Overview 1
Catalyst 1
Summary 1
Table of Contents 2
Table of figures 3
Table of tables 4
The UK Consumer Credit Market in 2008 and Future Outlook 5
The consumer credit market deteriorated over 2008 5
The consumer credit market performed poorly in 2008, but although lending was weakened considerably, balances outstanding began to fall 5
Savings and investments declined in 2008 as consumers dip into their balances to pay off debt 7
The credit crunch and recession continue to impede the functioning of the consumer credit market 9
Base rate cuts during 2008 have failed to help Britain climb out of recession 9
Lenders have become more conservative in order to cope with the economic downturn 9
Despite attempts to cut their spending, many consumers need to keep borrowing 10
Most credit products saw modest falls in gross lending during 2008 10
Consumers continue to fund short-term borrowing needs with their credit cards 12
Unsecured personal loans declined dramatically over 2008 12
Gross advances on overdrafts have stayed relatively stable over 2008 13
The last quarter of 2008 saw a sharp decline in point of sale retail finance 13
Point of sale motor finance fell dramatically in the second half of 2008 13
Personal loans have strengthened their market share over the past five years 14
The reduction in consumer credit slowed in the first quarter of 2009 15
The consumer credit market declined for the fifth consecutive period in Q1 2009 15
The rate of decline seen across unsecured personal loans and motor finance slowed in Q1 2009 17
Despite drastic moves by the Bank of England, lenders and borrowers are shying away from credit products 20
The Bank of England has moved towards a policy of quantitative easing 20
Lenders continue to pursue conservative strategies as the prevailing economic conditions remain difficult 20
Consumers are becoming more aware of the need to organize their finances 21
Datamonitor expects conditions to remain tough during 2009 and 2010 before improving in 2011 22
Datamonitor's forecasting model explained 22
Further falls in GDP and soaring unemployment show that the UK economy remains in turmoil 23
Falling inflation has allowed the bank to maintain an historically low base rate 23
Retail sales dropped but new car and used car registrations grew in the first quarter 23
There were further reductions in house prices 24
Under the Datamonitor scenario, all credit products will have a difficult 2009 24
Datamonitor has also considered two additional scenarios 25
Under the pessimistic scenario, there will be a longer contraction in the economy 26
Under the optimistic scenario, the recovery will come sooner and be more pronounced 26
The government is introducing new measures to regulate the consumer credit market 27
The government is looking to prevent the unsolicited raising of credit card limits 27
The OFT is conducting a review on the fairness of competition in the consumer credit market 27
Consumers are turning to loan sharks in desperation as the credit crunch continues to bite 28
Competitive Dynamics in the UK Personal Lending Market 29
Unsecured personal lending levels contracted in 2008 as the market remained tough 29
The unsecured personal lending market had five larger players and a fringe of smaller players in 2008 29
Lloyds Banking Group was the market leader in terms of balances outstanding 30
Competitive pressures remain low as loan providers direct their focus internally 31
The number of unsecured personal lenders has declined further over the last year 31
Financial institutions are adopting a prudent approach to their lending policy 33
For the largest lenders in particular, cross-selling to existing customers is a favored practice, used in order to avoid taking on more risk 34
The average interest rate for a £5,000 loan has increased despite the plummeting base rates 34
Advertising expenditure has also dropped as a result of the credit crunch 35
Innovation in the UK personal lending market remains fairly minimal 36
High levels of bad debt and the new PPI ruling are hurdles that lenders need to overcome 37
Bad debt levels remain high but are now at a manageable level 37
The level of impairments has increased, which may in part come as a result of borrowers prioritizing secured debt repayment 38
The ban on the selling of single premium PPI will lead to lenders finding other ways to recoup their outlay 39
The current market conditions are impacting on the dynamics of other players in the market 40
Aggregators have been an important player in the market but they are losing their influence under current market conditions 40
Consumers trust online price comparison sites more than banks and building societies 41
Nevertheless, the internal focus of most loan providers may serve to cull the number of aggregators in the market 42
