UK Personal Lending 2007 (Review Report)

Following a muted performance in 2005, the consumer credit market delivered a worse performance in 2006. Indeed, after more than a decade of strong growth, the consumer credit market has now slowed. Moreover, to add to their woes, lenders are facing a number of other challenges. So, what lies ahead for unsecured lenders?



Report Highlights
Constrained by various factors such as a weaker labor market, increasing consumer debts and low consumer confidence, gross lending amounted to £207.8 billion at the end of December 2006, representing a contraction of 4.5 per cent on the 2005 level (£217.5 billion). Overdrafts are an important income stream for banks, especially as current accounts are not particularly profitable in themselves. However, overdrafts are receiving increased regulatory. While regulation is working towards serving the consumer better, it is likely that the end result will see banks lose a part of this income stream. Going forward, the challenges being faced by unsecured personal lenders suggest that many will be willing to place more emphasis on increasing their profitability, even if that means sacrificing volume. Indeed, the lending environment is only going to get tougher and the issue of high levels of personal indebtedness is not going to disappear.


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Catalyst 1
Summary 1
Introduction 5
What is this report about? 5
Who is the target reader? 5
How to use this report 5
The UK Consumer Credit Market in 2006 and its Future Outlook 7
The consumer credit market delivered a poor performance in 2006 7
Advances dropped once again, though balances grew by a small degree 7
A number of factors can be attributed to the consumer credit market's poor performance 8
Despite a well performing UK economy in 2006, the consumer credit market did not follow suit 8
Successive base rate rises had a slowing effect on borrowing over 2006 9
Despite full employment, unemployment increased slightly over 2006, contributing to the consumer credit market's contraction 10
Though the housing market outperformed expectations in 2006, the consumer credit market still faltered 10
Further analysis highlighted that most individual product lines performed badly over 2006 11
In terms of balances outstanding, most products contracted except for retail finance and personal loans 11
Fluctuations in the share of the total consumer credit market show personal loans to have gained significantly 13
In terms of gross advances, all consumer credit products contracted except for overdrafts 14
Fluctuations in performance saw credit cards and overdrafts gain more share of the total consumer credit market 16
Meanwhile, point of sale finance continued to struggle 18
Motor finance had another poor year in 2006 18
Retail finance also had another poor year in 2006 23
What's next for the consumer credit market? 26
Datamonitor's forecasting model assesses the relationship of macroeconomic factors with respect to consumer credit products 26
Under the neutral view, new lending in the consumer credit market falls in 2007 and picks up thereafter 26
The consumer credit market will reach £229.4 billion in 2011 28
In terms of individual product lines, virtually all products will suffer in 2007 but will pick up thereafter 28
Under a pessimistic view of the economy, the consumer credit market will contract significantly in 2007 before picking up again in 2008 30
The consumer credit market will dip to a low of £199.8 billion in 2007 under a pessimistic scenario 31
In terms of individual product lines, retail and motor finance both continue their decline, with overdrafts performing best of all 31
Under an optimistic view of the economy, the consumer credit market will begin prospering again 33
The consumer credit market will expand at an annual average rate of 3.0 per cent to reach £238.1 billion in 2011 34
In terms of individual product lines, retail finance will be the only underperforming product 34
An Overview of the Overdrafts Market in the UK 36
Overdrafts are a key part of banks' current account packages 36
Overdrafts have grown strongly over the last five years 36
Overdrafts are an important income stream for banks 37
In addition, they contribute to those who switch bank accounts 37
For example, Alliance & Leicester continues to up the ante to win current account customers through its introductory offers on overdraft fees 38
Moreover, overdrafts are forecast to continue strong growth 39
But the overdrafts market is static compared to others 40
There are four main pricing models for overdrafts 40
It is surprising that individual risk-based pricing for overdrafts is not used to a greater degree 42
Prices on overdrafts do not tend to change very often 42
Such a condition can be attributed to complex nature of current accounts, but consumer apathy to switching current accounts is also to blame 44
There has been increasing scrutiny surrounding overdrafts, which will most likely have a significant effect on banks and consumers 44
First came the OFT investigation on credit card default fees 44
Now the OFT is to investigate the overdrafts market 44
A number of banks have been removing overdraft "buffers" and raising interest rates 45
Moreover, the investigation could have large consequences for the current account industry and consumers 45
Northern Ireland has also seen its current account and overdrafts market challenged 46
The Competition Commission found a number of significant issues with overdrafts 47
It advises that a number of remedies be applied to redress the market 47
The investigation is likely to conclude in a loss of income for banks in Northern Ireland 48
In addition, there is concern that too many consumers are using overdrafts for long-term borrowing instead of other cheaper lending products 48
Student Lending in the UK: Assessing Risk in an Environment of Rising Consumer Debt 49
Students are an important customer segment for banks 49
Students as a customer segment: banking on the future via cross-selling 49
Such a strategy is understandable given the increasing number of students in the UK 49
Lending is a large part of the student portfolio 50
Many banks offer a range of products, though the acquisition focus is on the current account 50
