UK Non-standard Unsecured Personal Loans 2008

The recent depressions in the financial markets have affected consumer lending significantly, not least in the non-standard segment. As the country's economy wanes, the number of non-standard individuals is set to increase, but what does this really mean for non-standard unsecured lenders and the related market? This report provides the answers.

Report Highlights
With economic growth waning slightly, 2007 brought further increases, spurred on primarily by changes in employment status. As the credit crunch starts to impact the economy, particularly through mortgage defaults and repossessions, the non-standard population looks set to increase dramatically going forward.

The non-standard unsecured loans market recorded yet another subdued performance in 2007 as the cost of lending increased due to the freezing up of the wholesale money markets. The market is now bracing itself for some very difficult challenges as factors that have previously driven this market are declining significantly.

The competitive dynamics of the home collected credit market are set to change, as some lenders seek to reduce exposure while others continue to mop up additional market share. While this market has continued to perform poorly in financial terms, lenders remain upbeat.
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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The number of non-standard individuals in the UK reached 7.2 million in 2007 2
Financial market instability affected the non-standard consumer base in 2007 2
Datamonitor predicts a steady increase in the non-standard population over the next five years 2
The non-standard unsecured personal loans market faced another difficult year in 2007 3
Gross advances have decreased significantly in recent years 3
Despite funding worries, Datamonitor predicts a slow and steady increase in the non-standard unsecured loans market 4
More individuals will become credit-impaired as the effects of the credit crunch start to impact consumers directly 4
Greater lending conservatism by mainstream banks will lead to an increase in the number of high-street credit applications being declined 5
The home collected credit market performed poorly in 2007 5
The big four players sustained their dominance in the market, although two main competitors are reducing their exposure 5
Table of Contents 6
Table of figures 7
Table of tables 7
The UK Non-standard Population 8
The number of non-standard individuals in the UK reached 7.2 million in 2007 8
A brief note on the definition of non-standard individuals 8
An element of subjectivity is needed with any definition of non-standard 9
The non-standard population rose by 73,000 in 2007 over 2006 levels 10
Changes in employment status proved the key driver for the recent increase in the population 11
Financial market instability affected the non-standard consumer base in 2007 12
Most factors contributing to the non-standard population slowed in 2007, thanks to a strong start to the beginning of the year 13
The number of CCJs issued in 2007 increased by 6.3% 13
Datamonitor predicts a steady increase in the non-standard population over the next five years 13
A country-wide recession in the short to medium-term will see an increase in the number of non-standard individuals 13
The UK non-standard Unsecured Personal Loans Market 16
The non-standard unsecured personal loans market faced another difficult year in 2007 16
Gross advances have decreased significantly in recent years 16
Balances outstanding have remained fairly stable 18
Funding issues caused the market to slow down during the second half of 2007 19
Many lenders have exited the unsecured personal loan market in the wake of the financial crisis 19
A shortage of cost-effective funding is placing huge pressure on the main non-standard players 20
Amid takeover rumors and debt refinancing concerns, Cattles applied for a banking license in an attempt to capture retail deposits 20
London Scottish Bank is expected to exit, or significantly reduce its exposure to, the market 20
More conservative lenders are weathering the storm and refocusing on their core profitable lines 21
Provident Financial splits from its international business and focuses yet more heavily on home collected credit and Vanquis Bank 21
Impairment provisions set to increase as recession brings on greater default risk 21
Despite funding worries, Datamonitor predicts a slow and steady increase in the non-standard unsecured loans market 22
More individuals will become credit-impaired as the effects of the credit crunch start to impact consumers directly 22
Greater lending conservatism by mainstream banks will lead to an increase in the number of high-street credit applications being declined 22
The UK Home Collected Credit Market 24
Home collected credit fills an important niche for small amounts of unsecured credit 24
The home credit market is a sub-sector of the non-standard unsecured personal loans market 24
Home collected credit provides short term, unsecured cash loans typically in the region of £200 to £400 24
The home collected credit market performed poorly in 2007 25
Datamonitor's methodology for sizing the home collected credit market is based on two measures 25
Home collected credit balances have remained stagnant 25
Home collected credit advances have declined by almost 3% since 2003 26
Over the last five years, home collected credit has declined relative to the performance of other lending markets 27
The competitive dynamics of the home collected credit market are set to change 28
The big four players sustained their dominance in the market, although two main competitors are reducing their exposure 28
Provident Financial extended its dominance of the home collected credit market, capturing an additional 5% of market share in 2007 30
S&U consolidates its three brands to promote one consistent message 31
