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UK Personal Lending 2009

Datamonitor
October 8, 2009
103 Pages - SKU: DFMN2470138

Abstract Table of Contents Related Reports

Countries covered: United Kingdom

Introduction

The recession in the UK has impacted lending considerably and the consumer credit landscape is now very different to what it was a year ago. However, with change comes opportunity, and with signs of a slow but steady recovery on the horizon, lenders will need to move quickly to take advantage of the improving consumer sentiment in the economy.

Scope

Covers unsecured personal loans, credit cards, overdrafts, motor finance and retail finance in the UK with the main focus on unsecured personal loans.
Provides forecasts under 3 different scenarios for the consumer credit market as a whole as well as for individual product lines.
Includes market share data for 2008 for major personal loan providers and examines the latest competitor developments shaping the market.
Provides discussion and analysis of several key issues facing UK consumer credit lenders.

Highlights

The UK personal lending market has suffered considerably over the past year. Lending has declined across all product lines, and many lenders have left the market entirely. While some signs of recovery are on the horizon, the supply of credit is still restricted, and perhaps more importantly, consumers are reducing borrowing and debt obligations.

Datamonitor expects conditions to remain tough throughout 2009 and 2010 before improving in 2011. Datamonitor's expectation is of an overall contraction of around 12% in the market from £192.9 billion to £170 billion between 2008 and 2009.

The competitive landscape has also shrunk considerably. In June 2008, there were 46 lenders offering unsecured personal loans, down from 58 in June 2007, however, by June 2009 this number had dropped further to just 37.

Reasons to Purchase

Gain access to the latest market sizing and forecasting data for the UK consumer credit market to place your performance in context to the market's.
Gain insight into how your competitors are responding to the various issues facing the unsecured lending sector.
Receive updated market share data to tell you how your company compares to your closest rivals.

