Almost five years after the launch of branded banks by Tesco, Sainsbury and Safeway, the concept of buying customer-friendly financial services from the big supermarket chains has proved to be a winner. Now, it's the c-store operators who are starting to get in on the act as they test whether consumers will find instore banking units truly convenient. But why is the relationship between retail and the banking sector proving to be so cosy? Clearly, the banks that got involved did so because they knew piggy-backing onto the supermarkets' networks of stores and their strong brands would help them recruit customers at relatively low cost. As the Royal Bank of Scotland puts it: "We are the supplier; Tesco is the distribution chain." The benefits for supermarket chains is just as obvious ­ not only are they starting to make money from the financial services they sell, they are also finding out more about their customers. There's another, more recent, upside ­ branch closures mean it's now probably more convenient to have an account with the local supermarket. And that's a trend the convenience sector has started to tap into. Nobody is suggesting that small store groups such as Spar or One Stop have the brand strength needed to launch an own label' bank. But the government's plan to introduce a Universal Bank through post offices should provide some independents with a service that should appeal to some consumers who, thanks to the pioneering work of the supermarkets, are well used to the idea of banking in a food retail environment. Not surprisingly, Colin Baker of the Federation of Sub-Postmasters says his members are best placed to capitalise on such trends. "We already offer Paypoint, Payzone and cash machines. We aregue that the Post Office is at the heart of the community and the natural place for banking as we are a trusted brand with a long heritage," he says. Nevertheless, the more immediate wins for independent retailers will come through a more obvious route. With branch closures in rural and inner city areas having hit an all-time high, the provision of banking services has come under the spotlight ­ highlighting a niche for those keen to join the banking revolution. It's not a new idea. A few years ago, One Stop was chosen by NatWest to run trials of a self service banking facility at a store in Yateley, Hants. The facility was housed in an 8ft section of the store and comprised a safe where people could deposit money, a freephone link with a NatWest advisor, and leaflet dispensers. And now Spar is embracing this kind of thinking. It opened a bank concession in a Botterills convenience store outside Edinburgh in August, in partnership with the Bank of Scotland. The prototype 500 sq ft pod at the 4,200 sq ft store has a cash deposit and withdrawal machine, business banking safe deposit, telephone banking point and private interview room for customers. A second has now been opened at a petrol forecourt. Bank of Scotland project manager Alan Coats says: "This new channel gives us the opportunity to recruit customers outside the traditional banking market and build our presence in areas where it was not viable to enter as a branch." More importantly, the bank cost only £60,000 to establish, one tenth of the cost of opening a standalone branch. Spar retail development controller Barry Wallis says the opening is the first in a series of banking-related innovations. Rival Scottish convenience chain Morning, Noon & Night, which was the first c-store operator in the country to introduce ATMs, is also developing instore banks with the Bank of Scotland. Founder Eddie Thompson says: "We will shortly be bringing Bank of Scotland concessions into our stores in rural areas. Banking is a much needed part of the convenience formula in rural areas." As the Bank of Scotland gets to work in the villages, giving a whole new meaning to the phrase remote banking, other c-store operators should be taking a serious look at the opportunities. Thanks to the pioneering work of the likes of MN&N, cash machines are now a necessity for c-store operators ­ not an added bonus. So one way of building a point of difference, and driving footfall, would be to open a instore banking facility. That's one of the learnings to come from the supermarket sector, which has polarised between those retailers that are trying to become some kind of one stop shop for financial services and those that see the value in teaming up with a bank to offer convenient instore facilities for shoppers. Today most supermarket operators have established partnerships with banks, following the lead set by Sainsbury and Tesco. Tesco launched a joint project with the Royal Bank of Scotland in 1997 and that gave the bank a ready made customer base from a network of 650 Tesco branches for its expansion into England. An RBS spokesman says: "People are entranced with brands these days and the tie-up with Tesco ­ at a time when our presence was mainly in Scotland ­ gave us the opportunity to attract a whole new set of customers who otherwise might not have considered our brand." Tesco is also feeling the benefit ­ its dominant position in the grocery market is mirrored by the success of its personal finance arm, which made £14m profit in the first half of the year. The company's finance director Andrew Higginson says: "We are thrilled with the bank; it is in its fourth year and is performing profitably. We now have 2.2 million customers and a great relationship with our partner, the Royal Bank of Scotland." The chain's strategy has not changed much since a nine month experiment with NatWest in 1996 which was eventually dropped in favour of the RBS partnership. Then, the product was limited to a deposit account called Clubcard Plus and the formula was to reward customers ­ loyalty card holders who were given extra Clubcard loyalty points and competitive rates of interest. Tesco now offers a comprehensive range of personal finance products under the Tesco Personal Finance brand and customers are attracted by good rates, made affordable because RBS has not had to lay out for a branch network. Higginson explains: "Because our customers come in through the grocery business