UK Personal Loan Distribution 2009

Introduction

The intermediary channel has been hit hard by the recession as business has dried up in general. Lenders are looking to avoid taking on excessive risk by focusing on existing customers. The rise in the popularity of the internet has been tempered by a desire on the part of consumers for more face-to-face advice in a branch. Call centers also remain an important channel of arrangement.

Scope

*Sizes and forecasts the popularity of different distribution channels in terms of arrangement of secured and unsecured personal loans.

*Uses Datamonitor's proprietary Retail Banking Survey to gain more of an insight into consumers' behaviour regarding personal loan products.

*Analyses the results of Datamonitor's Intermediary Distribution Survey to understand intermediaries attitudes in the market.

Highlights

Branches have seen a resurgence during the credit crunch for the arrangement of personal loans. For secured personal loans, more than one third of respondents went through the branch, whereas the intermediary channel, which has traditionally performed strongly was used by less than 10%.

The arrival of new entrants from outside the world of UK financial services could shake up the personal loans market. Entrants such as Tesco can bring their experience from running a successful retail operation to attract customers from the incumbent players.

The internet has encouraged innovation in the type of lending available. Peer-to-peer lending through websites such as lendingkarma and Zopa have become popular in the US but their success has not yet translated to the UK market. Nonetheless other websites such as Wonga are looking to differentiate themselves through the type of lending they offer.

Reasons to Purchase

*Provides lenders with an understanding of the dynamics of personal loan distribution and how it is likely to develop over the next few years.

*Uses proprietary surveys to provide insight into the behaviors and attitudes of consumers and intermediaries to the current the market conditions.

*Presents forecasts for the performance of different channels and the personal loans market as a whole, split into both secured and unsecured loans.


Report Highlights
Branches have seen a resurgence during the credit crunch for the arrangement of personal loans. For secured personal loans, more than one third of respondents went through the branch, whereas the intermediary channel, which has traditionally performed strongly was used by less than 10%.

The arrival of new entrants from outside the world of UK financial services could shake up the personal loans market. Entrants such as Tesco can bring their experience from running a successful retail operation to attract customers from the incumbent players.