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Overview: Catalyst; Summary; Table of Contents; Table of figures; Table of tables; The UK Consumer Credit Market in 2008 and Future Outlook; The consumer credit market deteriorated over 2008; The consumer credit market performed poorly in 2008, but although lending was weakened considerably, balances outstanding began to fall; Savings and investments declined in 2008 as consumers dip into their balances to pay off debt; The credit crunch and recession continue to impede the functioning of the consumer credit market; Base rate cuts during 2008 have failed to help Britain climb out of recession; Lenders have become more conservative in order to cope with the economic downturn; Despite attempts to cut their spending, many consumers need to keep borrowing; Most credit products saw modest falls in gross lending during 2008; Consumers continue to fund short-term borrowing needs with their credit cards; Unsecured personal loans declined dramatically over 2008; Gross advances on overdrafts have stayed relatively stable over 2008; The last quarter of 2008 saw a sharp decline in point of sale retail finance; Point of sale motor finance fell dramatically in the second half of 2008; Personal loans have strengthened their market share over the past five years; The reduction in consumer credit slowed in the first quarter of 2009; The consumer credit market declined for the fifth consecutive period in Q1 2009; The rate of decline seen across unsecured personal loans and motor finance slowed in Q1 2009; Despite drastic moves by the Bank of England, lenders and borrowers are shying away from credit products; The Bank of England has moved towards a policy of quantitative easing; Lenders continue to pursue conservative strategies as the prevailing economic conditions remain difficult; Consumers are becoming more aware of the need to organize their finances; Datamonitor expects conditions to remain tough during 2009 and 2010 before improving in 2011; Datamonitor's forecasting model explained; Further falls in GDP and soaring unemployment show that the UK economy remains in turmoil; Falling inflation has allowed the bank to maintain an historically low base rate; Retail sales dropped but new car and used car registrations grew in the first quarter; There were further reductions in house prices; Under the Datamonitor scenario, all credit products will have a difficult 2009; Datamonitor has also considered two additional scenarios; Under the pessimistic scenario, there will be a longer contraction in the economy; Under the optimistic scenario, the recovery will come sooner and be more pronounced; The government is introducing new measures to regulate the consumer credit market; The government is looking to prevent the unsolicited raising of credit card limits; The OFT is conducting a review on the fairness of competition in the consumer credit market; Consumers are turning to loan sharks in desperation as the credit crunch continues to bite; Competitive Dynamics in the UK Personal Lending Market; Unsecured personal lending levels contracted in 2008 as the market remained tough; The unsecured personal lending market had five larger players and a fringe of smaller players in 2008; Lloyds Banking Group was the market leader in terms of balances outstanding; Competitive pressures remain low as loan providers direct their focus internally; The number of unsecured personal lenders has declined further over the last year; Financial institutions are adopting a prudent approach to their lending policy; For the largest lenders in particular, cross-selling to existing customers is a favored practice, used in order to avoid taking on more risk; The average interest rate for a £5,000 loan has increased despite the plummeting base rates; Advertising expenditure has also dropped as a result of the credit crunch; Innovation in the UK personal lending market remains fairly minimal; High levels of bad debt and the new PPI ruling are hurdles that lenders need to overcome; Bad debt levels remain high but are now at a manageable level; The level of impairments has increased, which may in part come as a result of borrowers prioritizing secured debt repayment; The ban on the selling of single premium PPI will lead to lenders finding other ways to recoup their outlay; The current market conditions are impacting on the dynamics of other players in the market; Aggregators have been an important player in the market but they are losing their influence under current market conditions; Consumers trust online price comparison sites more than banks and building societies; Nevertheless, the internal focus of most loan providers may serve to cull the number of aggregators in the market; The payday loan industry has taken advantage of the current market conditions; Collections and Debt Management in UK Personal Lending; The personal loan market is bracing itself for rising impairments; Personal loan balances have grown partially due to higher default rates; Personal loan balances have grown while advances have fallen over the past 18 months; Arrears and delinquency rates will continue to rise during the recession; Impairment provisions will continue to grow as banks adapt to the worsening economic climate; Greater levels of lending in 2007 led to higher provisions for bad debt; As a percentage of total lending only a handful of lenders have increased their loan provisions; Most lenders will have increased their impairment provisions for 2008; Growing unemployment will result in a larger non-standard population adversely affecting impairments; Datamonitor predicts that the non-standard population will rise to just over nine million by 2010; Prevention of bad debts is better than the cure in the current climate; Most banks have similar methods for debt recovery and collection; Determining customer intentions is crucial for future loan portfolio performance; Data sharing can reduce fraud; Stringent lending policies are often the best way to minimize potential defaults; Affordability measures offer a better assessment of a borrower's financial status; Inter-bank data sharing minimizes the risk of lending to new customers by reducing informational asymmetries; Financial advice could be