Traditional banks increasingly under siege from unlikely players and sectors

“In dealing with a man who thinks you are a fool, it is good sometimes to remind him that you know what he knows but have chosen to appear foolish for the sake of peace.” Ibo Proverb

Imagine walking into a luxury car showroom today, looking at the various models on display, test driving one or two, and then end up walking out of the showroom with a mortgage application duly filled and submitted for your dream home instead.

Then imagine walking into your supermarket to pick up some grocery items, and then end up walking out with a personal loan tucked into your wallet.

BMW Finance in South Africa, the financial services arm of the luxury German car manufacturer, is offering home loans at lower costs and with better service than any of South Africa’s big four lenders — Nedbank, ABSA, FNB and Standard Bank — according to Finweek magazine’s May 2012 edition.

An investigation by the magazine found that BMW Finance provided better service, a more competitive interest rate and lower administrative costs than any of South Africa’s big four banks.

British supermarket giant Tesco entered into a joint venture with Royal Bank of Scotland in 1997 named Tesco Personal Finance.

It was renamed Tesco Bank when the supermarket bought out the 50 per cent RBS stake for a reported £950 million in 2008.

What is the key synergy proposition for Tesco? Tesco is able to use its large customer base to cross-sell financial services products. The bank has more than six million customer accounts across all products with double-digit growth in savings, loans and credit cards. Tesco said it was now the seventh largest credit card issuer in Britain.

What do BMW and Tesco have in common? They are NOT traditional financial institutions.

They do not have the strictures that come with the near paralysing management attitude of “that’s the way things are done around here.” In Tesco’s case (which has also been replicated by the UK food giant Sainsbury’s and the high street retailer Marks and Spencer) they have recognised that they have an enviable primary business requirement: customer footfall.

They then strategically take a business decision to deepen the share of wallet of that customer footfall because for as long as that customer is shopping inside their retail outlets, the retailer has another enviable business requirement: a captive marketing audience.

Leveraging on the retail outlets as a distribution network, the supermarkets have been able to grow their customer bases primarily through cheaper in-store advertising as well as customer loyalty linkages through bonus points.

Tesco, for instance, allows customers to accumulate Tesco Clubcard points when they purchase finance products.

This strategy results in customers spending higher amounts of money.

In BMW Finance’s case, it didn’t require a rocket scientist to understand their customer demographic.