Tesco is to become a stand alone bank, offering cheap home loans and current accounts alongside credit cards, insurance and savings deals.
The supermarket will go head-to-head with the traditional banks in a bid to grab a share of a £20 billion profit pool from UK customers.
It will operate out of branches within more than 200 Extra stores and also over the internet and telephone both in Britain and other countries where it has stores.
Tesco is promising simple cut-price financial products alongside the shelves of baked beans, washing powder, fruit and veg.
The retail goliath will have to launch a series of market leading 'best buy' deals on home loans, savings and current accounts if it is to grab the public's imagination.
Tesco believes it can tap into customer dissatisfaction with the existing 'big five' High Street banks - HSBC, Lloyds-TSB, RBS/NatWest, Barclays and Halifax Bank of Scotland.
The company says the public will be willing to switch to a Tesco bank because the brand is trusted.
It has set itself a target of making profits of £1 billion a year from the bank and a number of related services, including its shopping website, within five to 10 years.
Tesco has hired Benny Higgins, who ran the retail arm of the UK's biggest mortgage bank, Halifax, to head the banking operation.
Mr Higgins, who left HBoS after just one year at the bank having been head-hunted from RBS, is expected to take an aggressive approach to attracting customers.
The Tesco bank will be part of a new division at the retailer headed by Andrew Higginson, who has been promoted from the job of Finance Director.
Outlining the new bank's plans, he said: 'There is a real appetite for Tesco in this area.
'If you put together simple, easy to understand, relevant products, we feel people will buy them.
'I think the current account is one we will look at very carefully. That is often at the core of people's relationship with their financial service providers.
'There are big opportunites for savings products and mortgages is something we will look at. Mortgages may well be something we offer.'
Mr Higginson said Tesco has an advantage over existing banks which have been criticised for offering complex 'labyrinthine' deals and hidden charges on current accounts.
'We start from a position where we can be more transparent,' he said.
'A lot of it is about giving customers what they really want at a really fair price and treating them well. That is really where Tesco's reputation lies.
'We have a good reputation for simpler, straight-forward, good value products.'
He said the bigger stores will have a 'branch' within them, which will help recruit customers.
Mr Higginson said: 'We have a physical presence through our stores. People come to our stores in large numbers to do their shopping, we have a terrific brand and good knowledge of customers.
'All three of those things we can exploit when it comes to build the bank.'
The decision by Tesco amounts to a major expansion of its existing personal finance business, which has been run in partnership with the Royal Bank of Scotland for 11 years.
It is buying out RBS, which currently owns 50per cent of the finance business, at a cost of £950 million.
Tesco's profits for the last financial year hit £2.8billion. While this is gargantuan in terms of retailers, it is relatively small compared to financial services.
The store's chief executive, Sir Terry Leahy, indicated expanding into this sector could bring a powerful new profit stream.
'Services are bigger and faster-growing markets than food. As consumers look to make every pound work harder, it is a good time for Tesco to expand its presence,' he said.
'With a renewed focus on growth in the UK and internationally, we can unlock the true potential of Tesco's retailing services.'
Tesco admitted that it will take three years before it is a fully functioning bank. It will be six to 12 months before it begins to roll out a range of new products.
The store's banking operation employs around 300 people in Edinburgh, Redhill and Ireland. These workers will keep their jobs, while the company is looking to expand.
Tesco Personal Finance was founded in 1997 and now has more than five million customer accounts. It generated profit before tax of £206 million last year, with the figure expected to exceed £240 million this year.
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