Supermarket giant Tesco's plans to create a stand-alone bank are a real threat to small banks and building societies, warns an independent analyst.

Tesco signalled its intentions to progress further into the retail banking market back in July 2008, when it bought RBS's 50 per cent share in Tesco Personal Finance (TPF) for £950 million.

But independent retail banking analyst Robert Mattai, believes that this move would make TPF a direct rival to small banks and building societies.

He says, ‘Parallel to how the supermarket chain has forced many local retailers out of business, it will be no surprise if Tesco's move into banking captures the market share of a lot of smaller building societies that rely on local business.’

According to Mattai, Tesco has three key advantages over many smaller banks and building societies – existing knowledge of a large customer base, a 2,000 strong network and the most valuable brand on the high street.

He adds, ‘Tesco's loyalty card system, Clubcard, has revolutionised retail through the collection of customer data and tailored promotions. This simple and effective offering will certainly be integrated into the newly formed retail bank, providing customers with financial products specifically suited to them, while the large store network will potentially lure many customers away from local building societies.’

This is not the first time that a supermarket has progressed into retail banking. In 2007, US supermarket chain Wal-Mart penetrated the Mexican banking market with relative success, taking advantage of the estimated US$23 billion worth of remittances sent home every year by US-based Mexican immigrants.

Mattai believes that, in order to compete against the newly formed Tesco bank, smaller banks and building societies need to offer niche products to maintain a steady customer base, such as The Co-Operative’s ‘ethical banking’ offer.