The payday loan industry has taken advantage of the current market conditions 42
Collections and Debt Management in UK Personal Lending 44
The personal loan market is bracing itself for rising impairments 44
Personal loan balances have grown partially due to higher default rates 44
Personal loan balances have grown while advances have fallen over the past 18 months 45
Arrears and delinquency rates will continue to rise during the recession 45
Impairment provisions will continue to grow as banks adapt to the worsening economic climate 46
Greater levels of lending in 2007 led to higher provisions for bad debt 46
As a percentage of total lending only a handful of lenders have increased their loan provisions 47
Most lenders will have increased their impairment provisions for 2008 48
Growing unemployment will result in a larger non-standard population adversely affecting impairments 48
Datamonitor predicts that the non-standard population will rise to just over nine million by 2010 50
Prevention of bad debts is better than the cure in the current climate 51
Most banks have similar methods for debt recovery and collection 51
Determining customer intentions is crucial for future loan portfolio performance 51
Data sharing can reduce fraud 52
Stringent lending policies are often the best way to minimize potential defaults 52
Affordability measures offer a better assessment of a borrower's financial status 53
Inter-bank data sharing minimizes the risk of lending to new customers by reducing informational asymmetries 53
Financial advice could be one way to prevent borrowers from falling into delinquency 54
Lloyds TSB have further led the way for customer advice 55
In-branch financial advice is becoming more popular as consumers become increasingly worried about their debts 56
A delinquency needs to be identified and resolved as soon as possible 56
Quick identification of arrears and delinquency is the most important aspect of debt management 57
Experian's Tallyman is an advanced system that streamlines debt collection and recovery 57
Customer segmentation is vitally important in order to maximize debt recovery 58
First time impaired need to be nurtured by the bank to ensure a successful debt collection procedure 58
There are three main solutions for borrowers who fall into repayment difficulties 58
Debt management plans are suited to those with relatively low levels of debt 59
Alternatively, IVAs offer a solution for an individual faced with overwhelming debts from various creditors 59
Often bankruptcies are used as the last resort for those who are severely impaired 59
Third party debt collection agencies are used once all other options are exhausted 59
Growing pressure to treat customers fairly is an important consideration for DCAs 60
Secured personal loans eliminate any confusion as to what should happen should a borrower default 60
Personal Lending Innovations From Abroad 61
The UK personal loans market has been severely affected over the last 12 months 61
Difficult conditions persist in the consumer credit market 61
Restrictions are being introduced on the sale of Payment Protection Insurance 61
The majority of loans are now used for debt consolidation 62
Banks must respond to these conditions through innovation and differentiation 62
Product design: some overseas banks offer loans secured against non-property assets 62
Banks in Asia offer debt secured against gold, equities and other assets 62
The Retail Banking team view 64
In the past, banks have been reluctant to enter this market 64
In the current climate, secured loans offer benefits to both parties 64
Mainstream provision of these loans could increase their attractiveness to the mass market 64
Customer segmentation: providers are increasingly targeting specific segments such as students, lower income consumers and those seeking 'green' loans 65
National Australia Bank offers lower income consumers access to low cost micro-loans 65
The Retail Banking team view 65
Danske Bank of Denmark offers low cost education loans to students with children 65
The Retail Banking team view 66
Several banks offer low-cost unsecured loans for environmental purposes 66
Bendigo Bank, Australia - 'Generation Green' range of products 66
BNP Paribas Fortis, Belgium - Energy Credit offering 67
RBC, Canada - Energy Saver Loan 67
Shiga Bank, Japan - carbon neutral loans 67
The Retail Banking team view 67
Incentives: rewards can be used to encourage good behavior 68
In Malaysia, EON Bank offers cashback to reward prompt repayments 68
The Retail Banking team view 68
Distribution: foreign banks make greater use of alternative channels for loan applications 68
Loan application via ATMs is commonplace in many other countries 68