The internet has encouraged innovation in the type of lending available. Peer-to-peer lending through websites such as lendingkarma and Zopa have become popular in the US but their success has not yet translated to the UK market. Nonetheless other websites such as Wonga are looking to differentiate themselves through the type of lending they offer.
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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The market for personal loans continued to decline in 2008 and 2009 2
Total personal lending volumes declined significantly between 2004 and Q3 2009 2
Lenders are focusing on their existing customer base rather than on attracting new borrowers 3
Lenders are focusing on their core customer base when selling loans 3
The sale of loans has fallen, but branches are an important part of the distribution of loans 4
Intermediaries concentrate on pricing issues when deciding upon their choice of lender 4
Competitive pricing is the most important feature for intermediaries when choosing a lender 4
Table of Contents 6
Table of figures 7
Table of tables 8
Overview of Personal Loan Distribution 9
The market for personal loans continued to decline in 2008 and 2009 9
Total personal lending volumes declined significantly between 2004 and Q3 2009 9
UK lenders offer secured and unsecured loans, products that are quite different 10
Unsecured personal loans do not have any collateral behind them 10
Secured personal loans are usually secured on a borrower's property 11
The decline in personal lending has been more acute in the secured market 11
The personal loan market is expected to recover slowly over the next couple of years 12
Unsecured personal lending is expected to grow by 5.9% between 2009 and 2013 12
Secured personal lending is expected to grow by 6.2% between 2009 and 2013 14
Personal loans continue to be distributed through an array of distribution channels 16
Personal loans can be taken out through three main routes 16
Datamonitor's retail banking survey provides insight into consumers' channel usage 17
Branches have seen a resurgence during the credit crunch for personal loans 18
Direct through the internet is the most important channel of arrangement for unsecured personal loans 19
The popularity of bank branches has remained steady as consumers put renewed importance on face-to-face contact 20
Prior to the crisis there was a more pronounced move away from traditional direct channels 20
Online aggregators have been impacted by the current market conditions 21
The call center has taken a larger share of secured lending 21
The distribution of personal loans via direct channels is expected to remain popular over the next few years 21
Direct lending will continue to dominate the indirect proposition for unsecured personal loans 21
The online channel will grow steadily over the next few years 22
The branch will remain an important channel but will lose share to the internet 23
Post will continue to die out as a channel 23
Mobile phones are not yet established as a channel of distribution for personal loans 23
The indirect channel will recover slightly as the market recovers 24
Intermediaries will see their share of the secured market pick up after a large fall during the economic crisis 24
Direct lending is forecast to remain flat over the forecast period 25
Indirect lending will pick up as the market starts to recover 26
Direct Loan Distribution 27
Lenders are focusing on their existing customer base rather than on attracting new borrowers 27
Lenders are focusing on their core customer base when selling loans 27
The sale of loans has fallen, but branches are an important part of the distribution of loans 28
Personal pricing has continued to increase in popularity, as lenders assess individuals' circumstances 28
The level of competition remains low, with typical APRs not reflective of the low base rate 28
Borrowers tended to favor the same channel for loan applications and arrangement 28
New entrants into banking may have an impact on the popularity of different distribution channels for loans 30
The arrival of Tesco Bank could shake up the personal loans market 30
Metro Bank is entering the retail banking market, placing a real emphasis on service 31
Virgin Money's purchase of Church House Trust gave it a 'ready-made' banking license 32
Other retailers have also expressed some interest in developing a full retail banking proposition 32
Banks can use tricks from retailers to successfully improve their sales through branches 33
Lenders have looked to make their branches more exciting for consumers 34
Banks have made further steps to improve the customer experience in branches 34
Barclays has been refurbishing and innovating in its branches 35
HSBC's 'branch of the future' is looking to give consumers a taste of the short to medium term future of branch banking 35
Santander's moves illustrate the value it places on a large branch network 36
Banks and building societies appreciate the importance of bank networks despite the costs 36
Cross-selling is an important part of banks' in-branch activity 37
There has been a general decline in the number of bank branches available for consumers 37
Internet personal loan offerings continue to develop 39
The online channel tends to encourage the arrangement of larger loans 40
The online channel is more popular for unsecured rather than secured personal loans 40
HSBC's Assisted Internet program aims to understand barriers to online activity 40
Security concerns remain for consumers considering using an online distribution channel 41
The online channel of arrangement is more conducive to fraud, so lenders need to be vigilant 41
The banning of point-of-sale PPI will see lenders factoring in the lost revenue into loan pricing 41
