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Can Tesco and Virgin hack it as banks?

I was having a conversation with a firm considering entering banking in the UK. They would be an unexpected player, as their brand is seen to be trusted but totally unrelated to financial services.

So I sent them this article from my collection of white papers, and thought it may be of interest to the readers of the blog. There’s a sting in the tail if you read it to the end …

Within the banking marketplace, a revolution is occurring.

For over 200 years, banking was a simple branch-based operation. Since 1980, this branch has been completely re-invented through new technology. These changes, alongside the drivers for cross-industry banking, combine such that there is more change taking place in banking today than seen in the last two hundred years.

Cross-industry banking refers to all world-wide activities where an organisation that is not a bank is developing, offering or enabling banking delivery.

The major drivers enabling Cross-Industry Banking are:

  • Information technology
  • New forms of delivery
  • Disaggregation
  • Regulation and Deregulation
  • Consumer perception
  • Partnerships between banks and non-banks

The advantages new entrants have over existing banks include:

  • Low entry and exit barriers to the market
  • New entrants focus and do not compete in everything
  • New entrants manage the consumer value chain, relating their financial offer to their core business as a complement to the consumer purchasing process
  • New entrants cherry-pick by recognising that traditional bank charging structures incorporate significant product cross-subsidies
  • Lower costs as new entrants have no fixed overhead infrastructure, costs or legacy
  • Low fixed costs relative to variable costs as new entrants can leverage banking from existing operations

As a result, banking opportunities for new entrants are greater than ever.

25% of all credit cards issued are now branded by companies that are not banks according to Lafferty Research. Two of the top three credit cards issued in the USA originate from non-banks. Motor manufacturers make more profits from their financial dealings with customers than they do from their cars.

In particular, some retailers believe banking is a highly lucrative area for success.

“Tesco has watched the banks and thinks that most are a bunch of clowns. Tesco can do a much better job. It has a much stronger customer base and could offer better services”, states an unofficial Tesco source.

In eight weeks over 100,000 customers joined Sainsbury Bank depositing over £100 million, with growth at 10,000 new customers each week. After three months, the Retailer Bank has 250,000 accounts, 200,000 customers and £300m in deposits.

Other ‘Banks’ entering the market include:

  • Mail Order Companies, e.g. Great Universal Stores
  • Car Manufacturers, e.g. Ford and VW
  • Other Manufacturers, e.g. Lego and General Electric
  • Utilities, e.g. British Gas and Electrical companies
  • Telecoms, e.g. AT&T and BT
  • Technology, e.g. possibly Microsoft and IBM?
  • Petroleum Companies, e.g. BP
  • Airlines, e.g. British Airways, American Airlines and KLM
  • Brand Stretch Companies, e.g. Virgin and Disney

One thing all of these have in common is:

  • regular and frequent consumer contact
  • an ability to manage and process large volume transaction bases
  • strong brands and 
  • a major consumer experiential marketing focus

Any company with a strong brand, consumer focus, and frequent consumer contact, could become a bank.

The result of the non-bank entry into banking is that banks will choose new strategies to survive. In choosing a strategy, each bank will be reviewing their core set of competencies across the complete consumer delivery and supply value chain for financial services, and identifying where their strengths reside – in the form of core competencies.

So what’s the sting in the tail? I hear you ask.

You may have guessed already but, if not, it’s that the article is one that I wrote in 1997.

Back then, I created a strategy for a technology firm to broaden their offer from narrow banking to much wider cross-industry banking.

The strategy paper ran to over 300 pages and reads as fresh and relevant today as it did back then.

The strategy would have worked … if all of the new entrant players could have broken into the banking markets with any significant gusto.

Thirteen years later, we talk about Tesco and Virgin breaking into UK banking again.

A note of caution: after thirteen years, these names have not made a dent on these markets. Will they in the next thirteen years?

Answer: in 1997, none of these brands stood a cat in hell’s chance of getting a banking licence. Today, Virgin and Tesco have banking licences.

Therefore, if I was a betting man, I’d probably bet that by 2023 some of these names will make a difference this time around.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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