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UK Personal Loan Distribution 2008

Datamonitor
December 4, 2008
8 Pages - SKU: DFMN2043745

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Countries covered: United Kingdom

Introduction

The use of the internet is gaining momentum in personal loan distribution and as a result some other channels are set to decline through 2012. While telephone call centers are expected to remain important, branch networks are evolving to become more advisory oriented. At the same time the intermediary channel has been shrinking due to tougher market conditions.

Scope

Quantifies the size of the different distribution channels in the UK personal loan market.
Gives insight into the future challenges lenders and brokers will face.
Uses Datamonitor's intermediary survey to understand intermediaries attitudes in the market.

Highlights

In 2007, the UK saw personal loan gross advances reach £62.3 billion, 9.6% down from the previous year. The fall in new business was due to a weakening economy, more stringent lending requirements and falling house prices.

Datamonitor estimates that in 2007 direct distribution accounted for 87.6% of all personal loan advances. Direct channels include bank branches, telephone, internet, or post.

There are a small number of lenders in the secured personal loan market.While some lend directly to consumers the majority lend exclusively through intermediaries. Almost all (95%) of intermediaries offer secured personal loans and 61.2% of secured perosonal loans are distributed by intermediaries.

Reasons to Purchase

Helps lenders understand the dynamics of personal loan distribution and the future developments that are expected to take place.
Presents the size of the personal loan market and the forecasted change in gross lending for both secured and unsecured loans.
Gives the reader insight into the views of intermediaries in a variety of areas across the market.

