Tesco current account launch is 'good news' but a 'small step' say analysts

10th Jun 2014 08:28

Tesco has launched the first current account from its banking division as it seeks new ways of increasing customer loyalty to aid its recently troubled core business.Tesco Bank, which has so far only offered mortgages, savings accounts and insurance, has roughly 6m customers in the UK.While it is only a minor contributor to group profit, with £194m out of the total £3.3bn last year, it is seen as a key part of the broad overall offering of Tesco to its customers.The bank's Chief Executive Officer, Benny Higgins, confirmed to reporters that the cost of launching current accounts will slow the bank's profit growth in the short term.The current account proposition offers customers Clubcard points on debit card spending, whether in-store or elsewhere, in order to persuade customer to leave their accounts with major high street banks. Every £4 spent in Tesco stores will generate one Clubcard point, with every £8 elsewhere giving the same result.Money held in the account will receive an annual variable interest rate of 3% on credit balances up to £3,000, but account customers will be charged £5 per month for running the account if they deposit less than £750 per month, which analysts noted was 'setting the bar quite high' in respect of the type of customer targeted. Account holders will be able to make deposits in certain Tesco's stores - although only 300 out of more than 3,000 stores will offer this service at present. The structure of the account has been designed to be simple, to differentiate from accounts offered by high street banks, with the company conducting market research and gained feed back from more than 20,000 customers. "The account we are launching today offers all the features they told us mattered most," said Higgins. "There are no gimmicks; just a simple, rewarding, modern, convenient current account, designed for Tesco customers, by Tesco customers."Analysts at broker Shore Capital said the launch was "good news" against a backdrop of "pretty awful trading" in its core market.The launch has been a time consuming and challenging activity, but it is a small step forward for the overall group, but a leap ahead for the bank as it completes its offering. "Other major retail banks in the UK may be looking at Tesco Bank's current account offer with some interest, as we believe that this could be a force for real good within the group, and whilst only marginal, if effectively executed it may not do the stores any harm as well," the broker said in a note on Tuesday."Furthermore, if effectively communicated, the current account could in time be a boost to the Bank's own trading performance, noting as we do that in the current financial year the cost of its launch flattens the profit profile for the division."While by no means a game-changer to the banking industry, ShoreCap said the product's "simplicity, transparency and interest pay features could appeal to more affluent, probably older, customers whilst the Clubcard component may lead to a little more commitment from what we call 'Tesco loyalists'."Shares in Tesco were down 0.32% to 293.15 at 09:20 on Tuesday. OH