Tesco, Britain's largest retailer by sales, moved into banking in the UK in 1997 in partnership with Royal Bank of Scotland. Since 2008, Tesco Bank became a wholly owned subsidiary of Tesco PLC and began their transformation, recently launching a current (checking) account. Although Tesco have 3,300 stores, they have chosen to only support the account through online channels with limited deposit services in about 9% of their stores.
Tesco takes almost 50p of every £1 spent on online food shopping in the UK. They obviously ‘get’ digital in grocery retail. While this demonstrates Tesco’s ability to execute online, online grocery shopping in 2013 accounted for only 5.5% of the market. Online bank account opening for new customers also only accounts for a very small percentage of the market now. In the current account market, according to Bain, about 3% of customers switched their primary bank relationship in 2013.
Customers cited three main influences to switching; level of fees, convenience of branch and ease of account opening. Branches in every market remain the dominant channel for starting relationships. Roughly three-quarters of new account openings happen in branches. TNS Global have been analyzing account switching in the UK identifying branch location and opening hours as the main reason for choosing a new bank. Santander, Lloyds TSB and Halifax account for over 50% of the acquired switchers.
Opening a branch network is expensive and complex. The future of banking is primarily digital. Tesco have 3,300 stores in the UK and it would a crazy strategy to open 3,300 branches. That said, Tesco are not utilizing their competitive advantage and instead choosing to join the battle for online account switchers based on features such as interest rates or fees. Tesco has a large physical network and could easily absorb a small retail banking presence in a small number of locations. These locations already have the staff facilities, security, cash in transit services and a significant element of the technology. Most importantly, they have the footfall with access to potential customers. If I go in to a Tesco store at 7pm on a Thursday evening dreaming of summer holidays, I may remind myself to research personal loans when I get home. Either I don’t do the research because home life gets in the way or I become confused by choice. If I could sit with a financial whiz in Tesco and get that loan in 20 minutes, I would open the account immediately. The next time I may get my Tesco loan through their digital channel but it is likely that Tesco would never have acquired me as a customer without the physical presence and my knowledge that there was somewhere to go if there was a problem.
The fact that most consumers are able to use digital technology does not make it the best channel for onboarding new customers, yet. Tesco would be wise to look at the experience of WebVan in the US during the dot com era. They were ahead of their time on their delivery channel and went spectacularly bust as the money spent on infrastructure far exceeded sales growth.