UK Personal Lending 2009

• Covers unsecured personal loans, credit cards, overdrafts, motor finance and retail finance in the UK with the main focus on unsecured personal loans.
• Provides forecasts under 3 different scenarios for the consumer credit market as a whole as well as for individual product lines.
• Includes market share data for 2008 for major personal loan providers and examines the latest competitor developments shaping the market.
• Provides discussion and analysis of several key issues facing UK consumer credit lenders.

• Gain access to the latest market sizing and forecasting data for the UK consumer credit market to place your performance in context to the market's.
• Gain insight into how your competitors are responding to the various issues facing the unsecured lending sector.
• Receive updated market share data to tell you how your company compares to your closest rivals.

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