Aggregators use different methods to generate revenue from loan distribution 41
Aggregators have fared relatively poorly during the current downturn 42
Qualified leads reduce the number of borrowers being turned away by the lender 42
The overall impact of aggregators is easily overstated 43
The internet has encouraged innovation in the types of lending available 43
Peer-to-peer websites have yet to really take off in the UK 43
In the US, peer-to-peer websites with differing models have become more commonplace 44
Wonga allows customers access to a personal loan in as little as 15 minutes 44
The use of direct mail to distribute loans represents a declining part of the market 45
Various factors have combined to limit the popularity of direct mail as a channel of arrangement 46
Direct mail makes up the majority of unsecured personal lending advertising expenditure 46
Direct mail also plays a key role in advertising for secured personal loans 47
Direct mail allows lenders to cross-sell products 48
Call centers remain an integral part of lenders' strategies 48
The call center model provides both benefits and drawbacks 49
Call centers may be used reactively and proactively to build up a relationship with the customer 50
Intermediary Loan Distribution 51
Intermediaries in the personal lending market focus on secured personal loans 51
Intermediaries remain stronger in the secured personal loan market because of its small size and non-standard basis 51
Four out of five intermediaries offer secured personal loans 52
More intermediaries principally or solely offer secured personal loans 53
Intermediaries are undecided as to whether lenders are currently focusing more on direct lending 54
Intermediaries are unsure whether they are losing market share to direct channels 55
Intermediaries tend to be pessimistic about their share of the market in 2010 56
The personal loan market is beginning to recover, and Abbey is in the best position to benefit from this 57
Although brokers in the secured loan market have suffered, there have been some signs of improvement 57
Abbey and HBOS/Halifax are the most popular secured loan providers 58
Abbey and HBOS/Halifax are also the most popular lenders for unsecured personal loan intermediaries 58
Commission levels have shown signs of decline, prompting intermediaries to cut costs 60
The majority of intermediaries have not witnessed a fall in their average commission over the last year 60
A greater proportion of intermediaries have seen a fall in secured loan commission levels 61
Intermediaries are most interested in cross-selling and commission opportunities as methods to cope with the loss of income 62
Intermediaries concentrate on pricing issues when deciding upon their choice of lender 63
Competitive pricing is the most important feature for intermediaries when choosing a lender 63
Better rates and a speedier service are the biggest factors in persuading intermediaries to switch lender 64
Intermediaries tend to agree that consumers will demand more credit and lenders will accept more customers over the next 12 months 65
The fallout from the credit crunch has resulted in the availability of fewer loan products 66
The median number of loans arranged by intermediaries was significantly lower than in previous years 66
The median broker lent £100,000 in loans 67
Intermediaries tended to agree that the sub-prime sector had suffered due to fewer players 68
The consensus among intermediaries is that their overall level of personal lending declined in 2009 69
There is little optimism that individual brokers will increase their lending level in 2010 70
Intermediaries tended to show the greatest levels of concern about commission and fees 71
Intermediaries continue to face some tough challenges in maintaining their customer base 72
Intermediaries had some success maintaining their customer bases during 2009 72
Intermediaries are having to turn business down because of the tough conditions in the market 73
A larger percentage of respondents felt that secured rather than unsecured personal lending had fallen 74
APPENDIX 76
Supplementary data 76
Overview of Personal Loan Distribution chapter 76
Direct Loan Distribution chapter 80
Intermediary Loan Distribution chapter 82
Definitions 90
Balances outstanding 90
CAGR 90
Fixed rate personal loan 90
Gross advances 90
Non-standard 90
Online aggregator 90
POS 91
Secured personal loan 91
Unsecured personal loan 91
Methodology 91
Further reading 91
Ask the analyst 91
Datamonitor consulting 91
Disclaimer 92
List of Tables
Table 1: Proportion of intermediaries that believe lenders are focusing more on direct distribution than intermediary distribution by size of customer base 55
Table 2: Proportion of intermediaries that believe they are losing share of new lending to direct distribution by opinion on change in size of customer base over the last 12 months 56
Table 3: Performance of secured and unsecured personal loans in 2009 compared to 2008 75
Table 4: Gross advances for personal loans, 2004 to Q3 2009 76
Table 5: Gross advances for secured and unsecured personal loans, 2004 to Q3 2009 76
Table 6: Gross advances for secured and unsecured personal loans, 2009e to 2013f 77
Table 7: Channel of arrangement: secured personal loan 77
Table 8: Channel of arrangement: unsecured personal loan 78
Table 9: Forecasts for unsecured personal loan distribution channels, 2009e-2013f 78
Table 10: Forecasts for secured personal loan distribution channels, 2009e-2013f 79
Table 11: Channel of application for unsecured loan (vertical) by channel of arrangement (horizontal) 80
Table 12: Channel of application for secured loan (vertical) by channel of arrangement (horizontal) 80
