Tesco takes on banks with current account launch

LONDON, United Kingdom - Tesco Bank, the financial services arm of Britain's biggest retailer, has launched its first personal current account, looking to challenge established lenders and bring shoppers back into its parent's stores.

The bank is aiming for a slice of a market dominated by Lloyds Banking Group, Royal Bank of Scotland, Barclays, HSBC and Santander UK (part of Spain's Santander), who provide over three-quarters of accounts.

Parent Tesco also hopes the service will help entice customers back into its supermarkets after suffering its worst three-monthly sales drop in 40 years.

Account holders will be offered credits via Tesco's loyalty scheme Clubcard, which they can spend inside Tesco's 3,000 UK outlets.

"The bank is a cornerstone of Tesco's relationship with its customers and (the new account) will make that relationship stronger," Tesco Bank Chief Executive Benny Higgins told reporters.

Lawmakers and regulators are keen for challengers to emerge to break the dominance of Britain's "Big 5" lenders and last year introduced rules to guarantee customers can switch bank accounts within seven working days.

Higgins said the potential for growth was illustrated by the progress of Tesco Bank's credit card, which has built up a 12 percent share of the market in the UK. If that was replicated in current accounts, it would give Tesco the same share as HSBC.

Tesco is offering interest of 3 percent on balances of up to 3,000 pounds. Customers depositing less than 750 pounds a month into the account will have to pay a 5 pound monthly fee.

The success of Tesco's credit cards and other financial products such as mortgages have also boosted spending in stores. Clubcard points worth 120 million pounds were granted to Tesco Bank customers last year.

Aggressive targets

Current account customers will get 1 Clubcard point (worth 1 penny) for each 4 pounds spent in Tesco and 1 point for each 8 pounds spent elsewhere.

Britain's personal current account market has become increasingly competitive, with Nationwide and TSB setting aggressive targets for growth, and Santander UK also picking up market share through its heavily advertised 123 current account.

Current accounts are seen as key because they enable banks to cross-sell other products. However Higgins declined to set long-term targets for growth and played down the impact his bank can make on the overall market, saying bank customers were still reluctant to switch between lenders.

"We don't have a specific target on market share. Of course we have a business plan, but we don't have a market share target. One of the things that is clear is that there is very little switching taking place in the UK," he said.

However the Payments Council said in April there had been a 14 percent increase in the number of customers moving banks since the new switching rules were introduced last September.

Other British retailers have also ventured into financial services. Marks & Spencer for instance has a banking joint venture with HSBC, while Sainsbury bought Lloyds out of a banking joint venture in February, but has no plans to offer current accounts.

Tesco has gone further than its rivals, because it is offering a full range of services and owns the bank outright.