The UK Home Collected Credit Market 2007

Published by: Datamonitor

Published: Jul. 18, 2007 - 58 Pages

Table of Contents

Overview

Catalyst

Summary

Executive Summary

The UK home collected credit market became somewhat more attractive again in 2006

Home collected credit provides short-term, unsecured cash loans typically in the region of £200 to £400

Things are looking up for home collected credit, but growth remains sluggish

Balances outstanding increased by 5.3 per cent in 2006 after a number of years of weak growth

Its prospects have improved modestly, but the market's future outlook still reflects its mature nature

Under the Datamonitor View scenario, the market will grow at a slow pace over the next five years

The competitive dynamics of the UK home collected credit sector create further challenging conditions

The market continues to be dominated by the 'big four'

Provident leads the market with a significant 60.5 per cent share in terms of balances outstanding

Meanwhile, a number of other strategic changes are taking place

Lenders need to stay ahead of challenges to benefit from what limited growth the market has to offer

Home credit providers will continue to face a number of challenges

Table of Contents

Table of figures

Table of tables

The UK home collected credit market became somewhat more attractive again in 2006

Home collected credit fills an important niche for small amounts of unsecured credit

Home collected credit provides short-term, unsecured cash loans typically in the region of £200 to £400

Home collected credit customers are part of a broader set of non-standard individuals

An element of subjectivity is needed with any definition of non-standard

Datamonitor estimates that there were 7.0 million non-standard individuals in 2006

The home credit market is a sub-sector of the non-standard unsecured personal loans market

Things are looking up for home collected credit, but growth remains sluggish

Datamonitor's methodology for sizing the home collected credit market is based on two measures

Lenders implemented new accounting standards in 2005-6, which has caused market figures to change

Balances outstanding increased by 5.3 per cent in 2006 after a number of years of weak growth

Challenging economic conditions helped to push the market forwards in 2006

Higher household bills made life more difficult for home credit consumers

Mainstream lenders tightened their lending criteria

But the UK home collected credit market remains mature

The home collected credit market has contracted over the last five years, in contrast to other credit markets

Its prospects have improved modestly, but the market's future outlook still reflects its mature nature

Datamonitor's forecasts consist of three different scenarios of the UK economy

Datamonitor's forecasting model calculates home credit's penetration of the non-standard population

Datamonitor's bespoke forecasting model also considers drivers specific to home collected credit

In the Datamonitor View scenario, the market will grow at a slow pace over the next five years

In the Optimistic economic scenario, the market will decline gradually over the next five years

In the Pessimistic economic scenario, the market will grow substantially over the next five years

The competitive dynamics of the UK home collected credit sector create further challenging conditions

The market continues to be dominated by the 'big four'

Provident leads the market with a significant 60.5 per cent share in terms of balances outstanding

The big four have maintained their dominant position for many years

The majority of competitors experienced a rise in business over 2006

Most of the large players in the market saw a rise in balances outstanding in 2006

Consolidation is providing some larger lenders with opportunities

London Scottish Bank was the target of a number of potential acquisition bids, but nothing materialized

Park Group sold its book to Cattles in 2006 after battling with bad debt and difficulty entering the market

While some lenders reduce their exposure to the market, others are refocusing on it anew

Provident is renewing its focus on home credit, in addition to continuing diversification

Provident will be demerging its international division in 2007

Provident is renewing its focus on UK home credit as it will be a major part of its business going forward

But diversification in the UK will still remain a priority

Cattles continues to disengage from the home collected credit market in search of better returns

Cattles is instead focusing on its more profitable divisions

London Scottish Bank is restructuring its unsecured loan business and focusing on faster growth markets

The company is reducing its number of branches as a way of trimming losses

Instead it is developing its debt collection and secured lending businesses

Home credit still remains its core product, but S&U continues to diversify into other markets

Lenders need to stay ahead of challenges to benefit from what limited growth the market has to offer

Lenders are relieved by proposed regulation, but it will still be difficult for smaller players

Regulatory scrutiny has been intense in recent years

2003 saw the first damning report on home collected credit appear

The market then came under scrutiny by the Competition Commission

Most lenders were satisfied and relieved by the Competition Commission's final report in November 2006

Four remedies are to be implemented that will substantially increase the competitiveness of the market

Data sharing will aid in credit decisioning for lenders

A price comparison website will ultimately lead to thinner margins

Customers will be able to access better information

Early settlement rebates will reduce lender profits substantially

Importantly for lenders' survival, price maximums have been ruled out

But regulatory costs are going to cause difficulties especially for smaller lenders

The jury is also still out on whether regulation will help in the long-run if small lenders leave the market

In the end, it could be that consumers pay the highest price in the form of less competition

With bad debt remaining an issue, lenders are having to readjust their acquisition models

Bad debt began rising in 2005 and continued in 2006

Lenders are looking to balance quality and volume

Lenders are investing in order to make better credit decisions as well as relying increasingly on automation

Customers are increasingly depending on more than one provider for their credit needs

