UPDATE 1-Tesco takes on UK banks with current account launch

* Bank CEO says launch can boost spending in supermarkets

* Tesco looking to win market share from "Big 5" banks

* Bank customers offered points in Tesco loyalty scheme

* Bank has built up 12 percent credit card market share

* UK minister says bank will give consumers more choice (Adds government comment, Tesco Bank customer numbers)

By Matt Scuffham

LONDON, June 10 (Reuters) - Tesco Bank, the financialservices arm of Britain's biggest retailer, has launched itsfirst personal current or checking account, looking to challengeestablished lenders and bring shoppers back into its parent'sstores.

The bank is aiming for a slice of a market dominated byLloyds Banking Group, Royal Bank of Scotland,Barclays, HSBC and Santander UK (part ofSpain's Santander ), which provide over three-quartersof accounts.

Parent Tesco also hopes the service will helpentice customers back into its supermarkets after suffering itsworst three-monthly sales drop in 40 years.

Account holders will be offered credits via Tesco's loyaltyscheme Clubcard, which they can spend inside Tesco's 3,000 UKoutlets.

"The bank is a cornerstone of Tesco's relationship with itscustomers and (the new account) will make that relationshipstronger," Tesco Bank Chief Executive Benny Higgins toldreporters.

Lawmakers are keen for challengers to emerge to break thedominance of Britain's "Big 5" lenders and last year introducedrules to guarantee customers can switch bank accounts withinseven working days. Britain's financial regulator has also beenasked to promote competition within the industry.

"We want Britain's consumers and businesses to have fargreater choice in banking services," said Economic SecretaryAndrea Leadsom. "New banking providers will give people morechoice and encourage all banks to offer better and competitiveservices."

Higgins said the potential for growth was illustrated by theprogress of Tesco Bank's credit card, which has built up a 12percent share of the market in the UK. If that was replicated incurrent accounts, it would give Tesco the same share as HSBC.

He wants to target the 6 million customers already usingTesco Bank for credit cards, loans and savings products and the16 million Tesco customers who use Clubcard.

Tesco is offering interest of 3 percent on balances of up to3,000 pounds. Customers depositing less than 750 pounds a monthinto the account will have to pay a 5 pound monthly fee.

The success of Tesco's credit cards and other financialproducts such as mortgages have also boosted spending in stores.Clubcard points worth 120 million pounds were granted to TescoBank customers last year.

AMBITIOUS TARGETS

Current account customers will get 1 Clubcard point (worth 1penny) for each 4 pounds spent in Tesco and 1 point for each 8pounds spent elsewhere.

Britain's personal current account market has becomeincreasingly competitive, with Nationwide and TSB setting ambitious targets for growth, and SantanderUK also picking up market share through its heavily advertised123 current account.

Current accounts are seen as key because they enable banksto cross-sell other products. However Higgins declined to setlong-term targets for growth and played down the impact his bankcan make on the overall market, saying bank customers were stillreluctant to switch between lenders.

"We don't have a specific target on market share. Of coursewe have a business plan, but we don't have a market sharetarget. One of the things that is clear is that there is verylittle switching taking place in the UK," he said.

However, the Payments Council said in April there had been a14 percent increase in the number of customers moving bankssince the new switching rules were introduced last September.

Other British retailers have also ventured into financialservices. Marks & Spencer for instance has a bankingjoint venture with HSBC, while Sainsbury bought Lloydsout of a banking joint venture in February, but has no plans tooffer current accounts.

Tesco has gone further than its rivals, because it isoffering a full range of services and owns the bank outright. (Editing by David Holmes and Mark Potter)