UK Personal Loan Distribution 2006

• 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.
• What lenders can do to maximize intermediary business.

• In-depth analysis of distribution in the personal loan market showing where the opportunities lie, thus assisting you in devising strategic plans.
• Analysis of the major players in the market, thus allowing you to better plan your strategies.
• Gives the reader insight into the views of intermediaries in a variety of areas across the market.

CHAPTER 1 INTRODUCTION

What is this report about?

What is the scope of this report?

Who is the target reader?

How to use this report

CHAPTER 2 AN OVERVIEW OF PERSONAL LOAN DISTRIBUTION

Introduction

New lending in the personal loan market fell in 2005, with both the secured and unsecured loan markets performing poorly

The value of new lending in the personal loan market fell by 5.6 per cent in 2005

The secured personal loan market has outperformed the unsecured personal loan market

Unsecured loans account for the majority of the market but the secured loans market has grown rapidly in recent years

New lending in the personal loan market is forecast to return to a growth period

The unsecured personal loan market is forecast to grow by 3.2 per cent

The secured personal loan market is forecast to grow by 4.1 per cent

Numerous channels are used to distribute personal loans

Direct distribution accounts for the majority of the personal loan market

However, most secured personal loans are distributed through intermediaries

Meanwhile, bank branches dominate the distribution of unsecured personal loans

Direct lending is forecast to remain the dominant form of distribution for unsecured personal loans, while intermediaries continue to focus on secured personal loans

Direct lending will remain the main form of distribution for unsecured personal loans

Intermediaries will continue to dominate the secured personal loan market, but their share of the market is forecast to fall

Direct lending is expected to expand

Meanwhile, indirect lending will contract slightly

CHAPTER 3 DIRECT LOAN DISTRIBUTION

Introduction

Banks have once again realized the importance of branches after a number of years of branch closures

A number of banks have announced plans to expand the number of branches

However, banks are opening these branches in more affluent areas

Banks are opening branches that are moving away from the traditional bank branch

A strong branch network is beneficial for banks despite the cost

The opportunity of face-to-face contact is fundamental to the branch proposition

Cross-selling is another branch asset

Branches are facing financial challenges nonetheless

Clydesdale and Yorkshire are just the most recent examples of this trend

After buying Woolwich in 2000, Barclays Bank has just recently announced plans to close 200 Woolwich branches

Yet branches are benefitting from banks' integration of all distribution channels

The Internet has proved to be important, but not as important as once predicted

The Internet was once heralded as the future for personal banking

The use of the Internet for personal loans has increased dramatically

Online distribution has allowed new types of lenders to enter the personal loan market

Online distribution has distinct disadvantages, which mean that it will never be the dominant form of distribution

Credit agreements still have to be signed and returned by post or in person

Electronic signatures are lawful, but have yet to be used by mainstream lenders

Furthermore, consumers have concerns about the security of online transactions

Despite rising expenditure on online advertising it still remains marginal

The Internet has found a role, but branches will dominate for the foreseeable future

The Internet can be expected to contribute more to the unsecured personal loan market than the secured personal loan market

Other forms of distribution are of less importance

Call centers are a popular method of personal loan distribution, but their popularity is falling with the rise of the Internet

Telephone distribution transcends all other distribution channels

Call centers have both strengths and weaknesses

In future, call centers will be used mostly to service loans

Post is a little used method for setting up personal loans

Despite direct mail being one of the primary methods of advertising, consumers do not respond to direct mail by post

Furthermore, distribution via post is in decline

Because the distribution of personal loans is not expected to change significantly, lenders are looking for other ways to improve their businesses

Customer service is a key area for lenders to focus on

Regulatory changes will impact on the way lenders do business

Exclusion of secured personal loans under the FSA means that the market is regulated by the Consumer Credit Act

The Consumer Credit Act has reformed legislation that will greatly affect the secured personal loan market

Payment protection insurance is now regulated by the FSA

Pricing is still the main focus for lenders

CHAPTER 4 INTERMEDIARY LOAN DISTRIBUTION

Introduction

Intermediaries have an important role to play in the distribution of personal loans

However, intermediaries only account for a small proportion of the personal loan market

Intermediaries view personal loans as a growing market

Over half of all respondents felt their personal loan business had grown between zero and twenty per cent