one way to prevent borrowers from falling into delinquency; Lloyds TSB have further led the way for customer advice; In-branch financial advice is becoming more popular as consumers become increasingly worried about their debts; A delinquency needs to be identified and resolved as soon as possible; Quick identification of arrears and delinquency is the most important aspect of debt management; Experian's Tallyman is an advanced system that streamlines debt collection and recovery; Customer segmentation is vitally important in order to maximize debt recovery; First time impaired need to be nurtured by the bank to ensure a successful debt collection procedure; There are three main solutions for borrowers who fall into repayment difficulties; Debt management plans are suited to those with relatively low levels of debt; Alternatively, IVAs offer a solution for an individual faced with overwhelming debts from various creditors; Often bankruptcies are used as the last resort for those who are severely impaired; Third party debt collection agencies are used once all other options are exhausted; Growing pressure to treat customers fairly is an important consideration for DCAs; Secured personal loans eliminate any confusion as to what should happen should a borrower default; Personal Lending Innovations From Abroad; The UK personal loans market has been severely affected over the last 12 months; Difficult conditions persist in the consumer credit market; Restrictions are being introduced on the sale of Payment Protection Insurance; The majority of loans are now used for debt consolidation; Banks must respond to these conditions through innovation and differentiation; Product design: some overseas banks offer loans secured against non-property assets; Banks in Asia offer debt secured against gold, equities and other assets; The Retail Banking team view; In the past, banks have been reluctant to enter this market; In the current climate, secured loans offer benefits to both parties; Mainstream provision of these loans could increase their attractiveness to the mass market; Customer segmentation: providers are increasingly targeting specific segments such as students, lower income consumers and those seeking 'green' loans; National Australia Bank offers lower income consumers access to low cost micro-loans; The Retail Banking team view; Danske Bank of Denmark offers low cost education loans to students with children; The Retail Banking team view; Several banks offer low-cost unsecured loans for environmental purposes; Bendigo Bank, Australia - 'Generation Green' range of products; BNP Paribas Fortis, Belgium - Energy Credit offering; RBC, Canada - Energy Saver Loan; Shiga Bank, Japan - carbon neutral loans; The Retail Banking team view; Incentives: rewards can be used to encourage good behavior; In Malaysia, EON Bank offers cashback to reward prompt repayments; The Retail Banking team view; Distribution: foreign banks make greater use of alternative channels for loan applications; Loan application via ATMs is commonplace in many other countries; Garanti Bank, Turkey; Cairo Amman Bank, Jordan; The Retail Banking team view; New technology: Twitter emerges as the next big communications medium for financial services companies; Banks in the US and Australia experiment with ways to exploit the new medium; Bank of America has pioneered the use of Twitter as a channel for responding to customer enquiries; Commonwealth Bank in Australia has gained favorable publicity through using Twitter; UBank is criticized for allegedly posting fictitious positive customer feedback; The Retail Banking team view; Banks need to treat Twitter as a two-way medium; Possible security concerns will need to be addressed; Consumers overseas can request up-to-date loan information via mobile banking; The Retail Banking team view; The Datamonitor view of the future of the UK unsecured loans market; Restrictions on the sale of PPI will lead to costlier loans; Loans will become more flexible in response to changing circumstances; Greater emphasis will be placed on online distribution; Brand Values in UK Personal Lending; The downturn has placed an emphasis on reducing advertising expenditure; The credit crunch has severely affected the personal loan market; Global brand strengths have fallen significantly in light of the worsening financial situation; A combination of changing market dynamics and lower liquidity levels have forced personal loan advertising expenditure downwards; In line with the weakened personal loan market, advertising has fallen across the board; The top 10 personal loan advertisers have cut their total expenditure by 69%; Lenders have been more affected in the secured market.; Only a relatively small number of lenders have exited the unsecured market; The secured market is characterized by only a handful of lenders; Innovative customer targeting will reap significant rewards despite the bleak outlook; To drive brand values at minimal costs banks need to appeal to consumers' recessionary mindsets; Following Datamonitor's Megatrends framework is vital for improving brand values; Targeting and promoting self-service products will appeal to the Financial Intelligence Complexity; Consumers demand greater control over their financial future; Effective advertising should focus on safety and functionality to lessen consumer worries; Personal loan campaigns should emphasize how credit can improve the short term position of a borrower; Services and products need to satisfy the Authenticity Megatrend; Despite these examples, few banks satisfy the Authenticity Megatrend; Adopting a more friendly advisory and assistance based approach to customers develops better customer relationships; Working with NGOs and charities will help improve reputation and trust; Marketing innovative loans for customers in difficulties will enhance a bank's reputation; A more personalized approach to product offerings is a win-win for banks
