New threat to banks

New threat to banks – Coles

Retailer wants a banking licence to offer deposits to customers

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 6, 2013 1:54 pm AEST

Supermarket retailer Coles is pitting itself against Australia's banks, with news that the company is seeking a formal banking licence, so it can add savings accounts to its list of financial products.

The licence is likely to be held by Coles' parent, Wesfarmers (ASX:WES), which already issues Coles' car insurance product, and will add to its portfolio of financial services, which already includes credit cards. Coles replaced a non-branded GE credit card with its own MasterCard last year.

The move is no real surprise to many, with several senior Coles executives coming from British supermarket giant Tesco, which is regarded as the global model for supermarkets offering financial services products.

According to Internal Consulting Group's financial services practice leader David Cartwright, who has experience with UK supermarket giant Tesco, such a move to full banking by Coles would be a logical way both to grow revenue and to better understand and tie in customers.

"In the UK, life insurance is now sold online and through Tesco and Marks & Spencer, but the aim for supermarkets is generally simple products – savings accounts, credit cards, car insurance. It looks like that is what Coles is doing," he said. "We're not talking complicated, sophisticated banking here."

But the move could shake up the banks, with more than 60% of their funding currently coming from bank deposits. ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) could be forced to go offshore to get a majority of their funding if Coles can offer a highly competitive product. Then again, bank customers tend to be 'sticky' and very rarely switch financial service providers, despite being able to get cheaper or better products elsewhere.

Mr Cartwright says threats can come from any industry where a company has a strong customer base, and let's face it, Coles – and rival Woolworths (ASX:WOW) both have substantial numbers of customers.

At this stage media reports suggest Coles is well down the track in obtaining a deposit licence from the Australian Prudential Regulation Authority.

Foolish takeaway

Coles is unlikely to ever offer all the products a bank currently offers, but a small subset may force the banks to revisit how they generate revenues and where they source funds from. They will be worried if Coles manages to steal a big slice of their market share.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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