The big banks have just strengthened their grip on Britain

NatWest branch
NatWest has acquired Sainsbury's 1m customer accounts and £1.4bn of unsecured personal loans - Isabel Infantes/Reuters

The entry of supermarkets into the world of banking always felt like one of the more implausible business propositions of recent times.

A quarter of a century later, Sainsbury’s has finally given up on the idea that it might be able to flog someone a mortgage while they were doing the weekly shop.

As Sir Philip Hampton neatly put it earlier this year: “You wouldn’t buy your potatoes from HSBC.”

So what possessed the industry’s finest minds to think the reverse would be true and families would one day be arriving back from Aldi with a week’s worth of baked beans, 12 lavatory rolls and some new home insurance?

Presumably, Sir Philip wasn’t always such a non-believer, given that he was chairman of Sainsbury’s for five years in the late 2000s.

Yet, if the retailer’s decision to offload its banking arm isn’t confirmation of this failed foray then the fact it is being sold to Natwest – one of the very banks it was hoping to unseat – surely is.

What’s more, as a measure of just how badly things have gone, Sainsbury’s is paying Natwest £125m to get a million customer accounts off its hands, along with £1.4bn of unsecured personal loans, £1.1bn of credit card balances and about £2.6bn of customer deposits.

It comes just months after Barclays snapped up Tesco’s banking operations – £8bn of credit card loans and unsecured personal loans – in a £600m deal.

This embarrassing retreat is confirmation that the supermarket industry’s efforts to expand into financial services has ended in total defeat.

But isn’t it also proof of something even bigger: that wider attempts to break the grip of the high street banking giants have been an abject failure?

If a company of Sainsbury’s considerable size can’t do it – or Tesco, even more so – then what hope is there for the many minions out there still peddling the myth that they might one day shake-up the staid world of retail banking?

They are fooling themselves and the rest of us.

‘Big four’ banks retain iron grip

The great challenger bank has had several iterations yet Britain’s “big four” remain as strong, if not stronger, than ever.

Part of the reason is because twitchy regulators forced the industry to unwind the empire-building and dizzying overseas expansion that preceded the financial crisis.

As a result, the likes of Lloyds and NatWest have redoubled their efforts at home.

Regardless, new entrants have emphatically failed to weaken the iron grip that the incumbents have on every major aspect of our finances.

The landscape is littered with examples of new ventures that have made little, if any inroads.

There’s Metro Bank, which thought it could upset the established order by opening a handful of shiny branches with the help of a few clowns on stilts and free dog-biscuits. A catastrophic accounting crisis in 2019 put an end to that spurious notion.

Then there’s a long list of second tier banks who – confronted by the same glaring reality – have been forced into each other’s arms in one form or another.

This year alone, the Co-op and Coventry building society have had to merge; then came Nationwide’s tie-up with Virgin Money – itself a Frankenstein mash-up of Sir Richard Branson’s offering, Yorkshire and Clydesdale.

Sir Richard Branson
Nationwide merged with Sir Richard Branson's Virgin Money - Ted S. Warren/AP

Nationwide was so desperate to consummate that union that it was willing to destroy its carefully crafted mutual credentials by refusing to give members a vote on it.

It wasn’t that long ago that Branson’s people were touting themselves as “a genuine alternative to the large incumbent banks”.

Now the mantra appears to be “if you can’t beat ’em, join ’em”.

That leaves a succession of tech-led start-ups such as Atom, Starling, Monzo and others that have nibbled away at the edges but essentially remained fringe players.

The basic premise of all these ventures was essentially that sparkling new apps, decent service and providers that weren’t tarnished by scandal would persuade hordes of disillusioned customers to jump ship.

Yet, more than 15 years after the financial crash, the hold that Lloyds and its chief rivals have over current accounts, mortgages, and personal loans, remains roughly unchanged.

The unassailable obstacle is that ultimately retail banking is a game of scale.

The minnows can’t compete

The bigger you are, the cheaper the funding, the easier it is to invest and to sustain on thin margins.

It means the minnows can’t compete (these are the same barriers to entry that have blighted the energy market and ended in a catalogue of costly collapses).

In the never-ending yet largely elusive search for meaningful profits, the challengers are forced to explore ever racier areas of finance where risks are much higher.

It is one of the reasons that Revolut – still waiting on a banking licence three and a half years after applying for one – has expanded into crypto-trading and the unregulated buy now, pay later market.

The only thing that can be said about the challenger bank experiment is that it’s forced the incumbents to up their game on technology and service, albeit from the lowest of bases.

So in that sense, consumers have benefited from competition – but it hasn’t changed the structure of the market.

On the contrary, having sharpened up aspects of their offering, the competition has arguably made the big beasts more formidable – the precise opposite of what was intended.