Non-standard credit cards in the UK

With the development of improved credit scoring and increased competitiveness in the mainstream market, the UK non-standard credit card market has become an attractive area for issuers to venture into. This brief is designed to provide an overview of the non-standard market. It provides market sizing and forecasting, as well as an explanation for the strategies used by issuers in this market.

Report Highlights
Datamonitor estimates that the non-standard credit card market in the UK consists of 6 million cards in a non-standard population of 7.1 million individuals. The market is served by two dedicated non-standard issuers, as well as several mainstream issuers who have launched products or own subsidies that cater for this market

The size of the UK non-standard population is driving growth, due to an increase in the number of people with County Court Judgments and in mortgage arrears, as well as tightened issuing requirements from mainstream issuers, which has reduced the number of mainstream individuals.

Datamonitor forecasts moderate growth for the UK non-standard card market. The value of transactions is forecast to increase at a compound annual growth rate (CAGR) of 7.2% to 2012. This is much more rapid than the mainstream segment.
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Overview 1
Catalyst 1
Summary 1
Table of Contents 2
Table of figures 3
Table of tables 4
Non-Standard Credit Cards in the UK 5
Introduction 5
The non-standard market refers to consumers who are not considered for credit by mainstream issuers 5
The non-standard market covers the sub-prime sector 6
The term 'non-standard' covers a wide range of perceived risk 7
Despite the risks involved, the non-standard market has proved an attractive market to certain issuers in the UK 8
Careful segmentation and risk management is the key 9
Issuers in the non-standard segment face greater risks but charge a higher interest rate 9
Issuers in the non-standard space mitigate their risk with lower credit limits 10
Intense competition has led to decreasing margins and profitability in the mainstream market 10
Datamonitor estimates that the non-standard market in the UK consists of 7.1 million adults and six million credit cards 11
Datamonitor uses seven steps to size the UK non-standard population 11
Step one: the number of people in the UK of working age 11
Step two: absence of a bank account 11
Step three: unemployment 12
Step four: income support claimants 12
Step five: CCJs 12
Step six: mortgage arrears and repossessions 13
Step seven: self-employment with less than three years of proof of income 13
Elimination of double counting 13
Datamonitor estimates that there are seven million adults in the UK that fall into the non-standard category 14
Changes in employment status proved the key driver for the recent increase in the population 15
The number of registered CCJs looks likely to increase in 2008 16
Mortgage repossessions and arrears are rising 17
Personal bankruptcies peaked in 2006, but now appear to be falling 18
Payments in arrears are at a high 19
Mainstream issuers have been tightening their criteria 20
Datamonitor estimates that there are 6.0 million credit cards issued to non-standard individuals in the UK 20
Datamonitor's methodology might overestimate the number of non-standard cards in issue 21
Self-employment and having a CCJ account for over half of the non-standard cards in issue 21
Average cardholding is lower in the non-standard segment 22
The value of transactions on non-standard credit cards amounted to £9 billion in 2007 23
Datamonitor's estimation methodology 23
Datamonitor estimates that the value of transactions on non-standard cards reached £9.0 billion in 2007 24
The market is composed of mainstream and specialist providers 24
Capital One, HBOS, Barclaycard and RBS are all active in this market 25
Several mainstream players have acquired specialist lenders in order to gain the expertise needed to issue in this market 26
There are several advantages to this approach, as compared to direct market entry 27
Mainstream players have used different branding strategies to enter this market 27
Market entry through a subsidiary allows mainstream issuers to protect their prime brands 28
However, most issuers have stayed faithful to their prime brands 29
Other specialist issuers target the lower end of the non-standard spectrum 30
Profile: SAV Credit 30
Profile: Vanquis Bank 32
Non-standard specialist lenders are benefiting as a result of mainstream lenders tightening their issuing criteria 35
For example, Vanquis has continued to grow rapidly and become profitable 35
SAV Credit has expanded by inorganic growth 35
As a result, non-standard specialist providers are confident about the future 35
It is likely that other firms will eventually enter the non-standard market 36
Datamonitor forecasts moderate growth in the non-standard credit card market 36
Datamonitor forecasts that the value of transactions on non-standard cards will grow at a CAGR of 7.2% 36
Datamonitor's estimation methodology 36
Datamonitor forecasts the value of non-standard credit card transactions to reach £12.7 billion by 2012 37
Growth will be fastest among those with checkered or limited credit histories 39
A number of factors are forecast to drive growth in the non-standard credit card market 39
Summary 42
Appendix 43
Definitions 43
AAGR 43
APACS 43
Average transaction value 43
Balances outstanding 43
CAGR 43
Credit card 43
Debit card 43
Non-standard 44
Methodology 44
Primary research 44
Secondary research 44
Further reading 45
Ask the analyst 46
Datamonitor consulting 46
Disclaimer 46
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Table 1: A selection of credit cards from non-standard to premium, 2008 10
Table 2: Number of mortgage repossessions and arrears, 2003-07 18
Table 3: Cardholding per person in the mainstream and non-standard sectors, 2003-07 23
Table 4: SAV Credit fact file, 2008 30
Table 5: Vanquis Bank fact file, 2008 32
Table 6: APRs for Vanquis credit card products. 2008 34
Table 7: Datamonitor's forecast for the non-standard credit card market, 2007-12 38
Table 8: Non-standard population forecast, 2007-2012f 40
Table 9: Current relevant Datamonitor publications, 2008 45
Table 10: Future relevant Datamonitor publications, 2008 45
Figure 1: The non-standard sector encompasses a range of consumers 6
Figure 2: The sub-prime market accounts for just one part of the non-standard market 7
Figure 3: The non-standard population covers a spectrum of risk prospects from the near prime to the heavy sub-prime 8
Figure 4: The UK non-standard population has increased significantly in the last two years 15
Figure 5: CCJs and Mortgage Arrears contributed to the decrease in non-standard individuals, but was balanced by an increase in unemployment, 2003-2007 16
Figure 6: After a decade of decline, CCJs are now rising again, 1987-2008 17
Figure 7: Bankruptcies peaked in 2006, but now appear to be falling 19
Figure 8: The number of non-standard cards has grown from 4.3 million to 6.0 million, 2003-2007 21
Figure 9: Self-employment and having a CCJ account for over two-thirds of the cards in the possession of non-standard individuals, 2007 22
Figure 10: The non-standard sector accounts for a growing proportion of transaction values, 2003-07 24
Figure 11: Several mainstream players have an offering in the non-standard market, 2008 26
Figure 12: The table of figures is an optional section and can be removed 28
Figure 13: SAV cross-sells other financial products on its website 32
Figure 14: Datamonitor expects the value of transactions to grow at a CAGR of 7.2%, 2007-12 38
Figure 15: The non-standard population will increase steadily over the next five years, 2007-2012f 40
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