But lending is the more profitable product to sell 51
However, students are getting into greater and greater debt 52
The cost of attending university is becoming more expensive 52
As such, student debt has increased considerably over time 53
The majority of debt is in the form of Government loans, though overdrafts and credit cards are highly important too 53
Moreover, the average student beginning their course in 2006 will be at least £15,000 in debt by the time they finish 54
Given the more difficult economic environment and the increasing number of bankruptcies and IVAs, is student lending worth the risk? 55
Consumers are experiencing a more difficult economic time now 55
Such a situation is of worry to lenders who are already dealing with significant bad debt 55
While graduates are likely to earn more than non-graduates, they are not immune to economic difficulties 57
Because of significant student debt, there are suggestions that those under 30 are not big spenders on unsecured lending products 57
Moreover, even if students are better customers in the long-run, will they be loyal to their first current account provider? 58
Students continue to be viewed as a good investment, but banks are taking a number of precautions with student lending 59
In general, lenders are sharing more data in order to reduce bad debt 59
Lenders are pushing for Student Loans Company data to be shared 59
The Student Loans Company has become involved 60
The DTI is now holding a consultation over such "hidden data" 60
More importantly, lenders must be sure to lend responsibly 61
Customer Acquisition Strategies in the UK Personal Lending Market 62
The typical personal loan customer has a number of traits 62
Personal loan holding differs by age group and income band 62
Age group segmentation highlights that customers in the 25 to 34 age bracket are those most likely to hold a personal loan 62
Income band segmentation highlights that low income earners are the least likely to have a personal loan 63
The typical personal loan customer is likely to take out a loan of between £5,000 and £9,999 64
Customers aged between 18 and 24 years old tend to apply for smaller ticket loans 64
Unsurprisingly, higher income groups have a higher tendency to borrow greater amounts 65
The overwhelming majority of personal loan customers have only one personal loan 66
There is no clear trend in terms of age segmentation 67
The higher the household income, the higher the probability of the personal loan customer holding more than one loan 68
The typical length of a personal loan is five years 68
It is worth highlighting that many personal loan customers do not see their loan commitment to the end 69
Unsecured personal loans are used for a vast array of purposes 70
Car purchase, home improvements and debt consolidation remain the major reasons given by customers for taking out a personal loan 70
Car purchase remains the most mentioned purpose of an unsecured personal loan 71
Home improvements and debt consolidation came second and third respectively in terms of most mentioned usage 71
Analysis by age group and income band highlights a few interesting trends in terms of usage 71
A number of lenders do design their marketing material based on the specific uses of a personal loan 73
Lloyds TSB went one step further by producing a used car buyers' guide to attract unsecured personal loan customers 74
A number of factors drive customers when choosing a particular lender 75
While the majority of customers do not shop around, a significant proportion do so before purchasing a personal loan 75
Analysis by age group highlights that those aged above 65 are the least likely to research the unsecured personal loan market 76
The wealthier customers are, the more likely they are to shop around 77
Given that a significant number of customers do shop around, it is crucial for lenders to understand the reasons why customers choose a particular lender 78
Brand awareness provides a competitive advantage in the unsecured personal loan market 81
Direct channels, other than face-to-face, are increasingly being used by customers 83
Face-to-face distribution remains the channel of choice for a significant number of customers 83
Most personal loan providers with a branch presence follow a multi-channel strategy 84
Further analysis of the data highlights that young customers and the lower income households are more likely to visit the lender 85
Young customers and the elderly are more likely to visit a branch 85
Lower income households have a higher tendency to visit a lender to take out a personal loan 85
Competitive Dynamics in the UK Personal Loan Market 87
2005 saw a subdued performance from many lenders 87
Most lenders saw a rise in balances outstanding over 2005 87
Meanwhile, the five largest banking groups strengthened their market share over 2005 in terms of gross advances 90
Moreover, 2006 was another difficult year for personal lending 92
Personal loans also experienced a tough year 92
Indeed, most lenders experienced a difficult H1 2006 92
Not all players grew their balances over the half year 92
Moreover, many lenders saw a drop in new lending volumes 95
Unsurprisingly, lenders are feeling a number of competitive pressures 95
Competition is as tough as ever 95
The top competitors are spending more on advertising in terms of share 96
Lenders are having to look at other ways to compete successfully 98
Differentiation is key 98
But ultimately, the structure of pricing will have to change in the long-run 99
Moreover, bad debt continues to be a challenge when looking to beat the competition 99
Bad debt remains an issue for lenders 99
Such a situation has impacted upon lenders' competitive strategies and results 101
Pricing Strategies in the UK Personal Loan Market 2007 102
Price remains the acquisition weapon of choice in the UK unsecured personal loan sector 102
Price is a key product differentiator for both lenders and customers 102
Consequently, the average price of an unsecured loan has fallen considerably 102
Indeed, intense price competition in the UK unsecured personal loan market has led to a significant fall in average prices 103
However, lenders are adjusting their pricing models to a difficult lending environment 106
