Tesco must put retail back in banking

British banking urgently needs some fresh blood and the race is now on to take up this a once in a lifetime opportunity for new entrants, with Tesco firing the first salvo at the UK's clearing banks.

This leaves serial entrepreneur Richard Branson, who tried but failed to buy Northern Rock, as the other obvious contender to challenge a shrinking and discredited banking hierarchy.

The contrast between the two could not be more stark. Tesco epitomises a safe, established and boringly reliable giant, while Branson's Virgin Money represents a cheeky, at times ground-breaking but less predictable approach.

Tesco should prosper thanks to its size and heft and its reassuringly dull but effective approach. Unencumbered by the toxic losses or the need to write-down reckless loans and not tarred by the brush which is now applied to all banks, Tesco is uniquely placed to develop a real "retail" bank. By treating consumer banking like a utility and driving costs down, it should sweep up seriously disgruntled customers from the banks and give them a real run for their money.

It's unfortunate for Tesco and the poor British public that it isn't able to provide a full banking offering sooner. Tesco already has a banking licence, offers savings accounts, credit cards and insurance but says it needs between 18 months and two years to sort out the relevant IT before a Tesco current account becomes a reality. In the meantime, Britain's largest retailer is aiming to open bank branches in 30 of its stores by the end of this year. This marks its first serious move since declaring its intention of going it alone last July by buying Royal Bank of Scotland out of their 10-year-old Tesco Personal Finance joint venture.

Virgin also needs to disentangle itself from RBS if it is to really take on the banks. It's labelled deposit account is in fact an account with RBS, with Virgin Money administrating it.

Such delays means there is no real alternative available to a dwindling number of existing banks, few of whom have come out of the credit crisis with much to crow about but have become more concentrated as a result of failures. Spain's Santander has scooped up Alliance & Leicester and Abbey as well as the salvageable pieces of Bradford & Bingley, Lloyds has hoovered up HBOS and RBS has been all but nationalised. The mutually-owned building societies have also witnessed a series of shotgun weddings, further reducing consumer choice. Trust in banks is as low as it can go and regulators and the government are desperate to get new and credible players in to revitalise the tarnished sector.

Britain's banking oligopoly is not new - and people have tried to chip away at the clearers' dominance of the market before. Abbey and HBOS both tried to break in to the current account market in the 1990s. They both failed and ended up being swallowed by other firms.

As an alternative strategy, combining shopping and banking is a logical fit, particularly for Tesco which -- unlike Virgin Money -- already has a ready-made nationwide bank network. It also boasts a cash management and security system, a successful loyalty card which gives it detailed information on its clients spending habits, ATMs and the potential to tear up existing protocols by offering 24-hour banking at some stores.

If Tesco can get its act together and begin offering current accounts and mortgages quickly, it can break the power of the banks and restore some much needed consumer confidence. Tesco should be encouraged, but it needs to be watched carefully. The UK's competition authorities have it constantly in their sights thanks to its dominant position in retail.

The best counter-weight to Tesco's ambitions, with CEO Terry Leahy apparently determined that success in financial services should be his legacy, is Branson's Virgin Money. It is time for both men to prove they can deliver a real alternative.

-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --

By Alexander Smith

LONDON, April 1 (Reuters) -