Overview: Catalyst; Summary; Executive Summary; New lending in the personal loan market fell in 2007 and it is expected to continue to fall; Direct distribution is the primary method for distributing personal loans; Intermediaries dominate the provision of secured personal loans; Lenders' use of bank branches will rise and then fall as the internet becomes more popular; Online distribution is expected to grow and account for 22.3% of all unsecured personal loan applications by 2012; Other channels will fall in use as result of the internet becoming more popular; The immediate future for intermediaries is bleak; Intermediaries are most concerned by rising consumer debt and supply drying up; Datamonitor has identified some key issues of which intermediaries need to be aware; Table of Contents; Table of figures; Table of tables; An Overview of Personal Loan Distribution; Introduction; New lending in the personal loan market fell in 2007, with both secured and unsecured loan markets performing badly; The value of new lending in the personal loan market fell by 9.6% in 2007; The UK personal loan market is composed of secured and unsecured products; Secured personal loans are generally taken out by customers with existing mortgages; Unsecured personal loans are not backed by collateral; Both the secured and unsecured personal loan markets have performed poorly in recent years; Both the secured and unsecured personal loan markets are forecast to return to a positive growth period by 2012; The unsecured personal loan market is forecast to grow by 3.3% from 2008 to 2012; The secured personal loan market is forecast to grow by 4.0% from 2008 to 2012; Personal loans can be distributed through a variety of channels; Direct distribution accounts for the majority of the personal loan market; Intermediaries account for the vast majority of secured personal loan distribution; The majority of lenders lend exclusively through intermediaries; Bank branches account for a large proportion of unsecured personal loans distributed; The use of bank branches has fallen in the last three years as online distribution has become more popular; The popularity of telephone based distribution channels has fallen in the past couple of years; Intermediaries account for only a small share of the unsecured personal loan market; Datamonitor predicts that direct lending will become more prominent; Intermediaries have been exiting the personal loan market; Direct lending will remain the main form of distribution for unsecured personal loans; The use of bank branches will grow slightly then fall in popularity; Online distribution is expected to grow consistently; The use of the telephone will fall in the future; The popularity of direct mail as a distribution channel is anticipated to fall; The indirect channel is forecast to fall then rise; Intermediaries' share of the secured personal loan market will fall; Direct lending is forecasted to expand; Meanwhile, indirect lending will contract slightly because of tighter profit margins; Direct Loan Distribution; Introduction; The credit crunch has raised the profile of face to face channels because of the bespoke advice that it can facilitate; Many large lenders have focused on existing customers and are offering help to those in financial difficulty; Personal pricing has become more popular as lenders address individual's circumstances; Some lenders have noticed a fall in the quality and level of competition; Datamonitor believes that consumer demand is falling slightly, but is still outweighing supply; Borrowing for new car purchases and home improvement has fallen as consumers focus more on debt consolidation; Cutting expenditure on direct distribution channels would be a risky strategy as a response to the credit crunch; Bank branches are becoming more sophisticated; In 2007, bank branches accounted for almost half of all personal loan applications; A number of the major banks have been refurbishing their branches in order to improve the customer experience; It has been argued that banks are opening branches in affluent areas and closing branches elsewhere; Strong branch networks are very important for banks despite the cost; Face to face interactions are fundamental but independent advice given by banks will always be debated; Lenders are able to cross sell within branches which offers potential to increase revenue; Lenders have faced financial challenges in maintaining their branch numbers; The BBA outlines that UK branch networks have been falling steadily from 2001 to 2006; There is a continuing trend for banks to move away from traditional branches; Barclays' introduction of new flagship branches; Integration of all distribution channels is giving a further edge to the branch; Integration leads to better individual personal pricing, although this may not be in the interest of customers; Which? has accused lenders of using personal pricing as a means to avoid the 66% APR typical rule; Varying pricing across different channels is another way to boost profitability; The internet is growing and becoming more tailored to the next generation of consumers; The internet accounted for 16.5% of the direct personal loan market in 2007; Internet arranged unsecured personal loans are far more prevalent than online secured loan applications; The internet is leading to higher value loans being taken out online; The internet is also used as an information gathering tool; PPI has been a very topical issue especially with respect to online lending; The FSA has banned point of sale PPI as it may be against consumers' welfare; Online distribution has facilitated and spurred on new types of lenders; Direct channel lenders now play a significant role; Non-financially based lenders haven risen in popularity; Zopa has become an attractive source of finance for customers; There are significant factors that are limiting the development of online banking services; The possibility of fully completing a transaction online is becoming more fashionable; Online transactions' security is questionable especially as the number of phishing attacks has been rising; Consumers prefer bespoke advice, which is something the internet has not yet offered; Many banks have not seen a reduction in the number of their online users; Online aggregators are a growing phenomenon in the UK; Online aggregators generally earn a fee by linking consumers to banks; Aggregators earn the core of their revenues through three ways, depending on their business model; Aggregators have become increasingly popular as a direct result of the number of internet users rising; Aggregators offer a number of acquisition advantages to lenders; Lenders are concerned by aggregators' focus on price and greater non-price differentiation between lenders is becoming more important; Aggregators are becoming more sophisticated comparers and need help from lenders to take this further; Nevertheless lenders can receive too many applications from the wrong king of customer; Customers can often become confused by the wide array of online aggregators; Customers acquired via online aggregators yield low profits and offer little cross sell opportunity; Aggregators are volume driven and yield a low profit margin; Lenders must fully utilize online aggregators in order to stay competitive even in the current climate; Only a considerable level of consumer skepticism can hinder this channel's growth, but this is unlikely; Personal loans arranged through direct mail accounts for only 3.1% of the market; Distribution via direct mail is in decline; Lenders use direct mail as the primary channel for advertising; For unsecured lending direct mail accounts for the majority of total advertising; For secured personal lending, post only accounted for 35.5% of all advertising; Using direct mail is an effective way to cross sell products; Call centers will continue to be a popular method for personal loan distribution; Call centers have both strengths and weaknesses; Call centers provide customer service without the need of a branch; Call centers suffer similar disadvantages as the internet; There may be a move towards call centers for specialist enquires rather than distributing personal loans; Intermediary Loan Distribution; Introduction; Intermediaries still have an important role to play in the distribution of personal loans; The