferenc
es. Potentially therefore, every single magazine of the millions sent out every quarter is totally different, unique and individual.

This is why Tesco have such great loyalty and following from their customers.

Now I know several banks who have tried to use the Dunn Humby system for their loyalty programmes and targeted marketing efforts … and most have failed because banks have too much disparate data, spread across too many silo-based systems to be able to bring it all together effectively into a single data warehouse and mine it.

You may think I’m kidding but, by way of example, I worked with a bank in 1989 to re-engineer their mortgage process. We gave up because it was too difficult: “too many disparate systems across too many silos” was the response from the Executive.

I bumped into the Board Member of the bank in question two decades later and asked if they had ever tackled that mortgage process. “No”, he said. “Still too many different products across too many different systems and divisions”.

Oh dear.

With Tesco’s highly targeted, razor focused approach, banks in Britain (to begin with) should be afraid.

Be very afraid.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Martin Campbell

    Hmmm, not sure it will be quite as plain sailing as that for Tesco. I do believe the existing banks need to be afraid, but not just of Tesco, but of the deep, deep hole they have got themselves in over the last 2 years in how they are perceived by the consumer. Any number of new entrants could cause a stir, and if brands like First Direct that have truly loyal customers – fans even – can take the opportunity they have, then they could be just as disruptive.
    Anyway, the problem I think Tesco has is its own huge growth over the recent past, combined with a brand that says (and in experience is)”cheap and more than a little nasty.”
    Increasingly the people who were once fans of the new and improved Tesco brand are increasingly bored of its dominance, the way it carves up the geography and road systems around anything bigger than a hamlet, the way it clearly has more planning officials in its pocket than business ethics, the way it expands into more and more facets of our lives. It’s just a great big huge machine and possibly one of the last examples of unbriddled success in the mass production era.
    With a little extra help from the Halifax and the other trad banks that have given ‘BIG’ a whole new bad name, increasing percentages of people are reacting against the mass production bohemoths, the faceless corporates growing like uncontained and dehumanised machines they are. And in Tesco’s case they are the ones increasginly despised for screwing their suppliers into submission or bankruptcy, for selling the cheapest booze to anyone vaguely of the necessary age, shutting down and shutting out smaller local businesses. The only thing many of these future thinking people thank them for is driving the growth in farm shops and other reactions against their homogenised, monopolistic drive for supremecy.
    This is NOT an ideal brand platform to become the desperately desired new champion of consumer oriented banking. Especially once the increasingly socially connected audience shares news of the extent to which Tesco, like the State, has become yet another Big Brother, analysing how healthy they might be based on what food, drink and even drugs they buy, and charging them accordingly.
    Tesco Bank will no doubt get to a certain – and large – size simply because of their footfall and convenience of access. Their exoisting size and success will of course buy them a substantial size of the market.
    But they have got some huge brand and reputational issues to sort – few of which will help them maintain their leader status in the supermarket world – before they can evolve into Britain’s favourite bank.
    And given we are increasingly moving out of the mass production era and into the ‘individual revolution’ – enabled by technology like never before, and demanding of more human, authentic and personal(ised) experience, I think the tide is slowly but surely going out on Tesco, not coming in.
    I could go on, but enough is enough for now!
    Thanks,
    MC

  • Chris Skinner

    A comment from a Facebook reader:
    http://www.facebook.com/skinnercm?ref=name
    “They should, in my opinion, be beyond afraid and be working out exactly how they might have any retail banking left in 3 years time.
    It will be interesting to see what the popular press make of risk based pricing down to what you buy at the tills. That might be the chink in Tesco’s armour: it’s very big brother-esque.
    I do remember a talk given by a senior tescos exec at StPdV around knowing when to stop with loyalty (the classic “once someone stops buying contraception, buys flowers, cuts down alcohol and ups chocoloate consumption, is it right to send them nappy offers in 9 months time?” example), however I can see this as both a strength and vulnerability.”

  • Chris Skinner

    A comment from a Facebook reader:
    http://www.facebook.com/skinnercm?ref=name
    “They should, in my opinion, be beyond afraid and be working out exactly how they might have any retail banking left in 3 years time.
    It will be interesting to see what the popular press make of risk based pricing down to what you buy at the tills. That might be the chink in Tesco’s armour: it’s very big brother-esque.
    I do remember a talk given by a senior tescos exec at StPdV around knowing when to stop with loyalty (the classic “once someone stops buying contraception, buys flowers, cuts down alcohol and ups chocoloate consumption, is it right to send them nappy offers in 9 months time?” example), however I can see this as both a strength and vulnerability.”

  • R. Battram

    After last weeks IT fiasco (ongoing) nobody will fear Tesco Bank