UK Personal Loan Distribution 2008

Published by: Datamonitor

Published: Dec. 4, 2008 - 8 Pages

Table of Contents

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

Abstract

• 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.

• 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.

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