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Could Woolworths Group Ltd be a threat to Commonwealth Bank of Australia?

Every new day seems to bring more bad news for the banks, which are already struggling with the fallout from the Banking Royal Commission, lawsuits, sluggish credit growth and the threat of falling house prices.

If those weren’t enough, our supermarket giant Woolworths Group Ltd (ASX: WOW) could emerge as the next big competitive threat to the dominance of Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

It makes sense for our supermarkets to start offering banking services in the current climate, according to the former head of Tesco Bank in the UK, Benny Higgins, who was interviewed by the Australian Financial Review.

Tesco is the largest supermarket chain in the UK and Mr Higgins believes that Woolies and Wesfarmers Ltd’s (ASX: WES) Coles supermarkets can leverage on the mistrust towards the big banks to offer a differentiated financial services offering to the public.

While it is important that the supermarkets get an experienced banker to run the financial services division, they must remember that the only reason to start down this path is to act differently from the big banks, he added.

This is certainly food for thought.

Aussie supermarkets are likely to be open to new ideas on how to grow their business as they face off the onslaught of overseas discount grocers arriving on our shores (click here to read about the growing risk of a new grocery war breaking out).

Expanding into banking services makes sense as Coles and Woolies already offer some financial services and products like credit cards and insurance.

Growing further into this huge and lucrative market will also afford them better protection from the likes of Aldi, Kaufland and Amazon.com.

If the idea holds water, the supermarket company that is most likely to move first is Woolies as Wesfarmers is distracted by the upcoming spin-off of Coles. Metcash Limited (ASX: MTS) will also find it difficult to implement such an ambitious scheme due to its franchise model.

The big banks are already facing competition from smaller and nimbler non-traditional banking companies. Having a supermarket giant also nipping at their heels would be a bad development for the banking sector.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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