Garanti Bank, Turkey 68
Cairo Amman Bank, Jordan 69
The Retail Banking team view 70
New technology: Twitter emerges as the next big communications medium for financial services companies 70
Banks in the US and Australia experiment with ways to exploit the new medium 70
Bank of America has pioneered the use of Twitter as a channel for responding to customer enquiries 71
Commonwealth Bank in Australia has gained favorable publicity through using Twitter 72
UBank is criticized for allegedly posting fictitious positive customer feedback 72
The Retail Banking team view 72
Banks need to treat Twitter as a two-way medium 72
Possible security concerns will need to be addressed 73
Consumers overseas can request up-to-date loan information via mobile banking 73
The Retail Banking team view 73
The Datamonitor view of the future of the UK unsecured loans market 74
Restrictions on the sale of PPI will lead to costlier loans 74
Loans will become more flexible in response to changing circumstances 74
Greater emphasis will be placed on online distribution 74
Brand Values in UK Personal Lending 75
The downturn has placed an emphasis on reducing advertising expenditure 75
The credit crunch has severely affected the personal loan market 75
Global brand strengths have fallen significantly in light of the worsening financial situation 75
A combination of changing market dynamics and lower liquidity levels have forced personal loan advertising expenditure downwards 76
In line with the weakened personal loan market, advertising has fallen across the board 77
The top 10 personal loan advertisers have cut their total expenditure by 69% 79
Lenders have been more affected in the secured market. 80
Only a relatively small number of lenders have exited the unsecured market 81
The secured market is characterized by only a handful of lenders 81
Innovative customer targeting will reap significant rewards despite the bleak outlook 81
To drive brand values at minimal costs banks need to appeal to consumers' recessionary mindsets 81
Following Datamonitor's Megatrends framework is vital for improving brand values 82
Targeting and promoting self-service products will appeal to the Financial Intelligence Complexity 84
Consumers demand greater control over their financial future 85
Effective advertising should focus on safety and functionality to lessen consumer worries 86
Personal loan campaigns should emphasize how credit can improve the short term position of a borrower 86
Services and products need to satisfy the Authenticity Megatrend 87
Despite these examples, few banks satisfy the Authenticity Megatrend 89
Adopting a more friendly advisory and assistance based approach to customers develops better customer relationships 90
Working with NGOs and charities will help improve reputation and trust 90
Marketing innovative loans for customers in difficulties will enhance a bank's reputation 91
A more personalized approach to product offerings is a win-win for banks 91
APPENDIX 93
Supplementary data 93
UK Consumer Credit Market in 2008 and Future Outlook 93
Competitive Dynamics in the UK Personal Loan Market 2009 94
Collections and Debt Management in UK Personal Lending 96
Brand Values in UK Personal Lending 98
Definitions 99
General definitions 99
Bank of England base rate 99
Balances outstanding 99
CAGR 99
Consumer credit 99
Gross advances 99
Overdraft 99
Definitions of point of sale motor and retail finance products 99
Motor finance products available at the point of sale 100
Retail finance products available at the point of sale 101
Methodology 102
Forecasting methodology 102
Choice of economic variables 102
Model outputs 103
Bespoke scenario based forecasting 103
Further reading 103
Ask the analyst 103
Datamonitor consulting 103
Disclaimer 103
List of Tables
Table 1: Quarterly total consumer credit gross advances and balances outstanding in the UK, Q4 2006-Q4 2008 6
Table 2: Retail savings and investments in the UK, 2004-08, £m 8
Table 3: Net inflows of retail savings and investments, 2004-Q3 2008 9
Table 4: UK consumer credit gross advances by product, Q4 2006-Q4 2008 (£m) 11
Table 5: Market share of consumer credit balances outstanding by product line, 2004-08 15
Table 6: Quarterly total consumer credit gross advances and balances outstanding in the UK, Q1 2007 to Q1 2009 17
Table 7: UK consumer credit gross advances by product, Q1 2007 to Q1 2009 (£m) 18
Table 8: Datamonitor's updated macroeconomic variables for 2008-13: Datamonitor scenario 24
Table 9: Updated Datamonitor view consumer credit forecast by product line, 2008-13 (£ billion) 25
Table 10: Datamonitor's updated pessimistic consumer credit forecast by product line, 2008-13 (£ billion) 26