Intermediaries focus on the secured personal loan market

Unlike unsecured personal loans, secured loans depend substantially upon the intermediary channel

Most intermediaries offer secured personal loans rather than unsecured personal loans

Lenders should focus their attention on intermediaries in order to expand

Intermediary size varies across the market, but the typical player is small

The majority of intermediaries have a customer base of up to 1,000

The value of the average secured personal loan is above the threshold covered by the Consumer Credit Act

Intermediaries are not selling PPI as a matter of course on personal loans

However, there has been no real change in the level of PPI sold on personal loans

Most intermediaries only deal with a small number of lenders

Profile: Nemo Personal Finance has also been successful since entering the market

While intermedaries are aware that Halifax is a major player in the market, they are not so aware of Nationwide

The suitability and pricing of a secured personal loan is the primary concern for intermediaries when choosing a lender

The quality of service and support provided to intermediaries from lenders was also an important factor

Fees and commissions paid to intermediaries are the least important factors when an intermediary chooses a lender

Overall intermediaries are happy with the service they get from their main lender

Face-to-face service is the most widely used intermediary distribution channel, but the Internet is rising quickly in popularity

Intermediaries use various methods to acquire customers

In addition, quality of service drives customer retention

What can lenders do in order to maximize intermediary business?

Lenders need to build up relationships with intermediaries in order to be among their top three favorites

Lenders should look to design products that are best suited to intermediaries' customers

IFAs are an unexploited opportunity

Setting up an intermediary subsidiary

Some regulations may affect the intermediary market

When the £25,000 limit is removed there will be more competition from mainstream lenders

The changes in early settlement charges may be damaging for small specialist lenders

However, intermediaries are confident about the future of personal loans

CHAPTER 5 CONCLUSIONS

Introduction

Various themes have emerged

A number of banks are increasing their branch networks

Personal loans sold via the Internet are set to continue growing

Competition in the personal loan market is expected to increase with intermediaries coming under the most pressure

CHAPTER 6 APPENDIX

Supplementary data

Sizing methodology

It is important to take into account Datamonitor's market sizing methodology

Research methodology

Forecasting methodology

Definitions

Bank of England base rate

Balances outstanding

CAGR

Fixed rate personal loan

Flexible mortgage

Gross advances

Loan term

Non-standard

Remortgaging

Rule of 78

Secured personal loan

Unsecured personal loan

Variable rate personal loan

Relevant readings

Reports

Relevant links

Datamonitor's custom research capabilities

The retail banking team

List of Tables

Table 1: Value of personal loans arranged directly and indirectly, 2004 and 2005

Table 2: Value of secured personal loans arranged directly and indirectly, 2005

Table 3: Value of unsecured personal loans arranged directly and indirectly, 2004 and 2005

Table 4: Datamonitor's forecast for the distribution of unsecured personal loans, 2005 and 2010f

Table 5: Datamonitor's forecast for the distribution of secured personal loans, 2005 and 2010f

Table 6: Personal loan advertising, split by type, 2005

Table 7: Intermediary market of secured and unsecured personal loans, 2005

Table 8: Intermediary and total advances for secured and unsecured personal loans, 2005

Table 9: Unsecured and secured personal loan gross advances, 2001-2005

Table 10: Forecasted unsecured and secured personal loan gross advances, 2005-2010f

Table 11: Online advertising and total advertising expenditure in the personal loans market, 2002-2005

Table 12: Total advertising expenditure and online advertising expenditure for selected companies operating in the personal loan market, 2005

Table 13: Growth and decline in intermediary personal loan business, 2006

Table 14: Intermediary secured personal loan business as a proportion of total personal loans, 2006

Table 15: The reasons why intermediaries believe that customers use them for personal loans, 2006

Table 16: The most commonly used lenders by intermediaries, 2006

Table 17: Lenders with the strongest presence in the intermediary market, 2006

Table 18: The features intermediaries find important in their choice of lender, 2006

Table 19: Factors that would tempt an intermediary to offer another lenders loans more often, 2006

Table 20: The key features of personal loans for customers, 2006

Table 21: Intermediaries' thoughts on changes to lenders' lending criteria, 2006

Table 22: Intermediary distribution channels that intermediaries use, 2006

Table 23: Reasons why customers choose a particular intermediary, 2006

Table 24: The methods used by intermediaries to target customers, 2006

Table 25: Split of advertising depending on if the personal loan is secured or unsecured, 2006

