UK Personal Lending 2007 (Review Report)

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Overview

Catalyst

Summary

Table of Contents

Table of figures

Table of tables

Introduction

What is this report about?

Who is the target reader?

How to use this report

The UK Consumer Credit Market in 2006 and its Future Outlook

The consumer credit market delivered a poor performance in 2006

Advances dropped once again, though balances grew by a small degree

A number of factors can be attributed to the consumer credit market's poor performance

Despite a well performing UK economy in 2006, the consumer credit market did not follow suit

Successive base rate rises had a slowing effect on borrowing over 2006

Despite full employment, unemployment increased slightly over 2006, contributing to the consumer credit market's contraction

Though the housing market outperformed expectations in 2006, the consumer credit market still faltered

Further analysis highlighted that most individual product lines performed badly over 2006

In terms of balances outstanding, most products contracted except for retail finance and personal loans

Fluctuations in the share of the total consumer credit market show personal loans to have gained significantly

In terms of gross advances, all consumer credit products contracted except for overdrafts

Fluctuations in performance saw credit cards and overdrafts gain more share of the total consumer credit market

Meanwhile, point of sale finance continued to struggle

Motor finance had another poor year in 2006

Retail finance also had another poor year in 2006

What's next for the consumer credit market?

Datamonitor's forecasting model assesses the relationship of macroeconomic factors with respect to consumer credit products

Under the neutral view, new lending in the consumer credit market falls in 2007 and picks up thereafter

The consumer credit market will reach £229.4 billion in 2011

In terms of individual product lines, virtually all products will suffer in 2007 but will pick up thereafter

Under a pessimistic view of the economy, the consumer credit market will contract significantly in 2007 before picking up again in 2008

The consumer credit market will dip to a low of £199.8 billion in 2007 under a pessimistic scenario

In terms of individual product lines, retail and motor finance both continue their decline, with overdrafts performing best of all

Under an optimistic view of the economy, the consumer credit market will begin prospering again

The consumer credit market will expand at an annual average rate of 3.0 per cent to reach £238.1 billion in 2011

In terms of individual product lines, retail finance will be the only underperforming product

An Overview of the Overdrafts Market in the UK

Overdrafts are a key part of banks' current account packages

Overdrafts have grown strongly over the last five years

Overdrafts are an important income stream for banks

In addition, they contribute to those who switch bank accounts

For example, Alliance & Leicester continues to up the ante to win current account customers through its introductory offers on overdraft fees

Moreover, overdrafts are forecast to continue strong growth

But the overdrafts market is static compared to others

There are four main pricing models for overdrafts

It is surprising that individual risk-based pricing for overdrafts is not used to a greater degree

Prices on overdrafts do not tend to change very often

Such a condition can be attributed to complex nature of current accounts, but consumer apathy to switching current accounts is also to blame

There has been increasing scrutiny surrounding overdrafts, which will most likely have a significant effect on banks and consumers

First came the OFT investigation on credit card default fees

Now the OFT is to investigate the overdrafts market

A number of banks have been removing overdraft ""buffers"" and raising interest rates

Moreover, the investigation could have large consequences for the current account industry and consumers

Northern Ireland has also seen its current account and overdrafts market challenged

The Competition Commission found a number of significant issues with overdrafts

It advises that a number of remedies be applied to redress the market

The investigation is likely to conclude in a loss of income for banks in Northern Ireland

In addition, there is concern that too many consumers are using overdrafts for long-term borrowing instead of other cheaper lending products

Student Lending in the UK: Assessing Risk in an Environment of Rising Consumer Debt

Students are an important customer segment for banks

Students as a customer segment: banking on the future via cross-selling

Such a strategy is understandable given the increasing number of students in the UK

Lending is a large part of the student portfolio

Many banks offer a range of products, though the acquisition focus is on the current account

But lending is the more profitable product to sell

However, students are getting into greater and greater debt

The cost of attending university is becoming more expensive

As such, student debt has increased considerably over time

The majority of debt is in the form of Government loans, though overdrafts and credit cards are highly important too

Moreover, the average student beginning their course in 2006 will be at least £15,000 in debt by the time they finish

Given the more difficult economic environment and the increasing number of bankruptcies and IVAs, is student lending worth the risk?