we have low customer acquisition costs and can offer a very good deal. We know today's customers are sophisticated and will shop around ­ it is a very competitive marketplace. "Customers are also kept onside with loyalty schemes, which create data that can be used to cross-sell extra goods and services. We have a huge amount of data from our Clubcard and bank and we use that to target customers for financial service products and offers." And the opportunities for cross-selling keep on growing because the business now provides a number of Norwich Union products, such as life insurance and ISAs. The Tesco banking adjunct, which has about 2% of the overall market, is also a useful way to pool data about customers' financial and shopping habits, although data protection laws forbid the two sides to share information until a customer has signed up to a Clubcard as well as a credit card, or another financial services product. It's this combination of convenience, trusted brands and competitive products that is behind the success of the supermarket banks, according to Sainsbury marketing communications manager Stuart McMillan. Sainsbury's Bank, a joint venture in which the Bank of Scotland has a 45% stake, is on track to make a £15m profit this year. It is a telephone-focused operation and products on offer include savings, loans, insurance, credit card and mortgages ­ with loans and credit cards most popular with customers ­ and a relaunch of the mortgage service due next month. McMillan says: "We can offer customers much more than big, stuffy, apathetic high street banks can. We have huge advantages, because we have extended opening hours. We are on hand every time a customer goes shopping. We are also very competitive on rates as we can keep costs down because we do not need to invest in branch infrastructure." McMillan says a high proportion of the supermarket bank's business is generated by customer awareness and trust in the brand, an advantage which could prove a double edged sword if either side of the business floundered. Although McMillan steers clear of the term "relaunch", Sainsbury's Bank is being more closely integrated with the supermarket in a move to take advantage of footfall in stores. Marketing activity has been stepped up and the supermarket has started to trumpet its financial services offer to grocery customers. Twenty banking centres have been set up in stores nationwide, with plans to roll out concessions in those areas where the Reward Card and Sainsbury's Bank data show there would be most demand. Permanent point of sale for the bank is being set up in the majority of stores in a bid to maximise returns from the 10.8 million customers a week. Tesco experimented with similar instore banks in the early days, but Higginson says it found no great demand from customers at that time. He adds: "We do offer instore banking services for customer convenience ­ cheque deposits at the till, ATMS in store, and recently more on-shelf products, like holiday insurance." It's a similar story at Marks and Spencer which began its move into financial services with a storecard in 1986. It has since developed a chargecard, budget card, two types of unsecured loans and offers a comprehensive range of financial services, including unit trusts, ISAs, insurance, and mortgage payment protection. The service operates from a web site and 14 stores have financial service centres which, in the last 18 months, have been moved to the front of store to attract customers' attention when they walk in. A Marks and Spencer spokeswoman says: "Financial services offer us the ideal opportunity to get to know our customers better. Our success is down to great value, unique products and massively undercutting main players in the market. And people trust our brand." Supermarket banks will never be dominant players, but that was never really the point, as Tesco's Higginson explains: "Although we have more than two million customers we are still niche in banking terms, with some 2% of the market. As things stand, Tesco Personal Finance is popular and a useful adjunct to the Tesco brand." Nevertheless, 2% of a big market is worth having. As one analyst says: "Supermarket banking is still customer service oriented rather than core to business credibility. It helps build customer loyalty and gives a grocery brand an extra dimension." But those retailers happy simply to team up with a banking partner to offer nothing more complicated than instore facilities have found that strategy is also proving to be a winning formula ­ that carries very low risk. Morrisons has teamed up with HSBC and now has 42 in-store banking concessions. A spokeswoman says: "HSBC leases the space from us. The system is to our benefit as customers come in because they know they can do their banking with their shopping." Even Asda has dabbled in the past ­ opening Lloyds TSB easibanks' in a handful of stores. And some industry commentators think the Wal-Mart subsidiary may need to go one step further. "For the immediate future it can get away with not offering financial services because they do not tie in with its brand values of no frills, low prices," says one analyst, "But Asda may need to look at offering customers banking facilities further down the line, so as not to be put at a competitive disadvantage against other supermarket brands." An Asda spokesman admits: "We are keeping a watching brief on the possibility of going into financial services. There is nothing imminent, although we are looking at on-shelf products." Safeway took a hybrid route in 1997 when it launched a small scale bank in conjunction with Abbey National. Banking products are co-branded, an arrangement that lets the supermarket benefit from the bank's strong brand identity, and vice versa, while helping Abbey National compensate for its limited branch network. And concessions are now installed in 38 stores nationwide. Whichever route is taken, it's becoming obvious the one option that is not acceptable is to do nothing. For those yet to take the plunge, whether a major multiple or c-store operator, time is running out. n {{FEATURES }}

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