A former RBS and HBOS banker is leading supermarket giant Tesco's charge into the financial services sector. Rosemary Gallagher assesses his chances of competing against the high street big guns
PICTURE the scene. You've stocked up on your weekly groceries at the 24-hour supermarket, topped up your loyalty card and applied to remortgage your house as the store is offering a far better fixed-rate deal than your high street bank. And you've do
ne all this without leaving Tesco.
That scenario is not yet a reality but it could be within the next few years if the UK's most powerful retailer succeeds in becoming a major force in financial services. With traditional banks continuing to hit the headlines for all the wrong reasons, Tesco is quietly working on its plans to take them on.
Just as Sir Fred Goodwin, the most famous ex-banker in Britain, continues to attract national opprobrium for almost bringing down the Royal Bank, his former employee, Benny Higgins, has vowed to build a rival with the backing of one of Britain's soundest companies.
Higgins was hired as chief executive of Tesco Personal Finance (PF) last year as the supermarket ended its joint venture with RBS to take control of the operation. Higgins led the £950m deal, Tesco's biggest ever, which was completed last July. Tesco PF currently offers a wide range of products from savings accounts to personal loans to pet insurance. But it does not yet provide mortgages or current accounts, which would send it on its way to becoming a full-service retail bank.
So will Tesco realise its dream of competing alongside established names such as Lloyds, HSBC and RBS? Or will it be consigned to the bargain bucket?
Since last summer, Higgins has focused on recruiting top-level staff rather than launching products. He has poached a number of senior level executives from his former employers, RBS and HBOS, including Shaun Doherty, former HBOS retail operations director, who has come on board as operations and IT director, and Julie McLelland, previously head of banking and savings operations at HBOS, who has joined as operations director. Most recently Higgins has taken on Ian Wilson to manage risk. Wilson was chief risk officer at GE Money Home Lending, but had previously worked with Higgins as a director of credit risk in retail at RBS.
Higgins last week announced further "major expansion" with the creation of more than 200 jobs and the establishment of its headquarters in Edinburgh, beside Haymarket Station, as it moves out of offices it shared with RBS at the South Gyle. It will bring 250 existing staff to the new office when it relocates in the second quarter of this year.
Higgins said in a statement last week that Tesco has made an "important step by committing to expanding its financial services business from Scotland".
Not surprisingly, given the unrest at Lloyds Banking Group, created from the takeover of HBOS earlier this year, and RBS, both of which expect to make job cuts, Tesco PF is likely to be swamped with applications from disgruntled staff.
A Scottish lawyer who specialises in banking says: "A lot of the 200 jobs Tesco PF is creating in Edinburgh will be ones that would have been lost in the city's banks. There are a lot of very worried people at RBS and HBOS (Lloyds] just waiting for the axe to fall. It's pretty dire in the banks and there's a lot of pain still to come."
However, in spite of Tesco's ambitions, it is unlikely that it will offer enough highly paid skilled jobs to make more than a reasonable dent in the cuts at RBS and Lloyds. "Tesco PF is just about retail, not corporate banking, where the better paid jobs are. I would think a lot of the positions will be call centre type roles."
Higgins has kept a fairly low profile, preferring not to get drawn into the HBOS/RBS row, especially as he is fully aware that some see him as a fall guy for HBOS's problems in the mortgage business when it went after low margin business against his advice. However, as Tesco PF begins to take shape, he knows he has to take on a more public profile, and after the announcement last week he said he was recruiting "across the spectrum" to fill all the positions that would be required for a major bank or general insurance company.
"People sometimes forget we're a sizeable general insurance company," he said. "We're filling jobs in technical functions, such as risk and finance, and at director level. We're putting together a robust organisation that can stand on its own two feet."
Analysts are in agreement that Tesco PF's timing could not be better as trust in established banks has hit rock bottom among consumers and employees who have received nothing in return for years of loyalty. They have lost millions on their shares, branches have been closed and personal and business lending has dried up despite the government pumping in billions of pounds to boost their balance sheets.
Michael Bolton, former head of specialist lending at HBOS and now a banking consultant, says: "In terms of timing, now is the best chance Tesco PF will ever have to establish itself as a major retail bank consumer brand. Public confidence in traditional banks is close to zero."
While Sainsbury's also has a financial services arm, it was established as a joint venture with HBOS and it is unclear whether Lloyds is committed to its development. According to analysts, Sainsbury's is not in as strong a position as Tesco to invest in this part of its business, and even the chairman of Sainsbury's, Sir Philip Hampton, now also chair of RBS, admits it is "only a small part of the business". Andrew Hobson of Williams de Broe says: "Looking at their strategic positioning, I don't think Sainsbury's has the cash flow to support the same kind of growth."
Tesco has shown that it is in "a league of its own" in its ability to build market share and diversify, says Bolton. It has expanded from selling food to selling televisions and clothes and rarely gets its growth plans wrong. "Tesco PF is a hell of a proposition. Tesco can become a one-stop shop allowing customers to buy a baguette and do their banking all at the same time," he says.
According to Hobson, Tesco's management team gives it an advantage over rival retailers. Appointing Higgins at the helm of its financial services business is regarded as a coup in the industry and he is a high-profile figure in Edinburgh. He began his career with Standard Life and rose through the ranks to become general manager of sales at the age of 35, making him the youngest executive in a top role at the company. He left abruptly in June 1997 when stories about his private life appeared in the press.
He joined RBS, where he had a stint at running Tesco PF, before becoming chief executive of retail banking. He made a shock exit in 2006 when he was poached by HBOS and became chief executive of its retail division. Once again in his career he made headlines when he controversially departed, appearing to take the flack for the bank losing its dominant share of the mortgage market.
Commentators now say his reluctance to chase market share may, in hindsight, have been a wise move and the bank should have listened to him to avoid the problems that led to it having to be bailed out by Lloyds.
Bolton says: "Benny has a proven track record and is clearly a very competent banker." He adds that Higgins is more interested in chasing profit than market share, which may prove the more sensible approach.
Given the lack of products being launched by mainstream banks during the financial crisis, Tesco PF could fill gaps in what is already on offer. "It is crucial that it gets product innovation right," says Bolton. He explains there is no point in it providing a current account with a slightly better interest rate than that offered by rivals as that has already been tried by the likes of HBOS.
Higgins says: "We will launch these products (mortgages and current accounts] when the market is right and our proposition is right for customers." At the moment, he says there is no doubt the mortgage market would support its entry in terms of margins and risk, but wholesale markets are difficult and funding is a challenge. He is waiting for the dust to settle on the saga around bank charges before he presses ahead with current accounts.
Tesco PF will also have to open bank branches, rather than just allow customers to do business online or by phone, if it is to take on the big names and establish itself as a financial force. It currently has a trial branch in the Tesco store at Silverburn near Glasgow and analysts say it must look at extending this type of service. This is especially true if it wants to offer more complex products, such as pensions. "It needs to have bricks and mortar branches," says Hobson. "This is a capital expenditure Tesco will have to make. They will want to take this slowly and pick the locations well."
If it gets its product and rate of expansion right, Hobson says Tesco may look at de-merging the financial services division to set it up as a separate entity.