Consumers are experiencing a more difficult economic time now

Such a situation is of worry to lenders who are already dealing with significant bad debt

While graduates are likely to earn more than non-graduates, they are not immune to economic difficulties

Because of significant student debt, there are suggestions that those under 30 are not big spenders on unsecured lending products

Moreover, even if students are better customers in the long-run, will they be loyal to their first current account provider?

Students continue to be viewed as a good investment, but banks are taking a number of precautions with student lending

In general, lenders are sharing more data in order to reduce bad debt

Lenders are pushing for Student Loans Company data to be shared

The Student Loans Company has become involved 60

The DTI is now holding a consultation over such ""hidden data""

More importantly, lenders must be sure to lend responsibly

Customer Acquisition Strategies in the UK Personal Lending Market

The typical personal loan customer has a number of traits

Personal loan holding differs by age group and income band

Age group segmentation highlights that customers in the 25 to 34 age bracket are those most likely to hold a personal loan

Income band segmentation highlights that low income earners are the least likely to have a personal loan

The typical personal loan customer is likely to take out a loan of between £5,000 and £9,999

Customers aged between 18 and 24 years old tend to apply for smaller ticket loans

Unsurprisingly, higher income groups have a higher tendency to borrow greater amounts

The overwhelming majority of personal loan customers have only one personal loan

There is no clear trend in terms of age segmentation

The higher the household income, the higher the probability of the personal loan customer holding more than one loan

The typical length of a personal loan is five years

It is worth highlighting that many personal loan customers do not see their loan commitment to the end

Unsecured personal loans are used for a vast array of purposes

Car purchase, home improvements and debt consolidation remain the major reasons given by customers for taking out a personal loan

Car purchase remains the most mentioned purpose of an unsecured personal loan

Home improvements and debt consolidation came second and third respectively in terms of most mentioned usage

Analysis by age group and income band highlights a few interesting trends in terms of usage

A number of lenders do design their marketing material based on the specific uses of a personal loan

Lloyds TSB went one step further by producing a used car buyers' guide to attract unsecured personal loan customers

A number of factors drive customers when choosing a particular lender

While the majority of customers do not shop around, a significant proportion do so before purchasing a personal loan

Analysis by age group highlights that those aged above 6are the least likely to research the unsecured personal loan market

The wealthier customers are, the more likely they are to shop around

Given that a significant number of customers do shop around, it is crucial for lenders to understand the reasons why customers choose a particular lender

Brand awareness provides a competitive advantage in the unsecured personal loan market

Direct channels, other than face-to-face, are increasingly being used by customers

Face-to-face distribution remains the channel of choice for a significant number of customers

Most personal loan providers with a branch presence follow a multi-channel strategy

Further analysis of the data highlights that young customers and the lower income households are more likely to visit the lender

Young customers and the elderly are more likely to visit a branch

Lower income households have a higher tendency to visit a lender to take out a personal loan

Competitive Dynamics in the UK Personal Loan Market

2005 saw a subdued performance from many lenders

Most lenders saw a rise in balances outstanding over 2005

Meanwhile, the five largest banking groups strengthened their market share over 2005 in terms of gross advances

Moreover, 2006 was another difficult year for personal lending

Personal loans also experienced a tough year

Indeed, most lenders experienced a difficult H1 2006

Not all players grew their balances over the half year

Moreover, many lenders saw a drop in new lending volumes

Unsurprisingly, lenders are feeling a number of competitive pressures

Competition is as tough as ever

The top competitors are spending more on advertising in terms of share

Lenders are having to look at other ways to compete successfully

Differentiation is key

But ultimately, the structure of pricing will have to change in the long-run

Moreover, bad debt continues to be a challenge when looking to beat the competition

Bad debt remains an issue for lenders

Such a situation has impacted upon lenders' competitive strategies and results

Pricing Strategies in the UK Personal Loan Market 2007

Price remains the acquisition weapon of choice in the UK unsecured personal loan sector