Customer retention is an emerging issue that will increasingly affect lenders

Lenders must look to exploit the advantages of home credit in order to retain customers

Credit cards in particular are becoming an increasing competitive and substitutionary force

Competition from mainstream lenders has eased up lately due to more difficult economic conditions

The future of home credit will nevertheless eventually be in plastic, so lenders should make the move now

Though other sources of external credit still remain a small threat, lenders cannot be complacent

Government initiatives still pose little competitive threat

Overdrafts and basic bank accounts for non-standard individuals are not a replacement for home credit

Credit unions do not pose a real competitive threat just yet

Alternative commercial sources of credit nonetheless have the potential to pose greater competitive threat

Technology will become ever more important to success for the larger lenders

Large lenders are rolling out handheld computers to their agents in order to become more cost efficient

Though small lenders will not be able to afford such technology, it will not hurt them substantially

Lenders are also relying more on automation to improve their credit decisioning

APPENDIX

Supplementary data

Definitions

AAGR

Balances outstanding

Bank of England base rate

CAGR

CCJs

Gross advances

Non-standard

Methodology

Sizing methodology for the UK non-standard population

Reasons for credit rejection

Elimination of double counting

Datamonitor uses seven steps to size the UK non-standard population

Bankrupts are excluded because of double counting

Further reading

Relevant links

Ask the analyst

Datamonitor consulting

Disclaimer

List of Tables

Table 1: Forecasted UK home collected market gross advances and the UK non-standard population in the Datamonitor View scenario, 2006-2011f

Table 2: Forecasted UK home collected market gross advances and the UK non-standard population in the Optimistic economic scenario, 2006-2011f

Table 3: Forecasted UK home collected market gross advances and the UK non-standard population in the Pessimistic economic scenario, 2006-2011f

Table 4: Estimated market share of the four leading providers in the home collected credit market in terms of balances outstanding, 2002-2006

Table 5: Estimated UK home collected credit balances outstanding by competitor, 2002-2006

Table 6: Home collected credit gross advances and balances outstanding, 2002-2006

Table 7: Proportion of total group balances outstanding for each of Provident's divisions, 2002-2006

Table 8: Cattles' direct repayment and home collected credit customer receivables and numbers, 2004-2006

List of Figures

Figure 1: The home collected credit market saw an improved performance in 2006 after a number of years of stagnation, 2002-2006

Figure 2: Under the Datamonitor View scenario, the home collected credit market will grow slowly up to 2011, 2006-2011f

Figure 3: The 'big four' players remain in control of the home collected credit market, with almost 90 per cent of market share in 2006 in terms of balances outstanding

Figure 4: Datamonitor's definition of non-standard

Figure 5: A certain degree of subjectivity is needed in a definition of the non-standard population because some lenders are inevitably willing to accept greater risk than others

Figure 6: The non-standard population increased for the first time in many years in 2006, 2002-2006

Figure 7: The home collected credit market saw an improved performance in 2006 after a number of years of stagnation, 2002-2006

Figure 8: Compared to most mainstream lending markets, the home collected market has performed very poorly over the last five years in terms of new lending, 2002-2006

Figure 9: In the Datamonitor View scenario, the home collected credit market will grow slowly up to 2011, 2006-2011f

Figure 10: In the Optimistic economic scenario, the home collected credit market will decline over the next five years, 2006-2011f

Figure 11: In the Pessimistic economic scenario, the home collected credit market is forecast to grow significantly over the next five years, 2006-2011f

Figure 12: The 'big four' players remain in control of the home collected credit market, with almost 90 per cent market share in 2006 in terms of balances outstanding

Figure 13: The majority of large players saw a rise in balances over 2006, 2002-2006

Figure 14: Provident's international home collected credit division and Vanquis Bank have become increasingly important to the company's book, 2002-2006

Figure 15: Cattles continues to focus upon its direct repayment division at the expense of home collected credit, 2004-2006

Abstract

• Sizes the UK home collected credit market and presents scenario-based five year forecasts.
• Provides market share data for the major competitors in the home collected credit market.
• Gives insight into the future challenges of the market and how lenders could respond.

The home collected credit market's future growth remains inhibited by its highly mature nature. There is still good reason for providers to look to diversify into other product areas or grow the business through geographical expansion, though lenders focused on the sector will be able to experience higher lending volumes than in previous years.

Economic conditions have become tougher for home credit customers, as household bills have increased in recent years. Such higher household expenses are taking up a greater proportion of home credit customers' salaries and are therefore pushing more of them towards home collected credit, more often than not to fill the gap until the next payday.

Though the market has reached a stage of maturity, consolidation nevertheless continues, creating opportunities for a number of larger lenders. So far, Cattles and S&U are particularly taking advantage of the occurring consolidation.

• Understand how the market is changing and where the new opportunities lie.
• Gives you a competitive edge by providing you with a thorough analysis of the UK home collected credit market.
• Draw on Datamonitor's five-year scenario-based forecasts to plan your future strategy with confidence.

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