Rising personal debt has dealt a big blow to lenders' acquisition and profitability model 106
Consumers are increasingly resorting to debt solutions as they fail to keep up with repayments 107
Lenders' profitability has been affected significantly, as many consumers have started to default on repayments 109
It is therefore hardly surprising that many unsecured providers are adapting their acquisition and pricing model to reflect changes in the lending environment 109
Lenders' pricing models are changing as lenders are adapting their acquisition models 110
Will we see more lenders focusing on profitability rather than just increasing market share? 113
The great majority of unsecured loan providers practice a risk-based pricing model 113
Personal pricing has emerged in the last year or so 114
Furthermore, there are other examples where lenders are designing their pricing strategies to increase profitability 116
Going forward, pricing will remain aggressive but profitability will be equally as important, if not more so 117
Trends in Affinity Partnerships and Co-branding in the UK Personal Lending Market 119
Affinity and co-branding are two types of partnership in the personal lending market 119
While sharing similarities, affinity marketing and co-branding are separate business models 119
Affinity partnerships took off during the 1990s 120
There are a number of benefits for lenders who enter affinity partnerships 120
There are a significant number of large and small affinity partnerships in the UK 120
Co-branding also developed rapidly during the 1990s 121
Issuers have a range of reasons to get involved in the co-branding credit card market 121
There are a large number of co-branded credit cards available in the UK 122
Yet each is experiencing diverging trends 122
Affinity partnerships are stagnating at best 122
Affinity credit cards are losing ground to co-branded cards 122
Moreover, affinity personal loans have been in decline for a number of years now 123
Indeed, affinity partnerships are not as competitive as other schemes because of their inherent disadvantages 124
While co-branded cards continue to expand 124
Co-branding is expanding because it allows issuers to differentiate their offering in a saturated market 124
Such trends are likely to continue in the short to medium term 125
Affinity credit cards are likely to continue to stagnate 125
Moreover, the affinity personal loan model is in danger 125
For example, HBOS is gradually streamlining its affinity program 125
MBNA is also looking to wind down its dependence upon affinity partnerships 125
Meanwhile, co-branded credit cards are likely to increase in popularity 126
Yet issuers and merchants must think critically about whether or not this is the right opportunity for them 126
Personal Lending: Successful Entry Strategies in Western Europe 127
Lenders are increasingly coming up against a saturated UK consumer credit market 127
The UK consumer credit market is contracting 127
The UK consumer credit market is also highly competitive 127
Unsurprisingly, lenders' margins are falling in the saturated consumer credit market 128
Indeed, the UK consumer credit market is the most mature of all of Western Europe 128
Consumer credit plays a more important role in the UK economy than it does in any other Western European market 128
Moreover, in terms of new lending, the UK has performed poorly in comparison to the majority of the Western European markets 129
Consequently, UK lenders should look into higher growth European markets to expand 130
A number of international players have further expanded their operations in Western Europe 130
In particular, there remain opportunities in the Spanish consumer credit market 131
The Spanish consumer credit market continues to expand 131
A number of foreign lenders have become involved 132
The market continues to hold potential 132
As an example, Barclaycard is taking advantage of this growing market 132
Barclaycard is growing successfully in Spain 132
Barclaycard entered the Spanish market directly 134
Barclaycard's product range is designed to appeal to a range of customer segments 134
Barclaycard is likely to expand further in Spain by offering a wider range of products 135
In addition, the Turkish consumer credit market remains attractive to foreign acquisition 135
Turkey is the fastest growing consumer credit market in Western Europe 135
A number of reasons can explain Turkey's phenomenal growth 136
A number of international players have developed a significant presence in the market 136
As an example, GE Money now has a 25.5 per cent stake in Garanti Bank 137
Garanti Bank is a major player in the Turkish consumer credit market 137
By making such an acquisition, GE Money now has claim to a growing business in this market 138
But there are inherent risks in entering such a market 138
APPENDIX 139
Supplementary data 139
The UK Consumer Credit Market in 2006 and its Future Outlook 139
An Overview of the Overdrafts Market in the UK 140
Student Lending in the UK: Assessing Risk in an Environment of Rising Consumer Debt 141
Customer Acquisition Strategies in the UK Personal Lending Market 143
Competitive Dynamics in the UK Personal Loan Market 146
Pricing Strategies in the UK Personal Loan Market 2007 148
Trends in Affinity Partnerships and Co-branding in the UK Personal Lending Market 153
Personal Lending: Successful Entry Strategies in Western Europe 154
Definitions 156
General definitions 156
Affinity partnership 156
APR 156
Bank of England base rate 157
Balances outstanding 157
CAGR 157
CCJ 157
Co-branded card 157
Consumer credit 157
Current account 157
Gross advances 157
IVAs (Individual Voluntary Arrangements) 157
OFT 158
Overdraft 158
Student 158
Definitions of point of sale motor and retail finance products 158
Motor finance products available at the point of sale 159
Retail finance products available at the point of sale 160
Methodology 161
Forecasting methodology 162
Choice of economic variables 162
Model outputs 162
Bespoke scenario based forecasting 162
Further reading 163
European consumer credit reports 163
UK consumer credit reports 163
Relevant links 163
Ask the analyst 165
Datamonitor consulting 165
Disclaimer 165

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