Price is a key product differentiator for both lenders and customers

Consequently, the average price of an unsecured loan has fallen considerably

Indeed, intense price competition in the UK unsecured personal loan market has led to a significant fall in average prices

However, lenders are adjusting their pricing models to a difficult lending environment

Rising personal debt has dealt a big blow to lenders' acquisition and profitability model

Consumers are increasingly resorting to debt solutions as they fail to keep up with repayments

Lenders' profitability has been affected significantly, as many consumers have started to default on repayments

It is therefore hardly surprising that many unsecured providers are adapting their acquisition and pricing model to reflect changes in the lending environment

Lenders' pricing models are changing as lenders are adapting their acquisition models

Will we see more lenders focusing on profitability rather than just increasing market share?

The great majority of unsecured loan providers practice a risk-based pricing model

Personal pricing has emerged in the last year or so

Furthermore, there are other examples where lenders are designing their pricing strategies to increase profitability

Going forward, pricing will remain aggressive but profitability will be equally as important, if not more so

Trends in Affinity Partnerships and Co-branding in the UK Personal Lending Market

Affinity and co-branding are two types of partnership in the personal lending market

While sharing similarities, affinity marketing and co-branding are separate business models

Affinity partnerships took off during the 1990s

There are a number of benefits for lenders who enter affinity partnerships

There are a significant number of large and small affinity partnerships in the UK

Co-branding also developed rapidly during the 1990s

Issuers have a range of reasons to get involved in the co-branding credit card market

There are a large number of co-branded credit cards available in the UK

Yet each is experiencing diverging trends

Affinity partnerships are stagnating at best

Affinity credit cards are losing ground to co-branded cards

Moreover, affinity personal loans have been in decline for a number of years now

Indeed, affinity partnerships are not as competitive as other schemes because of their inherent disadvantages

While co-branded cards continue to expand

Co-branding is expanding because it allows issuers to differentiate their offering in a saturated market

Such trends are likely to continue in the short to medium term

Affinity credit cards are likely to continue to stagnate

Moreover, the affinity personal loan model is in danger

For example, HBOS is gradually streamlining its affinity program

MBNA is also looking to wind down its dependence upon affinity partnerships

Meanwhile, co-branded credit cards are likely to increase in popularity

Yet issuers and merchants must think critically about whether or not this is the right opportunity for them

Personal Lending: Successful Entry Strategies in Western Europe

Lenders are increasingly coming up against a saturated UK consumer credit market

The UK consumer credit market is contracting

The UK consumer credit market is also highly competitive

Unsurprisingly, lenders' margins are falling in the saturated consumer credit market

Indeed, the UK consumer credit market is the most mature of all of Western Europe

Consumer credit plays a more important role in the UK economy than it does in any other Western European market

Moreover, in terms of new lending, the UK has performed poorly in comparison to the majority of the Western European markets

Consequently, UK lenders should look into higher growth European markets to expand

A number of international players have further expanded their operations in Western Europe

In particular, there remain opportunities in the Spanish consumer credit market

The Spanish consumer credit market continues to expand

A number of foreign lenders have become involved

The market continues to hold potential

As an example, Barclaycard is taking advantage of this growing market

Barclaycard is growing successfully in Spain

Barclaycard entered the Spanish market directly

Barclaycard's product range is designed to appeal to a range of customer segments

Barclaycard is likely to expand further in Spain by offering a wider range of products

In addition, the Turkish consumer credit market remains attractive to foreign acquisition

Turkey is the fastest growing consumer credit market in Western Europe

A number of reasons can explain Turkey's phenomenal growth

A number of international players have developed a significant presence in the market

As an example, GE Money now has a 25.5 per cent stake in Garanti Bank

Garanti Bank is a major player in the Turkish consumer credit market

By making such an acquisition, GE Money now has claim to a growing business in this market

