The financial supermarket sweep!

Would you buy a mortgage with your mince and savings with your salad?

The UK's major supermarkets are forever competing for our grocery business, with an array of offers and deals designed to stop us defecting to their rivals.

But now the supermarket price war has spilled out of the stores and into the personal finance arena as the main players battle it out against the banks, and each other.

With customers more disillusioned with traditional banks than ever before, the supermarket chains have spotted an opportunity to ramp up their own financial offerings - capitalising on their trusted brands.

Tesco Personal Finance and Sainsbury's Bank, for example have both recently increased their savings rates in what is a particularly competitive sector. And last week Tesco announced its intention to open a new call centre in Glasgow, creating 800 new jobs.

Building a bank

The retailer intends to rebrand its Tesco Personal Finance to Tesco Bank, operating under its own FSA banking licence rather than offering white-labelled products from another bank. Last October it announced its intention to offer mortgages and current accounts in addition to the services it already provides.

Tesco Personal Finance was initially set up as a joint venture with The Royal Bank of Scotland, but in early 2008 the retailer bought out the bank's 50% share. It now says it intends to 'build a bank from scratch' that the public can trust and that is untainted by the city bonus culture.

Tesco Bank is not due to open until at least late 2010 but in the meantime Tesco offers a wide range of products through its Tesco Personal Finance brand.

Stack 'em high, sell 'em cheap

The other main supermarkets also have significant financial offerings. In fact Sainsbury's Bank was the first to dive into the financial sector back in 1997.

The supermarkets began operating in the same way as direct providers, with postal and phone accounts being marketed through leaflets in store. Now of course online has taken over but the till-side leaflets remain.

Because they don't have to support a branch network, the supermarkets claim they can pass on the cost savings to us in the form of lower borrowing and higher savings rates.

In addition, according to financial information provider Moneyfacts smaller financial providers like the supermarket brands rely more heavily on their savings books to fund their lending activities, and therefore have to offer attractive savings rates to get much-needed funds in.

By comparison, many high street banks have alternative ways of raising funds and tend to offer less attractive deals.

The theory is all well and good, but how well do the supermarket brands really stack up when it comes to their products?

Super savings

In the instant access savings arena Tesco leads the supermarket charge with its Internet Saver account paying 3%, closely followed by Sainsbury's which pays 2.9% on its Internet Saver (this special deal ends on 5th September though). M&S Money offers just 1.56% on its easy access savings.

Tesco's rate is among the most competitive in the wider market, but higher interest can be found if you go for the best buys. Coventry Building Society pays 3.3% on its Postal Account if you can handle only being allowed to make four withdrawals a year. If you need more access, Egg's Internet Saver at 3.25% is your next best bet.

Low rate loans

The supermarkets have historically performed really well in the personal loan market, and that remains the case currently.

Sainsbury's Bank and ASDA Financial Services charge a best buy 7.9% on loans of £10,000 over five years (though Sainsbury's deal is only available to Nectar Card holders), Tesco Personal Finance charges 8% and M&S Money 8.7%.

Headline rates quoted are often on specific terms so make sure you check that any loan deal applies to your circumstances. As a rule of thumb, loans for less than £7,000 are charged at a slightly higher rate than those from £7,000 to £15,000.

Flashing the plastic

The supermarkets offer a mixed bag in the competitive credit card sector.

They all offer cards with a 0% balance transfer period but none come close to the market-leading Virgin Money credit card which gives you 16 months interest-free credit on balance transfers in the first 60 days. Sainsbury's offers the longest 0% balance transfer period of the supermarkets at 10 months with ASDA close behind at nine months.

However the retailers do better on 0% periods for new purchases with Tesco the strongest in the whole credit card market, offering a whopping 12 months interest-free credit.

One advantage of the supermarket cards is their close links to the stores' rewards schemes -- the more you spend on your credit card the more reward points you get on your Nectar Card or Clubcard for example.

Protect yourself

The supermarket brands offer a good range of insurances, typically including home, car, travel, pet, life, health and even wedding insurance.

They are generally competitive, though any insurance quote is usually dependent on your specific circumstances.

I compared them below on a single trip travel insurance policy for a family of four for two weeks in Europe, taking the premium from the default cover they suggested without adding any extra features:

By searching the wider market you can easily get similar insurance for significantly less. But check any policy details carefully to ensure they meet your specific requirements - it's no good having a cheap policy that doesn't pay out your claim.

Ultimately the supermarket brands compete well in the wider market. In fact, in the loans and savings markets in particular they are regularly toward the top of the best buy tables.

At the same time the market will eagerly await the intended Tesco Bank and its move into the mortgage and current account arenas. Whether it will really rival the big banks is yet to be seen - but Tesco certainly has enormous marketing potential through its 2115 UK stores!

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