APPENDIX: Supplementary data; UK Consumer Credit Market in 2008 and Future Outlook; Competitive Dynamics in the UK Personal Loan Market 2009; Collections and Debt Management in UK Personal Lending; Brand Values in UK Personal Lending; Definitions; General definitions; Bank of England base rate; Balances outstanding; CAGR; Consumer credit; Gross advances; Overdraft; Definitions of point of sale motor and retail finance products; Motor finance products available at the point of sale; Retail finance products available at the point of sale; Methodology; Forecasting methodology; Choice of economic variables; Model outputs; Bespoke scenario based forecasting; Further reading; Ask the analyst; Datamonitor consulting; Disclaimer
List of Tables: Table 1: Quarterly total consumer credit gross advances and balances outstanding in the UK, Q4 2006-Q4 2008; Table 2: Retail savings and investments in the UK, 2004-08, £m; Table 3: Net inflows of retail savings and investments, 2004-Q3 2008; Table 4: UK consumer credit gross advances by product, Q4 2006-Q4 2008 (£m); Table 5: Market share of consumer credit balances outstanding by product line, 2004-08; Table 6: Quarterly total consumer credit gross advances and balances outstanding in the UK, Q1 2007 to Q1 2009; Table 7: UK consumer credit gross advances by product, Q1 2007 to Q1 2009 (£m); Table 8: Datamonitor's updated macroeconomic variables for 2008-13: Datamonitor scenario; Table 9: Updated Datamonitor view consumer credit forecast by product line, 2008-13 (£ billion); Table 10: Datamonitor's updated pessimistic consumer credit forecast by product line, 2008-13 (£ billion); Table 11: Datamonitor's updated optimistic consumer credit forecast by product line, 2008-13 (£ billion); Table 12: Unsecured personal lenders in the UK, Moneyfacts June 2009; Table 13: Loan impairment provisions for the main high street banks, 2005-07; Table 14: The top 10 global brand values, 2008; Table 15: The top 10 personal loan advertisers, 2007-08; Table 16: UK consumer credit balances outstanding by product, Q1 2007 to Q1 2009 (£m); Table 17: Datamonitor's updated macroeconomic variables for 2008-13: pessimistic scenario; Table 18: Datamonitor's updated macroeconomic variables for 2008-13: optimistic scenario; Table 19: Advertising spend for major providers, 2007-08; Table 20: Comparison of monthly interest rates on a £5,000 loan compared with the Bank of England base rate; Table 21: Write-offs on consumer lending from UK banks and building societies; Table 22: Average unsecured personal lending gross advances per person (over 18); Table 23: Extent to which consumers trust financial services companies; Table 24: Loan provisions as a percentage of total lending, 2005-07; Table 25: The non-standard population, 2004-08; Table 26: UK non-standard population forecast under the Datamonitor view, 2008-13f; Table 27: Total UK advertising expenditure by product line, 2004-08; Table 28: Total UK advertising expenditure in 2008, H1 2008-H2 2008
List of Figures: Figure 1: Total consumer gross lending slumped over 2008 and the rate of growth in balances outstanding started to decline in Q4 2008; Figure 2: Savings and investments in the UK fell in 2008; Figure 3: UK investors have pruned back their holdings in bonds, shares and mutual funds; Figure 4: There have been declines for most products, although overdrafts saw relatively flat year-on-year growth throughout 2008; Figure 5: Unsecured personal loans have continued to increase their market share of balances over the past five years; Figure 6: Both gross advances and balances outstanding continued to decline on a year-on-year basis; Figure 7: All products experienced negative year-on-year growth in Q1 2009; Figure 8: The rate of interest paid for a loan of £5,000 grew by 44% over two years; Figure 9: The majority of respondents said they plan to save more in the future; Figure 10: The newly formed Lloyds Banking Group had a market leading share of the gross advances in 2008; Figure 11: Lloyds Banking Group has the largest share of balances outstanding; Figure 12: Personal lending interest rates have increased significantly since June 2008 despite sharp cuts in the Bank of England's base rate; Figure 13: Across most banking groups, advertising expenditure shrank between 2007 and 2008; Figure 14: A fall in the level of write-offs in other unsecured lending counteracted the increase in write-offs for credit cards and secured loans; Figure 15: Despite strong performance in the credit card market, total unsecured lending dropped continuously between 2004 and 2008; Figure 16: Moneysupermarket.com lists all loans providers, but it does not link to products where the provider has not paid a fee; Figure 17: Online price comparison sites are more trusted than building societies and banks; Figure 18: The Wonga website emphasizes the convenience of the product; Figure 19: Unsecured personal loan advances have been falling while balances outstanding have grown, January 2007-September 2008; Figure 20: Only a few lenders increased their proportion of total loan provisions for impairments, 2005-07; Figure 21: 2008 witnessed a massive growth in the number of non-standard individuals, 2004-08; Figure 22: Under the Datamonitor view the non-standard population will increase significantly over the next five years, 2008-13f; Figure 23: Every bank aims to resolve a bad debt as quickly and effectively as possible, 2009; Figure 24: Lloyds TSB's budget calculator aggregates all outgoings thus providing a realistic budget representation for any consumer, 2009; Figure 25: ICICI Bank in India offers a 'Loan Against Securities'; Figure 26: Garanti Bank can grant loans through its ATMs; Figure 27: Bank of America is using Twitter to deal with customer enquiries; Figure 28: Total financial services advertising expenditure fell by 15.8% in 2008, 2004-08; Figure 29: Total advertising dropped by 22.4% throughout the second half of 2008; Figure 30: Recessionary consumers' behavior is affected by a number of basic drivers and inhibitors; Figure 31: Bank of Scotland's website provide a comprehensive source of information for borrowers, 2009; Figure 32: Online price comparison sites and banks are the most trusted financial institutions, 2008; Figure 33: First Direct's 'Enthuse' service explains products pure and simple, 2009; Figure 34: Virgin Money's homepage illustrates how the bank can help simplify financial services, 2009; Figure 35: Point of sale product aggregations used within this briefing

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