market's historical non-standard nature and small size explain the high participation of intermediaries; Intermediaries only account for a small percentage of the whole personal loan market; Most intermediaries use all distribution channels although face-to-face interaction is paramount; The average intermediary uses three distribution services; Post is used the least by intermediaries but its significance should not be underestimated; The average personal loan value distributed by intermediaries is £26,000; Intermediaries focus mainly on the secured personal loan market; Most intermediaries only offer secured personal loans; Secured personal loans are the main form of personal loan for intermediaries which offer both; Although a viable alternative to unsecured personal loans, secured lending has some major drawbacks; The majority of intermediaries have a customer base of up to 1,000; From this customer base, the average age band of a customer using an intermediary is 30-45 years old; The average customer using an intermediary falls into the £25,001-£40,000 income bracket; Most intermediaries only deal with a small number of lenders; Innovation in the secured personal loan market is lagging behind price in terms of importance; Competitively priced products is the most important aspect of a number one lender; Other features, such as personal relationship with the lender, are of lesser importance; The credit crunch may change the importance of the features outlined in selecting a number one lender; The credit crunch is causing there to be less lenders and loan products available; Intermediaries have reason to worry about the state of the personal loan market; Eight secured loan lenders have withdrawn from the secured loan sector since July 2007; Falling house prices have contributed to the fall in availability of secured personal loans; Intermediaries view the personal loans market as either stagnant or shrinking; Most intermediaries have experienced negative or no growth in their business; The sub-prime personal loan sector is expected not to grow; Intermediaries will face a number of challenges in the near future; Intermediaries are most concerned by rising consumer debt and supply drying up; Datamonitor has identified some key issues of which intermediaries need to be conscious; Consumers are far more aware of the risks involved when taking out a loan; Consumers are taking out secured loans for debt consolidation purposes; Intermediaries are seeing lower revenues and lower profitability as a result of the credit crunch; Most intermediaries are looking for alternative ways to boost their revenue as a result of lower profitability; There is no real agreement between intermediaries as to what will happen to the personal loan market after the credit crunch
APPENDIX: Supplementary data; Definitions; Balances outstanding; CAGR; Fixed rate personal loan; Gross advances; Non-standard; Online aggregator; Secured personal loan; Unsecured personal loan; Methodology; Further reading; Ask the analyst; Datamonitor consulting; Disclaimer
List of Tables: Table 1: Value of personal loans arranged directly and indirectly, 2006 and 2007; Table2: Value of secured personal loans arranged directly and indirectly, 2007; Table3: Value of unsecured personal loans arranged directly and indirectly, 2006 and 2007; Table 4: Datamonitor's forecast for the distribution of unsecured personal loans 2008f and 2010f; Table5: Datamonitor's forecast for the distribution of secured personal loans, 2008f and 2012f; Table 6: Typical APR charged by a sample of lenders at branch and online, October 2008; Table 7: Top 20 direct mail advertisers, 2008H1; Table 8: Most intermediaries use all of the main distribution channels, 2008; Table 9: Intermediary market of secured and unsecured personal loans, 2007; Table 10: How intermediaries perceive the future of the sub-prime personal sector over the next couple of years, 2008; Table 11: Secured and unsecured personal loan advances, 2003-07; Table 12: Forecasted secured and unsecured personal loan gross advances, 2007-12f; Table 13: Number of bank branches in the UK, 2001-06; Table 14: Number of reported phishing incidents targeted against UK banks and building societies, 2008; Table 15: Total advertising by channel, 2007; Table 16: Intermediary secured personal loan business as a proportion of total personal loans, 2008; Table 17: Most commonly used lenders by intermediaries, 2008; Table 18: Average customer base size of intermediaries, 2008; Table 19: Average age band of customers that use intermediaries, 2008; Table 20: Top five most important features that influence an intermediary's choice of lender, 2008; Table 21: The top five least important features that influence an intermediary's choice of number one lender, 2008; Table 22: Growth and decline in intermediary personal loan business, 2008; Table 23: Main concerns outlined by intermediaries, 2008
List of Figures: Figure 1: Both the secured and unsecured markets will grow by 3.4% from 2008f-12f 2007-10f; Figure 2: Direct distribution is the primary method of distribution for personal loans, 2007; Figure 3: Online distribution of unsecured personal loans will rise to 22.3%, 2008f-12f; Figure 4: Intermediaries are most concerned by lenders pulling away and rising levels of consumer debt, 2008; Figure 5: The value of new lending on personal loans fell by 3.2% between 2003-07; Figure 6: The secured personal loan market is considerably smaller than the unsecured personal loan market, 2003-07; Figure 7: Both the secured and unsecured markets will grow by 3.4% from 2008f-12f, 2007-12f; Figure 8: Direct distribution is the primary method of distribution for personal loans, 2007; Figure 9: 61% of secured personal loans are purchased through indirect channels, 2007; Figure 10: 87.6% of all unsecured loans are arranged directly, 2007; Figure 11: Online distribution of unsecured personal loans will rise to 22.3%, 2008f-12f; Figure 12: 77% of customers are worried about staying within their overdraft limit, which is why they are visiting bank branches more for advice, 2008; Figure 13: Intermediaries will continue to dominate the secured personal loan market, although their market share will fluctuate, 2008f-12f; Figure 14: UK branch networks have decreased by a CAGR of -1.6%, 2001-2006; Figure 15: Number of reported phishing incidents targeted against UK banks and building societies; Figure 16: Personal loan providers spend the most on direct mail advertising, 2007; Figure 17: Intermediaries account for only 6.7% of the personal loan market, 2007; Figure 18: Face to face and phone as a distribution channel account for 75% of most used channels, 2008; Figure 19: Secured personal loans dominate over unsecured personal loans in the intermediary market, 2007; Figure 20: Over half of intermediaries supply only secured personal loans, 2008; Figure 21: Secured personal loans are the most common form of personal loans that intermediaries offer, 2008; Figure 22: The majority of intermediaries have a customer base of 1,000 or less, 2008; Figure 23: 83% of customers fall into the 30 to 45 age band, 2008; Figure 24: The vast majority of customers fall into the £15,001 to £40,000 income band, 2008; Figure 25: Halifax, First Plus and GE Money are the most popular lenders with intermediaries, 2008; Figure 26: The most important features for intermediaries in selecting a number one lender was having competitively priced products and suiting customers needs, 2008; Figure 27: The least important features for intermediaries in choosing a number one lender was having a personal relationship with the lender and commission structure, 2008; Figure 28: The majority of intermediaries have not seen their personal loans business grow in the last 12 months, 2008; Figure 29: Most intermediaries have seen a decline of up to 20% of their business over the past 12 months, 2008; Figure 30: Most intermediaries are concerned by lenders exiting the personal lending market and the rising levels of consumer debt, 2008; Figure 31: The majority of customers take out personal loans for debt consolidation, 2008; Figure 32: Intermediaries agree that high personal indebtedness and low affordability of available personal loans will contribute to the market not returning to previous levels, 2008

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