Retail and finance – two drunks staggering from crisis to crisis

Britain's financial sector doesn't need high-street shops becoming banks. It needs entrepreneurs to shake up the industry, says Matthew Lynn. But that's just what it won't get.

Like London buses, you can wait forever for a major retail brand to attempt to resuscitate the UK's moribund finance industry and then two come along at once. Last month, M&S launched a current account. This month, Tesco introduced a range of mortgages.

But the last thing the finance industry needs is more big companies offering overpriced, poor-quality products. Instead, we need genuine entrepreneurs to give the industry the shake-up it so desperately needs.

There is certainly no mistaking the way in which the big retailers are making a charge on financial services. Last month, M&S launched a current account designed to tempt people away from the likes of Royal Bank of Scotland and Barclays companies that have fallen so low in public esteem that many people would gladly switch to the Bank of Kabul if it opened up a branch on their local high street.

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This week, Tesco launched a long-awaited push into financial services with its own range of mortgages. And of course the Co-op, which is not just a bank but also a retail chain, has made a big step forward in banking with its acquisition of 600-plus branches from Lloyds. At this rate, it won't be long before B&Q or Boots or John Lewis get in on the act. After all, they all have brands that have been around for a long time and are a lot more trusted than any of the main banks, fund managers or insurers.

There is no doubt the industry could use some fresh competition. Most customers despair of banks that offer wretched service, overpay their executives, have to be bailed out by the taxpayer, and do little to help the economy. The fund management industry is riddled with high charges for poor performance. Savings rates are miserable and very little money gets through to the small businesses that need it. If ever a business was wide open for new players, this one is.

But the retailers don't seem to be offering much of an alternative. The M&S account comes with steep monthly charges. Sure, you get money-off vouchers and some free cups of coffee and perhaps you won't be hassled all the time to buy insurance policies you don't need. But a switch from free banking to banking that costs money was not what most people were looking for.

Likewise, Tesco is hardly revolutionising the market. Its mortgage rates are no better than anyone else's, nor are the deposits required lower. You get Clubcard points on your repayments and that is about the only good thing to be said about it. A game changer it's not.

In truth, if there is one industry that is in as much structural trouble as banking, it is retailing. The UK consumer is over-indebted. After a decade of running up more debt, credit cards are maxed out people will only spend more when they earn more, which means that, in effect, retailing is a zero-growth industry for the foreseeable future.

There is also too much retail space. A lot of that crazy lending in the boom years went to developers building shiny new retail parks. So now the UK has more shops than it could possibly need. The sector is also over-taxed. While many companies can shift their profits around to minimise their taxes, retailers are about as mobile as an Olympic shot-putter.

They are an easy target for government. They have to pay VAT, business rates and national insurance, squeezing their profit margins to the bone. And then, of course, there is the internet a relatively new technology that is devastating sales in the shops. It is a terrible mix. And it is no surprise that companies like Tesco and M&S have been reporting disappointing figures in the UK along with many of the other big retail names.

Little wonder the retailers are eyeing the finance industry's fat margins and low competition. They see it as a way of making some relatively easy profits from well-known brands and a big customer base and compensating for the inevitably declining margins on the high street. But do we really need more big companies offering poor-quality products?

Banking needs new players that can provide quality customer service, not just anonymous call centres and wonky computer systems. The mortgage market needs new companies that can bring together the 20-somethings who want to get onto the housing ladder, and the 60-somethings who want to earn a decent return on their savings not just more companies borrowing in the wholesale markets and whacking a big percentage on top for lending to people who can prove they don't really need the money.

The fund-management industry needs investment houses who can work out how to make decent returns in long-term bear markets, and at low cost not just even more companies that charge you 2% a year for buying the FTSE index. And small companies need banks that are willing to extend them finance and on terms that won't bankrupt the company.

Those are all genuine gaps in the market consumers, companies and the economy would benefit if they were filled. But there is little sign that the retailers are offering any ideas on how that can be done. At the height of the boom, the big shops might have been able to offer some fresh competition but they were too busy selling food and clothes. Right now retail and finance just look like two drunks propping each other up at the bar.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.