Scottish Widows carries battle back to the banks' territory

The revelation that the insurer Scottish Widows has been given a banking licence by the Bank of England has caused a stir, writes Richard Thomson.

The new bank will almost certainly offer current and other instant access accounts, and probably cheque books and bank cards.. Scottish Widows' insurance clients will probably be encouraged to pay the proceeds from maturing policies into accounts set up at the bank. It may even offer mortgages.

Some experts are already predicting that this heralds a new counter-attack by the insurance sector against the inroads the bancassurers (insurance operations owned by banks) have made into their industry. Is the mysterious young lady of the Scottish Widows adverts about to become the symbol for a new high street banking chain?

There is considerable logic in such a move largely because the structure of the savings markets has changed radically over the past 10 years. For decades, insurance products attracted generous tax breaks, making them the natural vehicle for long-term savings. This is what the insurers thrived on, while the banks looked after the short-term end of the market with deposit and current accounts.

More recently, however, the tax advantages on insurance products have been drastically whittled down while the Government has strongly promoted other kinds of savings products such as personal equity plans and unit-linked schemes.

These new products are not the natural preserve of the insurance companies. Seven of the top ten PEPs companies are banks, not insurance companies. The banks' huge pool of short-term customer deposits is a captive resource that can be moved into the new savings products by deft marketing.

So it would hardly be surprising if the insurance companies wanted to carry the battle back to the banks. They would be on an equal marketing footing with the banks only if they too could get their hands on substantial short-term customer deposits - by setting up as banks.

So should we expect every insurance company to start offering loans, deposits and mortgages over the next few years?

So far, Scottish Widows has played down the importance of its move, insisting that it was not launching an assault on the bancassurers. It says that its new bank is purely to help it with its Treasury operations in the wholesale money markets.

Other insurance companies that have tried to move into banking have met with limited success. Allied Dunbar tried it with Dunbar Bank, but the initiative never blossomed into the financial services group envisaged..

Banking is a high-volume, low-margin business. Building up a retail bank is an expensive and relatively unprofitable operation. The banks moved into insurance - a high-margin business - to improve their profits. Why, the argument runs, should insurers want to move into the less profitable area of banking? The answer is that many will not, if only because they cannot afford to. A few larger ones, however, may find they have no choice if they are to maintain their position against banks.