Many lenders have left or are exiting the market due to the lack of availability of funding and the threat of increasing impairment 31
Provident Financial looks set to dominate the market as other competitors withdraw or reduce exposure 32
Competitors claim that unique insight into individual customer risk will protect the market during a recession, despite stagnant performance 32
Although LendersCompared.org.uk is likely to increase price competitiveness in the market, this will not be as much as previously thought 32
The LendersCompared site only allows price comparisons based on specific customer-input criteria 32
Datamonitor predicts further decline in the market, except in the most optimistic of circumstances 33
Under the Datamonitor view scenario, the home collected credit market is forecasted to decrease slowly up to 2012 34
Under the optimistic scenario, the home collected credit market is forecasted to decline more heavily over the next five years 35
Under the pessimistic scenario, the home collected credit market is forecasted to grow very little over the next five years 38
APPENDIX 40
Supplementary data 40
Data tables relating to the UK non-standard population chapter 40
Data tables relating to the UK non-standard unsecured personal loans market chapter 41
Data tables relating to the UK home collected credit market chapter 43
Definitions 44
AAGR 44
Balances outstanding 44
Bank of England base rate 44
CAGR 44
CCJs 44
Gross advances 45
Non-standard 45
Research methodology 45
Sizing methodology for the UK non-standard population 45
Reasons for credit rejection 45
Elimination of double counting 46
Datamonitor uses seven steps to size the UK non-standard population 46
Bankrupts are excluded because of double counting 48
Datamonitor's forecasting model calculates home credit's penetration of the non-standard population 48
Datamonitor's bespoke forecasting model also considers drivers specific to home collected credit 49
Further reading 50
Ask the analyst 50
Datamonitor consulting 50
Disclaimer 50
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Table 1: UK non-standard population forecast under Datamonitor view, 2007-12f 15
Table 2: Home collected credit market shares, 2004-07 31
Table 3: Forecasted gross advances for the UK home collected credit market under Datamonitor view, 2007-12f 35
Table 4: Forecasted gross advances for the UK home collected credit market under the optimistic scenario, 2007-12f 37
Table 5: Forecasted gross advances for the UK home collected credit market under the pessimistic scenario, 2007-12f 39
Table 6: UK non-standard population, 2003-07 40
Table 7: UK non-standard population forecast under the optimistic scenario, 2007-12f 40
Table 8: UK non-standard population forecast under the pessimistic scenario, 2007-12f 41
Table 9: UK non-standard and mainstream unsecured personal loan gross advances, 2003-07 41
Table 10: UK non-standard unsecured personal loan balances outstanding, 2003-07 42
Table 11: UK non-standard unsecured loan advances forecast under the Datamonitor view, £m 42
Table 12: Comparison of UK lending market CAGR performance, 2003-07 43
Table 13: UK home collected credit, balances outstanding and gross advances, 2004-07 (£m) 43
Table 14: UK home collected credit indexed balances outstanding for major players, 2004-07 43
Table 15: UK home collected credit market shares by balances, 2003-07 44
Figure 1: Under the Datamonitor view, the non-standard population will increase steadily over the next five years, 2007-12f 3
Figure 2: Non-standard unsecured lending has decreased significantly in the last three years 4
Figure 3: Under the Datamonitor view, gross advances in the non-standard unsecured personal loan market will increase steadily through to 2012 5
Figure 4: Provident and S&U have aggressively targeted home collected credit in recent years, while other competitors have sought to reduce exposure 6
Figure 5: Datamonitor's definition of non-standard 9
Figure 6: A certain degree of subjectivity is needed in a definition of the non-standard population because, inevitably, some lenders are willing to accept greater risk than others 10
Figure 7: The UK non-standard population has increased significantly in the last two years 11
Figure 8: CCJs and mortgage arrears contributed to the decrease in non-standard individuals over the past five years, but were balanced by an increase in unemployment, 2003-07 12
Figure 9: Under the Datamonitor view, the non-standard population will increase steadily over the next five years, 2007-12f 14
Figure 10: Non-standard unsecured lending has decreased significantly in the last three years 17
Figure 11: Non-standard unsecured loan balances have fluctuated over the past three years 18
Figure 12: Under the Datamonitor view, gross advances in the non-standard unsecured personal loan market will increase steadily through to 2012 23
Figure 13: Home collected credit balances outstanding grew marginally, while gross advances declined in 2007 26
Figure 14: The home collected credit market has declined substantially in the past five years 27
Figure 15: Compared to most other lending markets, the home collected market has performed poorly over the last five years, 2003-07 28
Figure 16: Provident and S&U have aggressively targeted home collected credit in recent years, while other competitors have sought to reduce exposure 29
Figure 17: Provident Financial now commands 65% of the home collected credit market, 2007 30
Figure 18: LendersCompared.org.uk minimizes rate shopping by filtering search results 33
Figure 19: Under the Datamonitor view scenario, the home collected credit market is forecasted to decrease slowly up to 2012 34
Figure 20: Under the optimistic scenario, the home collected credit market is forecasted to decline more heavily over the next five years 36
Figure 21: Under the pessimistic scenario, the home collected credit market is forecasted to grow very little over the next five years 38
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