But there are inherent risks in entering such a market

APPENDIX

Supplementary data

The UK Consumer Credit Market in 2006 and its Future Outlook

An Overview of the Overdrafts Market in the UK

Student Lending in the UK: Assessing Risk in an Environment of Rising Consumer Debt

Customer Acquisition Strategies in the UK Personal Lending Market

Competitive Dynamics in the UK Personal Loan Market

Pricing Strategies in the UK Personal Loan Market 2007

Trends in Affinity Partnerships and Co-branding in the UK Personal Lending Market

Personal Lending: Successful Entry Strategies in Western Europe

Definitions

General definitions

Affinity partnership

APR

Bank of England base rate

Balances outstanding

CAGR

CCJ

Co-branded card

Consumer credit

Current account

Gross advances

IVAs (Individual Voluntary Arrangements)

OFT

Overdraft

Student

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

European consumer credit reports

UK consumer credit reports

Relevant links

Ask the analyst

Datamonitor consulting

Disclaimer

List of Tables

Table 1: Balances outstanding and gross advances in the consumer credit market, 2002-2006

Table 2: Consumer credit balances outstanding by product, 2002-2006

Table 3: Market share of consumer credit balances outstanding by product line, 2002-2006

Table 4: Consumer credit gross advances split by product, 2002-2006

Table 5: Market share of gross advances in the consumer credit market by product line, 2002-2006

Table 6: New and used car POS motor finance balances outstanding, 2002-2006

Table 7: New and used car POS motor finance gross advances, 2002-2006

Table 8: New car finance gross advances by product line, 2002-2006

Table 9: Used car finance gross advances by product line, 2002-2006

Table 10: Retail finance balances outstanding by product line, 2002-2006

Table 11: Retail finance gross advances by product line, 2002-2006

Table 12: Forecast performance of the consumer credit market drivers under the neutral scenario, 2005-2011f

Table 13: Consumer credit forecasts under a neutral view of the economy, 2006-2011f

Table 14: Forecast performance of the consumer credit market drivers under the pessimistic scenario, 2005-2011f

Table 15: Consumer credit forecasts under a pessimistic view of the economy, 2006-2011f

Table 16: Forecast performance of the consumer credit market drivers under the optimistic scenario, 2005-2011f

Table 17: Consumer credit forecasts under an optimistic view of the economy, 2006-2011f

Table 18: The main banks compete for students by offering interest-free overdrafts, November 2006

Table 19: Value of personal loan when originally taken out, split by age group, January to June 2006

Table 20: Value of personal loan when originally taken out, split by income band, January to June 2006

Table 21: How many personal loans do you currently have?, by age group, January to June 2006

Table 22: How many personal loans do you currently have?, by income band, January to June 2006

Table 23: Usage of an unsecured personal loan, January to June 2006

Table 24: Usage of an unsecured personal loan, split by age group, January to June 2006

Table 25: Usage of an unsecured personal loan, split by income band, January to June 2006

Table 26: How did you actually arrange this loan?, split by age group, January to June 2006

Table 27: How did you actually arrange this loan?, split by income band, January to June 2006

Table 28: Unsecured personal loan balances outstanding and market share by group, 2004-2005

Table 29: Unsecured personal loan gross advances and market share by group, 2004-2005

Table 30: Unsecured personal loan balances outstanding and market share by group, H2 2005-H1 2006

Table 31: Advertising personal loan spend by the leading competitors, 2005-2006

Table 32: Typical interest rates offered by a sample of unsecured personal loan providers, Dec 2005 and March 2007 (Table 1 of 2)

Table 33: Typical interest rates offered by a sample of unsecured personal loan providers, Dec 2005 and March 2007 (Table 2 of 2)

Table 34: Unsecured personal loan providers' pricing strategies, March 2007

Table 35: Typical APR charged by a sample of lenders at branches and online, March 2007

Table 36: Typical APR for online loans from a sample of parent companies and their direct subsidiaries, March 2007

Table 37: Credit cards in issue in the UK by type, 2001-2005

Table 38: 12 month year-on-year change in UK house prices, January 2002-December 2006

