Could cash cost less at Sainsbury's?

Sainsbury's yesterday launched a dramatic assault on Britain's unpopular high street banks, with the announcement of plans to set up a branded Sainsbury's Bank. The supermarket's new venture will eventually see the grocer offering its 12 million customers a full range of financial services, including credit cards, mortgages and personal loans.

Sainsbury's said it had already applied to the Bank of England for authorisation to set up a new bank in conjunction with the Bank of Scotland. Its foray into banking is the latest in a series of moves by the supermarket giants which have given them an increasingly strong grip on Britain's high streets and threatened the viability of traditional shopkeepers.

They have already built dominant positions in petrol retailing, dry-cleaning and film processing. Their in-house bakeries have put a squeeze on their rivals while sophisticated book and magazine selling operations have piled pressure on newsagents and bookshops.

Sainsbury's Bank will be a joint venture with Bank of Scotland, with the supermarket owning 55 per cent of the shares and the Bank of Scotland the remainder.

David Sainsbury, chairman of Sainsbury's, said yesterday: "Our customers tell us they want good, efficient and reliable banking services. In Sainsbury's Bank, customers will have the reassurance of a name they know and trust, coupled with the banking expertise of the Bank of Scotland."

Sainsbury's Bank, which is to be backed by a massive advertising campaign to win over other supermarkets' customers, will be launched early next year as a deposit account. Classic and Gold credit cards will also be available from the outset. By the end of the year, Sainsbury's said, the supermarket would be providing "the most up-to-date and efficient direct banking services in the UK".

The proposed bank marks a big step forward from the supermarkets' existing forays into financial services. The services would be indistinguishable from those offered by banks.

In May Tesco launched ClubCard Plus, a budget account which offers preferential rates of interest. Operated in conjunction with National Westminster Bank, it offers members 5 per cent gross annual interest on deposits. This is as much as 20 times the rates offered by most high street banks.

The move into banking by Sainsbury's marks a continuation of the breakdown of traditional high street boundaries and the emergence of powerful brands that transcend existing business areas. Marks & Spencer is already offering pensions and personal equity plans (PEPs), capitalising on its trustworthy image. Richard Branson's Virgin has also attempted to steal a slice of the savings market through its Virgin PEPs.

One banking analyst said the move was a serious problem for the banks, which are seen as inefficient and are among Britain's most unpopular institutions: "They [Sainsbury's] could use the bank as a loss-leader to attract people into their shops. They can really affect prices of banking services, particularly deposit accounts."

High street banks are already under pressure from telephone banking services, which, without the overheads of a national branch network, can offer round-the-clock services more cheaply. Banking on the Internet represents another cloud on the horizon.

However, one banker warned that Sainsbury's would come up against a high level of customer apathy. Unless Sainsbury's made it extremely easy to transfer accounts, with all their accompanying direct debits and standing orders, most people would not bother. The company also risked jeopardising its strong brand image if the move into banking was mishandled in any way.

A spokesman for one of the major clearing banking was sceptical about the plan. "It is unlikely that people will do their main banking at a food store," he said. But analysts thought the move could have a dramatic effect on the high interest currently charged on credit cards, which might fall as a result of increased competition from a broad rate of 20 per cent to maybe only 15 per cent.

Lloyds TSB, which has 24 per cent of the current accounts in Britain, declined to say anything more than "good luck to them".