UK Personal Lending 2009 : Market Research Report

UK Personal Lending 2009

Published by: Datamonitor

Published: Oct. 8, 2009 - 103 Pages

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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UK Personal Lending 2009

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