Tesco rules out Northern Rock takeover

Published 29th Oct 2009

• We do not need their customers or brand, says Tesco
• Supermarket's bank network will ignore high street


Tesco ruled itself out of the bidding to take control of the Northern Rock "good bank" today as it outlined its plans to build a new full-service bank offering current accounts, mortgages and, in time, small business banking facilities.

The supermarket also hinted that it would not offer free banking for current account customers who stay in credit when it launches a Tesco cheque book account next autumn. Instead, it is likely to charge a small monthly fee and offer Clubcard loyalty points for those using its debit cards. The points can then be used to cut the cost of shopping or put towards days out, holidays, restaurant meals or other offers. It also plans to offer banking abroad, when the service is up and running in the UK.

Tesco Bank's chairman, Andy Higginson, said he looked at Northern Rock as a way into the home loans market but did not intend to make an offer for the business. "We thought about it, in case we could get into mortgages quicker, but we are not interested in an old [mortgage] book." He said the only reason to buy a lender such as Northern Rock, or any offshoots of either the state-backed Royal Bank of Scotland and Lloyds, was to buy a well-known brand, existing customers and a branch network – and Tesco did not need these. "We have a great brand and a great relationship with our customers. They are selling customers and a franchise. We do not need their customers or the brand."

Tesco Bank's chief executive, Benny Higgins, said Tesco also had no interest in an outdated branch network: "Why would we be interested in a branch network on high streets where no one goes when we have stores where there are lots of people? There is no obvious attraction to the high street. It is not where the future is. There are lots of things for sale but the only thing we need is infrastructure."

The giant supermarket chain's decision not to try and take over Northern Rock is a knockback for the government's strategy to rapidly increase competition in the banking business by encouraging new entrants into the market. It could also clear the way for Sir Richard Branson's Virgin Money to successfully bid for the Northern Rock good bank.

Higginson, who moved to run the bank from his previous position as group finance director, said "organic growth is best" for Tesco Bank, but that it could cash in on the upheaval coming to the bank sector as customers reassess what they want. "There is going to be a lot of disruption in the market. A whole load of customers could suddenly become customers of Williams & Glyn's [if RBS is forced to split its business] and we don't know how happy they will be with that. Our competitors will be busy looking inwards when we are looking outwards."

Higginson and Higgins were speaking in Newcastle upon Tyne as the newly named Tesco Bank unveiled plans for a new customer service centre in the city that will create 1,000 jobs, half within the next year.

Lord Mandelson, the business secretary, welcomed Tesco's move into the area, saying it was "hugely encouraging" that the supermarket chain had chosen Newcastle for the service centre, which will provide sales and claims advice for Tesco motor insurance policyholders.

Tesco's financial services business is not new; it started in 1995, with a partnership with the then NatWest Bank. However, within two years the two organisations had fallen out and, in a deal thrashed out by Tesco's boss, Sir Terry Leahy, and the now-disgraced former RBS boss, Sir Fred Goodwin, Tesco took its business to Royal Bank of Scotland. Higgins, then head of retail banking at RBS, sat on the board of the Tesco-RBS joint venture.

By 2007 Higginson and Leahy decided they needed "to push on" and expand the financial services operation, which is largely a savings and general insurance business. In September that year, when the credit crunch had just taken hold, Leahy went to see Goodwin to assess what they could do "and Sir Fred just said 'why don't you buy us out?'," recalls Higginson. The Tesco bosses were clearly surprised at the offer and Higginson says in hindsight it was clear then that RBS knew it needed cash. Nevertheless, it took 15 months to thrash out a deal, and Tesco eventually took control last year, paying £950m for RBS's half-share.

Higgins, who had left RBS, joined HBOS but quit after a year working alongside HBOS's chief executive, Andy Hornby, as a result of "differences". He was then swiftly hired by Tesco to run the new bank.

He plans a new-look banking service: "There is a real gap in the market to look after customers in a simple straightforward way and reward their loyalty," he says. "In financial services, being simple and straightforward is not common."

Working for the world's third-biggest retailer, he says, is unlike any of the financial organisations he has worked at before. "I've been here 18 months and have never before witnessed a company so focused on what customers say and want," says Higgins.

And, according to Higginson, what bank customers want is "to be treated like grown-ups". Higgins insists no decisions have yet been made on free banking and charging for items such as bouncing cheques, but his chairman is more forthcoming: "We have got to make money, but let's do it in a transparent way."

He does not want to punish account holders who "make the odd mistake" and go overdrawn by accident. Neither does he want to copy the traditional banks' "sneaky ways of imposing charges". Instead, he points to Tesco's online grocery business, which launched with a £5 delivery fee that many critics said would never work. "It was a brave decision [to charge]," he says. "But we explained why it was necessary and that a fiver was good value. That is an adult relationship and we are the only ones making a profit."

Higginson says they are also likely to offer Clubcard rewards. "We will be able to put Clubcard points on debit card transactions," he says, and maybe offer better deals to Clubcard holders.

The Tesco Bank – which already has 3.8 million insurance and savings customers, 8% of the credit cards issued in UK and £4bn invested – is growing fast, although most of the activity is invisible to potential customers. In addition to the new jobs in Newcastle, the Edinburgh head office has been expanded from 150 to 450 positions. Some 500 staff in a Glasgow call centre transferred from RBS and 1,000 more posts are planned there. There are another 300 in Stoke and Gloucester on the way.

Call centres will be key – they will all be in the UK – and so will customer service desks in stores. Higginson says they are reconsidering putting full branches in stores as first planned. They have six open now and had set out plans for 30, "but we are easing back on that." He adds: "People don't mind call centres per se. What they want is people who can sort things out for them. We will offer high standards of customer service."

The retailer intends to mine the information it holds on its Clubcard database to pull in new customers for the bank and will use TV advertising to get the Tesco Bank name better known.

Senior management are also being hired. Iain Clink, a previous boss of the Tesco/RBS joint venture, has been rehired as finance and international director. "When we have the UK established, we will try and do financial services in all our markets," says Higginson. Tesco's overseas operations span 13 countries ranging from Poland to Thailand, China, South Korea and the US.

A banking IT system is being built so current accounts can be offered next year. Mortgages will arrive at the same time if the systems can be arranged. Small business banking will then follow. "If current accounts and mortgages are in gestation, then small business will not be far behind," says Higgins.

But that, say the duo, is "as far as we will go". Tesco has no ambitions, says Higginson, to move into the bulge-bracket investment banking business.

CVs
Andy Higginson
Age: 52
Education: Birmingham Polytechnic, BSc in Town & Country Planning
Career:
1979: Students union, entertainment officer
1980: Unilever, graduate trainee, CIMA accountancy qualification
1986: Guinness, finance director for international brewing
1990: Laura Ashley, finance director
1994: Burton Group, finance director
1997: Tesco, group finance director
Family: Married, three adult children
Leisure: Bruce Springsteen fan

Benny Higgins
Age: 48
Education: Glasgow University, 1st class maths degree
1983: Standard Life, trained as an actuary, rising to managing director of UK sales
1997: Royal Bank of Scotland, managing director of retail banking
2006: HBOS, chief executive of retail banking
2007: Tesco, chief executive of banking
Family: Married four times, six children, including recent twins
Leisure: Football, especially Celtic (as a teenager captained Celtic youth team), keeping fit, books (currently reading An Education, by Lynn Barber)

Source: ' Guardian '

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