Table 13: Number of bank branches in the UK, 2003-08 81
Table 14: Total advertising revenue, unsecured personal loans, H1 2009 81
Table 15: Total advertising revenue, secured personal loans, H1 2009 81
Table 16: Products offered to consumers 82
Table 17: Percentage of lending comprised of unsecured and secured loans 82
Table 18: Focus of lenders in current market conditions 83
Table 19: Current impact of direct distribution on intermediary share 83
Table 20: Anticipated intermediary share in 2010 in comparison with 2009 83
Table 21: Most common lenders used by intermediaries for secured personal loans 84
Table 22: Most common lenders used by intermediaries for unsecured personal loans 84
Table 23: Performance of average commission/fee for personal loans 85
Table 24: Performance of fee/commission income over the last 12 months 85
Table 25: Measures taken to deal with loss in income 85
Table 26: Importance of features in choice of number one lender 86
Table 27: Importance of factors in choosing new lender 86
Table 28: Expectations for situation over the next 12 months 87
Table 29: Agreement with statements about sub-prime personal loans 87
Table 30: Change in value lent in past 12 months against previous 12 months 88
Table 31: Expectations of change in total value lent over next 12 months 88
Table 32: Level of concern regarding different factors facing intermediary business 89
Table 33: Change in customer base over last 12 months 89
Table 34: Proportion of loan customers turned down due to difficulty finding credit 90
List of Figures
Figure 1: The decline in total personal lending began to pick up pace in 2006 despite the economic boom 3
Figure 2: Competitive pricing and customers getting the advertised rate are the most important factors in choice of lender for intermediaries 5
Figure 3: The decline in total personal lending began to pick up pace in 2006 despite the economic boom 10
Figure 4: Both secured and unsecured lending levels declined significantly between 2006 and 2008 12
Figure 5: Unsecured personal loans will begin to pick up in 2011 before the recovery gains pace in 2012 14
Figure 6: The secured personal loan market will begin to recover in 2011 although from a very low base 15
Figure 7: The personal loan intermediary market has a straightforward structure 17
Figure 8: Visiting the lender is the most popular method of arranging secured personal loans 19
Figure 9: Going direct with the supplier via the internet is the most popular channel of arrangement for unsecured personal loans 20
Figure 10: The mix of unsecured loan channels is unlikely to change significantly over the next few years 22
Figure 11: The intermediary channel will begin to recover its share of secured lending over the forecast period 25
Figure 12: The majority of those who applied face-to-face or through the internet arranged their unsecured loan the same way 29
Figure 13: There is also a strong correlation between application and arrangement for secured lending 30
Figure 14: The incumbents in UK retail banking face an assault from various new players across various channels 33
Figure 15: The new HSBC branch in Reigate and Barclays flagship branch in London show the future of bank branches 35
Figure 16: The decline in the number of bank branches slowed between 2007 and 2008 39
Figure 17: Wonga emphasizes speed and simplicity of its short term loan products 45
Figure 18: Unsecured lending advertising expenditure has fallen but is still dominated by direct mail 47
Figure 19: Secured advertising expenditure is much lower than unsecured but also dominated by direct mail 48
Figure 20: Personal loan intermediaries are more likely to offer secured loans 53
Figure 21: Intermediaries tend to dedicate more of their business to secured lending 54
Figure 22: Only a small percentage of intermediaries feel that their market share will grow in 2010 57
Figure 23: Abbey and HBOS/Halifax are the most popular lenders for secured loan intermediaries 58
Figure 24: Abbey and HBOS/Halifax are also the most popular for unsecured loan intermediaries 59
Figure 25: More than one third of intermediaries have seen a fall in their average commission or fees 61
Figure 26: A greater proportion of intermediaries who offer the product have seen a fall in secured rather than unsecured loan commission 62
Figure 27: Cross-selling and cost reduction are key factors intermediaries have introduced to deal with a loss in income 63
Figure 28: Competitive pricing and customers getting the advertised rate are the most important factors in choice of lender for intermediaries 64
Figure 29: Better rates are the most important factor in encouraging intermediaries to choose a new lender 65
Figure 30: Almost two thirds of intermediaries feel that consumer demand for credit will rise over the next 12 months 66
Figure 31: The mean number of loans arranged by intermediaries was five, with one provider arranging 2,500 67
Figure 32: The majority of personal loan providers offered loans with a total value of £200,000 or less 68
Figure 33: Intermediaries tend to agree that sub-prime lending has shrunk considerably 69
Figure 34: More than half of the respondents believe that the overall amount lent has fallen 70
Figure 35: A large proportion of respondents feel that lending levels in 2010 will be the same as in 2009 71
Figure 36: Commission and fees are the most pressing concerns for intermediaries, although relationships with clients are also a concern 72
Figure 37: Intermediaries tended to feel that their customer base had stayed the same or fallen over the previous 12 months 73
Figure 38: More than a third of intermediaries are turning down at least half of their personal loan customers 74

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