Table 11: Datamonitor's updated optimistic consumer credit forecast by product line, 2008-13 (£ billion) 27
Table 12: Unsecured personal lenders in the UK, Moneyfacts June 2009 33
Table 13: Loan impairment provisions for the main high street banks, 2005-07 47
Table 14: The top 10 global brand values, 2008 76
Table 15: The top 10 personal loan advertisers, 2007-08 80
Table 16: UK consumer credit balances outstanding by product, Q1 2007 to Q1 2009 (£m) 93
Table 17: Datamonitor's updated macroeconomic variables for 2008-13: pessimistic scenario 93
Table 18: Datamonitor's updated macroeconomic variables for 2008-13: optimistic scenario 94
Table 19: Advertising spend for major providers, 2007-08 94
Table 20: Comparison of monthly interest rates on a £5,000 loan compared with the Bank of England base rate 95
Table 21: Write-offs on consumer lending from UK banks and building societies 95
Table 22: Average unsecured personal lending gross advances per person (over 18) 95
Table 23: Extent to which consumers trust financial services companies 96
Table 24: Loan provisions as a percentage of total lending, 2005-07 96
Table 25: The non-standard population, 2004-08 97
Table 26: UK non-standard population forecast under the Datamonitor view, 2008-13f 97
Table 27: Total UK advertising expenditure by product line, 2004-08 98
Table 28: Total UK advertising expenditure in 2008, H1 2008-H2 2008 98
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 6
Figure 2: Savings and investments in the UK fell in 2008 7
Figure 3: UK investors have pruned back their holdings in bonds, shares and mutual funds 8
Figure 4: There have been declines for most products, although overdrafts saw relatively flat year-on-year growth throughout 2008 11
Figure 5: Unsecured personal loans have continued to increase their market share of balances over the past five years 14
Figure 6: Both gross advances and balances outstanding continued to decline on a year-on-year basis 16
Figure 7: All products experienced negative year-on-year growth in Q1 2009 18
Figure 8: The rate of interest paid for a loan of £5,000 grew by 44% over two years 21
Figure 9: The majority of respondents said they plan to save more in the future 22
Figure 10: The newly formed Lloyds Banking Group had a market leading share of the gross advances in 2008 30
Figure 11: Lloyds Banking Group has the largest share of balances outstanding 31
Figure 12: Personal lending interest rates have increased significantly since June 2008 despite sharp cuts in the Bank of England's base rate 35
Figure 13: Across most banking groups, advertising expenditure shrank between 2007 and 2008 36
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 38
Figure 15: Despite strong performance in the credit card market, total unsecured lending dropped continuously between 2004 and 2008 39
Figure 16: Moneysupermarket.com lists all loans providers, but it does not link to products where the provider has not paid a fee 41
Figure 17: Online price comparison sites are more trusted than building societies and banks 42
Figure 18: The Wonga website emphasizes the convenience of the product 43
Figure 19: Unsecured personal loan advances have been falling while balances outstanding have grown, January 2007-September 2008 45
Figure 20: Only a few lenders increased their proportion of total loan provisions for impairments, 2005-07 48
Figure 21: 2008 witnessed a massive growth in the number of non-standard individuals, 2004-08 49
Figure 22: Under the Datamonitor view the non-standard population will increase significantly over the next five years, 2008-13f 50
Figure 23: Every bank aims to resolve a bad debt as quickly and effectively as possible, 2009 51
Figure 24: Lloyds TSB's budget calculator aggregates all outgoings thus providing a realistic budget representation for any consumer, 2009 55
Figure 25: ICICI Bank in India offers a 'Loan Against Securities' 63
Figure 26: Garanti Bank can grant loans through its ATMs 69
Figure 27: Bank of America is using Twitter to deal with customer enquiries 71
Figure 28: Total financial services advertising expenditure fell by 15.8% in 2008, 2004-08 78
Figure 29: Total advertising dropped by 22.4% throughout the second half of 2008 79
Figure 30: Recessionary consumers' behavior is affected by a number of basic drivers and inhibitors 82
Figure 31: Bank of Scotland's website provide a comprehensive source of information for borrowers, 2009 85
Figure 32: Online price comparison sites and banks are the most trusted financial institutions, 2008 86
Figure 33: First Direct's 'Enthuse' service explains products pure and simple, 2009 88
Figure 34: Virgin Money's homepage illustrates how the bank can help simplify financial services, 2009 89
Figure 35: Point of sale product aggregations used within this briefing 100