Table 26: The methods used by intermediaries to retain customers, 2006

List of Figures

Figure 1: The value of new lending on personal loans fell in 2003 and 2005, 2001-2005

Figure 2: The secured personal loan market is considerably smaller than the unsecured personal loan market, 2001-2005

Figure 3: Growth in both the secured and unsecured personal loan markets results in CAGR 06f-10f of 3.3 per cent for the whole personal loan market, 2005-2010f

Figure 4: Direct distribution is the primary method of distribution of personal loans, 2005

Figure 5: 71.5 per cent of secured personal loans are purchased through indirect channels, 2005

Figure 6: 94.3 per cent of all unsecured loans are arranged directly, 2005

Figure 7: In Datamonitor's view, online distribution of unsecured personal loans will increase the most, 2005 and 2010f

Figure 8: In Datamonitor's view, intermediaries will continue to dominate the secured personal loan market, however, their market share will fall marginally, 2005 and 2010f

Figure 9: PPI is included in the original quote for a loan from Lloyds TSB, thus encouraging borrowers to take this option, August 2006

Figure 10: Online advertising expenditure of personal loans rose in 2005 as did its proportion of total advertising expenditure on personal loans, 2002-2005

Figure 11: Unsurprisingly, direct lenders spend the highest proportion of their budget on online advertising, 2005

Figure 12: Alliance & Leicester's call back service allows the bank to capture key personal details about the customer, August 2006

Figure 13: Personal loan providers spend the most on direct mail advertising, 2005

Figure 14: Intermediaries account for a small proportion of the personal loan market, 2005

Figure 15: The majority of intermediaries have seen their personal loans business grow in the last 12 months, 2006

Figure 16: Most intermediaries saw steady growth in their business in the last 12 months, 2006

Figure 17: Secured personal loans dominate over unsecured loans in the intermediary market, 2005

Figure 18: Over half of intermediaries supply only secured personal loans, 2006

Figure 19: Secured personal loans are the most common form of personal loans that intermediaries offer, 2006

Figure 20: Trust and the advice intermediaries can give are the main reasons for customers to choose intermediaries, 2006

Figure 21: The majority of intermediaries have a customer base of 1,000 or less, 2006

Figure 22: The personal loan intermediary market is populated by a large number of relatively small entities, along with a small number of very large players, 2006

Figure 23: The average unsecured personal loan is of much lower value than the average secured personal loan, 2006

Figure 24: Most intermediaries only sell a limited amount of PPI on personal loans, 2006

Figure 25: There has been little change in the level of PPI sold on personal loans in the last year, 2006

Figure 26: Halifax and Nationwide and the most popular lenders with intermediaries, 2006

Figure 27: Halifax is perceived by intermediaries to have the strongest presence in the intermediary market, 2006

Figure 28: The suitability of a product's characteristics and its pricing are the most important attributes for intermediaries, 2006

Figure 29: The opportunity to offer better products to their customers is the main incentive for intermediaries to look at new lenders, 2006

Figure 30: Interest rates are the most important factor when choosing a loan for a customer, 2006

Figure 31: Most intermediaries think that lenders have not changed their lending criteria recently, 2006

Figure 32: Most intermediaries are generally happy with their main current lender, 2006

Figure 33: The most popular way intermediaries distribute personal loans is by face-to-face meetings, 2006

Figure 34: Online distribution has had a mixed effect on intermediaries' business, 2006

Figure 35: Reputation and trust are the main reason that intermediaries think that customers use their particular company, 2006

Figure 36: Most intermediaries do not target specific groups, but the ones that do, mostly target the non-standard/credit impaired market, 2006

Figure 37: Intermediaries find that word of mouth is the most successful way to target customers, 2006

Figure 38: Of the leading intermediary advertisers, most only offer secured personal loans, 2005

Figure 39: The quality of service given by intermediaries is the main method used in the retention of customers, 2006

Figure 40: The majority of intermediaries expect their personal loan business to grow over the next few years, 2006

Figure 41: The Internet was heralded as the future of personal loan distribution; it has in fact, become an important secondary channel, 2006

Figure 42: Datamonitor's personal loan intermediary survey took a cross section of intermediaries in the market, 2006

Figure 43: Datamonitor's core consulting capabilities