Table 39: Overdrafts gross advances and balances outstanding, 1997-2006

Table 40: Datamonitor's overdrafts forecasts, 2006-2011f

Table 41: Banks' overdraft interest rates, November 2002-November 2006

Table 42: The number of students in the UK, 2000-2005

Table 43: Average student debt upon finishing a three-year university course in the UK, 2000-2006

Table 44: Percentage of student in debt by product, 2005

Table 45: Number of bankruptcies and IVAs, Q3 2005-Q3 2006

Table 46: How many other companies did you obtain information from before choosing your current personal loan provider?, split by age group, January to June 2006

Table 47: How many other companies did you obtain information from before choosing your current personal loan provider?, split by income band, January to June 2006

Table 48: Can you tell me why you chose this institution for this loan?, January to June 2006

Table 49: Half-year growth and market share in terms of balances outstanding by group, H2 2005-H1 2006

Table 50: Debt write-offs for unsecured lending (excluding credit cards), March 2002-December 2006

Table 51: End month weighted average interest rate on a £10,000 and a £3,500 unsecured personal loan and the base rate, Jan 2001 to March 2007 (Table 1 of 3)

Table 52: End month weighted average interest rate on a £10,000 and a £3,500 unsecured personal loan and the base rate, Jan 2001 to March 2007 (Table 2 of 3)

Table 53: End month weighted average interest rate on a £10,000 and a £3,500 unsecured personal loan and the base rate, Jan 2001 to March 2007 (Table 3 of 3)

Table 54: The differential between the base rate and the average interest rate of a £10,000 and £3,500 unsecured loan, January 2001 to March 2007 (Table 1 of 3)

Table 55: The differential between the base rate and the average interest rate of a £10,000 and £3,500 unsecured loan, January 2001 to March 2007 (Table 2 of 3)

Table 56: The differential between the base rate and the average interest rate of a £10,000 and £3,500 unsecured loan, January 2001 to March 2007 (Table 3 of 3)

Table 57: Number of providers split by various typical interest rate brackets, December 2005 and 2006, March 2007

Table 58: Number of cards and value of transactions for affinity and co-branded credit cards, 2001-2005

Table 59: Western European markets' consumer credit balances outstanding as a proportion of their GDP, 2005

Table 60: Growth in consumer credit gross advances in Western European countries, 2001-2005

Table 61: Consumer credit gross advances in Spain, 2001-2005

Table 62: Number of credit cards in Spain in issue by competitor, 2005

Table 63: Consumer credit gross advances in Turkey, 2001-2005

List of Figures

Figure 1: Advances dropped by 4.5 per cent in 2006, though balances grew by a small amount, 2002-2006

Figure 2: Consumer confidence continued to fall through 2006, May 2004 -December 2006

Figure 3: The housing market performed significantly above expectations in 2006, January 2002-December 2006

Figure 4: Unsecured personal loans experienced the strongest growth over the last five years, 2002-2006

Figure 5: Unsecured personal loans have gained an extra share of 6.8 per cent in the last five years while credit cards, motor and retail finance have all lost share, 2002-2006

Figure 6: Except for overdrafts, new lending on all consumer credit products suffered from a poor performance in 2006, 2002-2006

Figure 7: Credit cards and overdrafts have gained share while unsecured personal loans have lost share, 2002-2006

Figure 8: The share of used car finance within the motor finance market declined slightly in 2006, 2002-2006

Figure 9: Gross lending in both the new and used car finance markets declined in 2006, 2002-2006

Figure 10: Reversing the trend somewhat, two of three retail finance product lines saw growth in balances outstanding over 2006, 2002-2006

Figure 11: Gross advances for all product lines within retail finance have followed a downward trend since 2004, 2002-2006

Figure 12: The consumer credit market will steadily increase and reach £229.4 billion in 2011f, 2006-2011f

Figure 13: Under the pessimistic scenario, the consumer credit market will drop to a low of £199.8 billion in gross advances in 2007, 2006-2011f

Figure 14: Under an optimistic view of the economy, the consumer credit market will grow very strongly over the next five years, 2006-2011f

