Battle of the supermarkets hots up

Tesco is planning to open in-store bank branches by the end of the year. So how does the supermarket bank compare to the rest?

This article was first sent to readers as a '360 degrees' email.

Tesco first entered the personal finance arena in 1997 in a joint venture with RBS and has quickly risen in popularity since then. Tesco bought out RBS last year and now offers a wide range of financial services, including credit cards, savings and insurance.

What's more, Tesco isn't just opening in-store branches, it's also planning to launch a current account in 2010. The first in-store branches will open in Blackpool, Bristol and Coventry, with Tesco hoping to persuade more of us to dump those traditional banks and building societies and put it in our shopping baskets instead.

So how does it compare to the competition?

Tesco is not the only supermarket to jump on the banking bandwagon, with rivals including Sainsbury's, Asda and Marks and Spencer all offering their own financial products.

Tesco hasn't always had a smooth ride when it comes to money management, and many who tried to open its market leading Internet Saver last year got more than they bargained for.

Problems with account opening and issues with its notorious card reader meant that this 'instant access' account was anything but instant access for some customers.

When it comes to rates, Tesco's Internet Saver now pays 1.75% on balances from £1. That sounds low but is still competitive considering the BoE base rate stands at 0.5%.

However, rival Sainsbury's equivalent pays 2% (which includes a guarantee that the rate will be at least 1.5% above the base rate for a year).

Sainsbury's has performed well when it comes to savings, and according to Moneyfacts offers the most consistent internet account over the past 36 months. So although Sainsbury's may not offer the No.1 savings account at the moment, we also know that it stays strong when others start to lag behind.

Of course, you shouldn't put all your eggs in one basket, and if you're looking for the best deal, it's important to broaden your horizons beyond the supermarkets.

Measuring up

The ING Direct Savings Account is the current table-topper with a 3% rate, including a 1.97% fixed bonus for a year. With the bonus forming the bulk of your interest rate, you may be put off opening one. However, as I explained in this article, when interest rates are low, bonuses can be attractive.

It's a similar story when it comes to credit cards. Here's a quick look at what's on offer at a few of the stores:

Card and provider	APR	Balance transfer offers	Other incentives
Tesco Clubcard credit card	16.9%	0% on balance transfers for 14 months (2.9% fee applies), and 0% on purchases for six months.	Five Clubcard points for every £4 spent in Tesco. One Clubcard point for every £4 spent elsewhere.
Asda Reward credit card	17.8%	0% on balance transfers for nine months (2.99% fee applies), and 0% on purchases for three months.	Quadruple points for the first three months, and during December at Asda stores.
Sainsbury's credit card	15.9%	0% on balance transfers for ten months (3% fee applies), and 0% on purchases for 12 months at Sainsbury's stores, and three months everywhere else.	Two points for every £1 spend in store. One point for every £5 spent elsewhere. 500 points = £2.50 off your shopping.
M&S Money credit card	15.9%	0% on balance transfers for six months (2% fee applies), and 0% on purchases for ten months.	One point for every £1 spent in M&S. One point for every £2 spent elsewhere. 100 points = £1 in M&S vouchers.
John Lewis Partnership credit card	16.9%	0% on balance transfers and purchases for six months (2.5% fee applies)	One point for every £1 spent in John Lewis, Waitrose, Peter Jones, Greenbee and Ocado, one point for every £2 spent elsewhere. 500 points = £5 in partnership vouchers

Supermarket credit cards want to elicit loyalty, and many will entice you with all manner of rewards and riches to try to get you to sign up.

Tesco's offering is generous - if you shop in Tesco that is. Although you'll earn five points for every £4 you spend in store, step outside, and this is reduced to just one point for every £4 spent.

It's a similar story with the rest, and unless you spend a significant amount of money in one particular store, you may be better off getting a cashback credit card instead.

It's also important to remember that if you want to take advantage of these perks, you shouldn't also transfer a balance from an existing card onto your new flexible friend, or you will be caught out by a trap known as negative payment hierarchy (apart from the John Lewis card, which offers equal terms on its balance transfer and purchase deals).

When it comes to supermarket accounts, the important thing to remember is they work like any other bank account. Check the rate regularly to ensure you're still getting a good deal, read reviews to check customer service, and don't always go for the gimmick. On closer inspection, they're usually worth less than you think.

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