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Milk, butter … mortgage

Tesco and Marks & Spencer are the latest supermarkets to announce plans to target the mortgage market. But will they manage to persuade customers that home loans can sit alongside a weekly shop? And will they be able to offer competitive rates? Natalie Thomas reports

Since the 1990s, supermarkets have offered shoppers the chance to sign up for a credit card or buy pet insurance while they stock up on their weekly supply of cornflakes. Now they are setting their sights higher and looking to muscle in on the mortgage market.

Tesco and Marks & Spencer have made no secret about their intentions to grab a slice of the mortgage industry. Tesco intends to offer a mortgage product when it receives its banking licence from the Financial Services Authority, which is expected in the next few months.

M&S has recently revealed that it wants to offer mortgages in 2013, after it launches its own bank later this year.

It is hardly surprising that supermarkets want to expand their financial offerings and sell bespoke mortgage products.

Recent research from YouGov found only 53% of consumers trust banks and building societies, with 70% of those surveyed blaming corporate greed for their lack of trust.

“Supermarkets are trusted by their customers and have a good relationship with them, so they can move into a space where the banks have taken a knock,” says Ian Foottit, a partner in financial strategy at Deloitte.

“Banking as an industry does not have the best customer satisfaction, whereas supermarkets are quite good at delivering what customers want. Supermarkets have looked at the retail financial services sector, seen a window of opportunity and think they can do something better.”

But it is not just the recent backlash against bankers that is causing supermarkets to look at expanding their financial offerings. For many, offering mortgages is a natural progression from offering savings and current accounts.

“If supermarkets are gathering deposits through savings accounts, they need to do something with those deposits,” says Foottit.

“Mortgages are the main asset class that banks are investing in. They are relatively low risk and this type of lending has lower capital requirements compared to unsecured personal loans.”

In 1997, Sainsbury’s became the first supermarket to launch a bank, which was a joint venture between itself and the Bank of Scotland. It only offers products such as credit cards, savings and loans and is remaining tight-lipped as to whether it has any mortgage plans in the pipeline.

But if, as Foottit suggests, it is a natural progression for retailers to launch financial services, it might not be long before Sainsbury’s also jumps on the mortgage bandwagon.

Many supermarkets are no strangers to the mortgage world and have offered mortgages in the past through a whitelabelled proposition. But they have never made any headway and their attempts to muscle in on the mortgage market have not proved as successful as many would have predicted.

“When supermarkets offered mortgages many years ago, they were seen by the big banks as a threat for two reasons,” says Kevin Mountford, head of banking at moneysupermarket.com.

“First, because they already had large distribution through their stores, and second, because they had a reasonable amount of data on their customers. When you combine the two it was quite a powerful threat.”

What hindered supermarkets in their past attempts at mortgage domination was their lack of power over which products they offered. Many of their deals were white-labelled and did not offer anything different from what banks were already offering.

“The biggest weakness in the early days was that they were dependent on other firms manufacturing the financial products for them and they didn’t necessarily have a banking licence,” says Mountford.

All that could change, with retailers such as Tesco going after their own banking licence.

Tesco cannot comment on what its mortgage offering will look like, but says it is in the final phase of testing its mortgage operations and developing the right launch products.

It is believed to be funding its mortgage lending through a mixture of savings balances and retail bonds – three of which it launched last year – while M&S’s funding will come from its bank’s owner, HSBC. So will the supermarkets be more successful in today’s market?

“Their success will be bounded by their ability to obtain cost-effective funding – that is the basic challenge. I’m sure they will compete in the market but whether they will become a top five lender will depend on their funding,” says Foottit.

It is no mean feat for an institution to become established in the wholesale funding market and it will take time to convince investors.

However, some believe the biggest challenge supermarkets face is their ability to persuade customers that a mortgage goes hand in hand with their weekly shop.

“Customers need to be in the right frame of mind and associate doing their shopping with buying financial products. That is why some supermarkets have not been successful in the past when offering mortgages,” says Alan Cleary, managing director of Precise Mortgages.

“When I go into the supermarket I don’t take any notice of the financial products on offer because I am there to buy baked beans. It’s going to be quite difficult to get shoppers to think in a certain way. However, supermarkets have a large number of customers with loyalty cards and they can market to them quite aggressively.”

Although it is early days, Cleary says it is not out of the question that a supermarket could make it into the top 10 of mortgage lenders as many supermarkets have the capacity to lend £0.5bn a year.

One supermarket that has successfully made the move into offering financial services products such as mortgages is the Co-operative Group, through its Co-operative Bank arm.

It started offering mortgages in 2000 and within 10 years gained a 2.4% share of the mortgage market, becoming the ninth-largest mortgage lender – a position that was aided by its merger with Britannia Building Society in 2009.

But even if supermarkets do lure customers into their mortgage proposition, they will need to make sure their products can compete.

“The mortgage market is already competitive and there is actually not that much margin to be made by the time you take into account the cost of funds and so on,” says Foottit.

“It is not obvious how the supermarkets can substantially change their proposition from what banks are already offering.

“They may be able to do something around the edges, but I would be sceptical as to how much they can differentiate their offer.”

Supermarkets will also have to be careful not to damage the relationship they have built with their customers by offering bad customer service on the financial side of their business.

This could constrain how innovative they can be in terms of product offerings because the more popular the product, the better the customer service proposition needs to be.

“Supermarkets have a retail brand that they need to protect, so they need to make sure their customer service is bang-on. There may be no real opportunity to differentiate themselves,” says Foottit

“I’m sure they will be able to innovate but I’m not sure whether that will go to the heart of the market.”

He adds: “At the end of the day, customers are going to look at the headline rate of the deal and its general product features. I don’t think supermarkets can change that too much.”

Buying a mortgage from a supermarket is very different from signing up to a credit card or loan and the jury is still out as to whether stores will be able to turn the mentality of shoppers around so they are perceived in the same way as banks.

When M&S launches its banking proposition, it intends to make the banks in its stores entities in themselves, which will go some way to help customers differentiate between shopping for their food and clothes and shopping for a mortgage.

Although supermarkets have a good distribution base to promote their deals, they will need more than just a trusted brand in order to tempt customers.

If supermarkets do not have the capacity or funding to offer competitive rates, they will not be able to grab as much market share as they might like.

“Their primary aim will be to serve existing shoppers,” says Foottit.

“It is very difficult to make a mark on the big banks in the mortgage industry as they dominate the market.

“Supermarkets will be a nuisance to the main banks but I don’t see them dominating the market.”

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