Figure 15: Overdrafts advances and balances have grown strongly, particularly over the last five years, 1997-2006

Figure 16: Alliance & Leicester's introductory offer on overdrafts is currently the most competitive in the market, November 2006

Figure 17: Datamonitor forecasts that overdrafts will continue to grow strongly, 2006-2011f

Figure 18: Banks use four different overdraft pricing models, November 2006

Figure 19: Authorized overdraft interest rates have not changed significantly over a five year period, November 2002-Novermber 2006

Figure 20: There are an increasing number of students in the UK, 2000/1-2004/5

Figure 21: Banks start by acquiring the student as a current account customer, followed by short and long-term cross-selling aims, 2006

Figure 22: Student debt has risen significantly since 2000, 2000-2006

Figure 23: The majority of student debt is in the form of Government loans, but overdrafts and credit cards are also important, 2005

Figure 24: Debt solutions have continued to become more popular in England and Wales, Q3 2005-Q3 2006

Figure 25: Customers between the age of 25 and 44 are most likely to take out a personal loan, January to June 2005 and 2006

Figure 26: Customers earning less than £15,499 are the least likely to hold a personal loan, January to June 2005 and 2006

Figure 27: Nine per cent of unsecured personal loan holders have more than one personal loan, January to June 2006

Figure 28: Five years is the most likely term for a typical personal loan, January to June 2006

Figure 29: Barclays and Northern Rock promote the specific uses of unsecured personal loans, 2006

Figure 30: Lloyds TSB has produced a used car buyers' guide to aid its acquisition of personal loan customers, 2006

Figure 31: Customers in the age bracket 65+ are the least likely to research the unsecured personal loan market before taking out an unsecured personal loan, January to June 2006

Figure 32: The wealthier customers are, the more likely they are to shop around, January to June 2006

Figure 33: Having an existing relationship remains the major reason for choosing a personal loan provider, January to June 2006

Figure 34: Halifax is the most mentioned lender by surveyed customers when asked about providers they would consider taking a new personal loan with, January to June 2006

Figure 35: Face-to-face remains the channel of choice for customers, January to June 2006

Figure 36: Barclays Bank and Northern Rock were the market's biggest winners over 2005 in terms of balances outstanding, 2004-2005

Figure 37: The top five lenders gained share over 2005 in terms of gross advances, 2004-2005

Figure 38: The first half of 2006 was tough on a large number of lenders, even in terms of balances outstanding, H2 2005-H1 2006

Figure 39: Debt write-offs on unsecured lending (except credit cards) has continued to rise, March 2002-December 2006

Figure 40: Interest rates in the unsecured personal loan market are dynamic, January 2001 to March 2007

Figure 41: The differential between the base rate and the average interest rate of an unsecured loan has fallen over the years, January 2001 to March 2007

Figure 42: The majority of lenders offer a typical interest rate below the seven per cent mark, December 2005 and 2006, March 2007

Figure 43: The average UK adult owed £4,522 in unsecured personal debt as at the end of 2006, 2002-2006

Figure 44: Both the number of IVAs approved and bankruptcy orders have risen significantly since 2005, 2002 and 2006

Figure 45: General characteristics of affinity partnerships and co-branding, 2007

Figure 46: Co-branded credit cards continue to expand while affinity credit cards have stagnated recently, 2001-2005

Figure 47: The UK is the most mature of Western European consumer credit markets as a proportion of GDP, 2005

Figure 48: From 2001 to 2005, new lending in the UK has been slower than most European consumer credit markets, 2001-2005

Figure 49: Consumer credit in Spain has witnessed a solid expansion, 2001-2005

Figure 50: La Caixa and BBVA dominate the Spanish credit card market, but Barclaycard is now fourth in terms of number of cards in issue, 2005

Figure 51: Barclaycard Spain now offers a range of credit cards in order to appeal to different customer segments, October 2006

Figure 52: Consumer credit gross advances are rising rapidly in Turkey, 2001-2005

Figure 53: Point of sale product aggregations used within this report