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British grocers adding home loans to their usual line of vegetables

March 5, 1997

YORK, England (AP) _ It hardly looks like the start of a financial revolution: a spartan kiosk in a Sainsbury supermarket, with a few pamphlets on banking and a red telephone hotline to some Scottish bankers.

But the promise of interest rates of 5.75 percent on instant access accounts, several points higher than the rates downtown banks offer, gets shoppers’ attention.

``I’m very impressed,″ said Ian Juden, whose wife suggested he check out the new Sainsbury’s Bank. ``If they come up with these sorts of rates on pensions, it’s going to be very, very good.″

Britain’s biggest grocery chains, long locked in a battle for loyal customers, are moving into banking. The change could increase their business and pose a fresh challenge to Britain’s traditional banking industry.

Not that everybody is impressed. Some people think grocers should stick to their meats and vegetables.

``I certainly wouldn’t bank with them,″ said Pauline Boddy, a retiree who was packing groceries onto her bicycle. ``I may be a bit old-fashioned, but banking’s banking. They’re merchants and shopkeepers. I think they should stick to what they know.″

Sainsbury points out the banking will be done by real bankers from the Bank of Scotland, which owns a minority stake of 45 percent in Sainsbury’s Bank.

Late last month, 244 Sainsbury’s Banks opened in northern England and Scotland, offering credit cards and savings accounts and soon to expand into home mortgages, personal loans and pension plans as the banks open nationwide. Rival supermarket chains Tesco and Safeway have similar ventures planned.

Although grocery shoppers in the United States can often do their banking at in-store branches of institutions such as Wells Fargo and the Bank of America, the trend in Britain is different. Sainsbury controls its own, newly licensed bank.

There are two goals: to entice customers to shop more at Sainsbury and to turn a profit in the bank.

Although Sainsbury’s Bank offers high interest rates on deposits, the bank’s CEO, former Bank of Scotland executive Rodger McArthur, dismissed the idea of going after customers by offering cut-rate payments on home mortgages or credit cards. That could land a bank into trouble if bad loans pile up.

Sainsbury’s Bank could instead offer its good clients special deals in the grocery stores, he said.

With startup costs to date of 6 million pounds, or $9.6 million, McArthur hopes to gain 250,000 to 300,000 Sainsbury’s Bank customers in the first year and turn a profit within two years.

Analysts point to a big potential pitfall: Customers often love their grocery stores but hate their banks. Does Sainsbury run the risk of losing good supermarket customers by telling them they’re bad credit risks?

``It’s a delicate area,″ McArthur acknowledged. ``In all our dealings, the underlying principal must be sound banking. If a customer needs to be declined on approval for a credit card, the customer will be declined on the basics of sound banking and the reasons will be explained to the customer.″

More gently than a regular commercial bank might explain things, McArthur added.

The supermarkets’ thrust into banking could spell bad news for Britain’s top four banks: Barclays, National Westminster, Midland and Lloyds TSB. They have nothing to gain and, potentially, customers to lose if the grocery banks do well.

The groceries have the advantage of countless good retail locations that are frequented by millions of Britons every week.

The supermarkets already have devastated many other specialist businesses, such as butchers, bakers, fish mongers, wine merchants and others that closed up shop throughout Britain, unable to compete with huge suburban stores that stock virtually everything.

For now, the big banks are left watching as the supermarkets attain their banking expertise by teaming up with medium-sized partners who run less risk of cannibalizing their customer base.

Tesco recently started a venture with the Royal Bank of Scotland after a bustup with NatWest, its partner in an earlier and smaller deal.

NatWest had run a Tesco club card service similar to airline frequent flier miles. The bank’s executives balked late last year when Tesco told them it wanted to offer home mortgages, personal loans and pensions _ exclusively under the Tesco brand name.

``It was clear from the start they did not see us as an equal partner,″ said NatWest spokesman Godfrey Davis.

``We do all those services at NatWest Bank and we do them very nicely, thank you. We’ve been around for over 300 years as a bank. We don’t see any advantage to ourselves or our customers to weaken that image.″

Tesco dumped NatWest and the Tesco chairman, Lord MacLaurin, left the bank’s board of directors.

Some grocers are staying out of the fray. The big supermarket company ASDA said all it wants to do is undercut the competition on food prices.

``That’s what we’re best at and what we think our customers want,″ ASDA spokesman Phil Reed said. ``That’s why we haven’t gotten into financial services or other peripheral activities.″

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