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Tesco delivers current account but inertia may favour big banks

THERE has been so much hot air from the UK Government about its ambitions to boost competition in the banking sector and so little meaningful action that it has seemed nothing is ever going to change.

However, at long last, we have something of real substance from a so-called challenger bank.

Tesco Bank's current account, launched this week, seems to have had a gestation period akin to that of an elephant, but it is good to have something heavyweight.

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Government hopes of boosting competition in the UK banking sector in the wake of the financial crisis have been pinned on sales of parcels of branches by Royal Bank of Scotland and Lloyds Banking Group, ordered by the European Union as a result of these institutions having accepted state aid. But these auctions turned into fiascos.

RBS thought it had sold its up-for-auction branches, concentrated in north-west England, to Spanish bank Santander, but this deal fell apart at the 11th hour.

Co-operative Bank meanwhile found itself in pole position to buy the branches being sold off by Lloyds. This deal fell apart and it is just as well, given what has subsequently come to light about Co-operative Bank's financial woes. Now Lloyds is floating off the parcel of branches which were up for sale, including the Lloyds TSB Scotland branch network, as TSB.

We have had a lot of touchy-feely stuff about culture and policies on remuneration from TSB but the fact of the matter is, after its flotation, Lloyds will for a while own three-quarters of the business.

Similarly, RBS is now looking at floating off its parcel of up-for-sale branches as Williams & Glyn.

So it is good to see Tesco, with its new-found autonomy from the UK banking sector establishment, mounting a challenge.

The supermarket giant has some advantages. Like the big banks, it has a huge customer base, running into many millions. And, at a time when people are probably still worried about where they put their money even with the UK Government's deposit guarantees, Tesco's visible scale will provide reassurance.

On the downside, the Tesco brand does not appear to be quite as appealing to consumers as it was in the past, as shown by the degree to which the supermarket group has struggled in the face of the strong challenge from discounters such as Aldi and Lidl. And, probably more significantly, there is the question of whether Tesco has left it too late in terms of its big push into the mainstream banking market.

In the grim years since the financial crisis unfolded, public anger about the behaviour of the big banks has probably dissipated, even if it has only been replaced in many cases by a sense of resignation as the bonus merry-go-round continues at a stomach-churning pace.

And, while much has been done to take the hassle out of switching to another bank for a current account, we should not under-estimate the importance of inertia in this context.

There would not be many people for whom, springing or crawling out of bed in the morning, changing their current account provider would be a top-ten priority for the day.

Tesco Bank has put much effort into developing what it views as an attractive proposition, with its current account paying annual interest of 3 per cent on credit balances up to £3,000.

But it remains to be seen how many people can be bothered switching.

It is easy to identify some situations in which people might look to move to another current account provider.

For example, if you were a Royal Bank of Scotland customer aggrieved at, and affected directly by, recently-installed RBS chief executive Ross McEwan's branch closure programme, you might well look around for another current account provider. And if you were a Co-operative Bank customer who thought that its culture might change with the heavy involvement of hedge funds who have put money into it, you might be looking elsewhere.

Tesco Bank, which has invested heavily in building up its operational infrastructure and appears to be focusing sharply on customer service under the astute leadership of Benny Higgins, might be a breath of fresh air.

Its move this week is much bigger than fellow retailer Marks & Spencer's recent launch of a current account. In contrast to the go-it-alone Tesco banking operation, which became autonomous from former partner Royal Bank of Scotland several years ago, M&S's banking operation is an alliance with HSBC. Elsewhere, although Sainsbury's Bank has this week signalled it is in no hurry to launch a current account, Edinburgh-based Virgin Money is expected to move into this arena soon.

But we should be wary of thinking Tesco Bank's move and Virgin Money's plans signal the dam is about to burst in terms of current account switching by frustrated customers of big banks. Many people continue to have their current account with the same bank they signed up with as a teenager, whether this was as a student, when starting their first job, or as a saver.

And anyone moving bank as a result of a branch closure might want to sign up with another provider with a physical presence nearby, rather than dealing online or by telephone.

But if Mr McEwan is right, the landscape in this respect is changing fast, with rapid growth in the number of people wanting to do their banking on mobile phones or other devices on the way to work. This may well be why he feels able to cut costs in RBS's retail banking division deeply without fearing an exodus of customers.

However, Mr McEwan will also benefit from the fact that old habits die hard. In this regard, even though Tesco Bank is already a sizeable player in savings, credit cards, and loans, and has access to its parent group's huge customer base, it might face a long, hard slog in building up its number of current accounts.

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