After making its financial services division fully independent, Tesco is progressing towards creating a standalone bank. Its vast customer base, extensive store network and solid brand reputation give the retailer a competitive edge over some of its potential rivals.

Tesco signaled its intentions to progress further into the retail banking market back in July 2008, when it bought RBS's 50% share in Tesco Personal Finance (TPF) for GBP950m. Since then, the supermarket giant has reshaped its TPF division by appointing Benny Higgins, the former head of retail banking of HBOS and RBS, as the new chief executive. Higgins plans to make TPF a fully established retail bank within the next three years, aiming for an initial profit of GBP1 billion.

The move to become a standalone bank, which will offer current accounts and mortgages among other things, makes TPF a direct rival to small banks and building societies. 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.

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, according to Intangible Business, the brand valuation consultancy. Tesco's loyalty card system, Clubcard, has revolutionized 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. Finally, Tesco's safe and reliable reputation makes it an attractive alternative to many weakened financial players, which have suffered from a major loss of customers' confidence.

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 $23 billion worth of remittances sent home every year by US-based Mexican immigrants. To compete against the newly formed Tesco bank, smaller banks and building societies need to offer niche products to maintain a steady customer base. For example, the Co-operative Bank offers customers 'ethical banking' and was voted the UK's most ethical brand for 2008, based on a consumer survey by GfK.