The brands are coming

It turns out that there might be some sense after all in the mad rush by supermarkets such as Sainsbury's to sell financial products to their food-shopping customers. Until now banks had been able to shrug off the plans of many of the retailers to take them on at their own game because of the inertia of bank customers. A report by Abbey National showed that 20 per cent of customers were dissatisfied with their banks and 66 per cent had thought of moving their account. Banks rely on the fact that in reality very few people do.

However, research by Interbrand, experts in branding, with Dresdner Kleinwort Benson, a City investment bank, concludes that supermarket chains could pose a very real challenge to the traditional financial services provider.

Why? It's all about brand names, according to Karen Hack, branding consultant at Interbrand.

She said that while banks and building societies are busy competing over savings products and the price at which they sell mortgages, they are eroding the brand-recognition of their institutions.

"If the banks don't wake up and realise that the messages on price are not enough, they could lose out to brands," she said.

"It makes sense that supermarkets are moving into financial services. If they play the brands very carefully it could be 'watch out, banks'."

This is because financial services firms generally have a reputation for letting their customers down. So customers stay with their bank or building society, believing it to be the best of a bad bunch.

However, the new entrants have strong brand names and have succeeded in areas where financial firms are traditionally seen to be lacking - value for money, quality and trust of expertise.

"Two of the most obvious examples (and in the case of the former probably the most successful) are Marks & Spencer and Virgin," Dresdner Kleinwort Benson says.

The would-be entrants - led by Sainsbury's - also have branding and distribution clout. Take two examples: within two years of selling petrol, retailers had a 25 per cent market share, and within six months of launching its loyalty card, Tesco had almost as many card holders as Barclaycard had established over 30 years.

The research pointed out that there is a risk for the supermarkets that their brands could be contaminated simply by being involved in banking. So far, M&S does not seem to have suffered from its drive into financial services although the research said it may be too early to reach any conclusions on this risk. Simon Samuels, banking analyst at Dresdner Kleinwort Benson, also believes that all is not lost for the banks and building societies. They can develop their brands by moving away from price battles to concentrate on other areas such as customer service.

"If you present yourself as the cheapest then one thing's for sure - you're not going to develop brand value," he said.

Barclaycard, which has kept away from pricing issues and developed a strong brand over the past 30 years, has the highest brand value of any financial services group, of pounds 1.334bn. This is well ahead of its nearest rival, Halifax Building Society, whose brand is valued at pounds 956m by the research, but well behind some of the world's top brands, such as McDonald's.

Whereas the world's top brands are valued at more than 10 times annual profits, the best mortgage and deposit-taking brands are valued at one times profits. Barclaycard's brand is valued at more than five times annual profits.

Towards the bottom end of the brand-value scale is Direct Line, the low- cost insurance firm, which, while radically altering the insurance market, has developed a brand worth only pounds 24m.

"Clearly Direct Line needs to encourage its customers to think of it as a value-for-money organisation with high-quality services - rather than simply cheap," said the research.