Table of Contents

Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The UK home collected credit market became somewhat more attractive again in 2006 2
Home collected credit provides short-term, unsecured cash loans typically in the region of £200 to £400 2
Things are looking up for home collected credit, but growth remains sluggish 2
Balances outstanding increased by 5.3 per cent in 2006 after a number of years of weak growth 2
Its prospects have improved modestly, but the market's future outlook still reflects its mature nature 3
Under the Datamonitor View scenario, the market will grow at a slow pace over the next five years 3
The competitive dynamics of the UK home collected credit sector create further challenging conditions 4
The market continues to be dominated by the 'big four' 4
Provident leads the market with a significant 60.5 per cent share in terms of balances outstanding 4
Meanwhile, a number of other strategic changes are taking place 5
Lenders need to stay ahead of challenges to benefit from what limited growth the market has to offer 5
Home credit providers will continue to face a number of challenges 5
Table of Contents 7
Table of figures 8
Table of tables 9
The UK home collected credit market became somewhat more attractive again in 2006 10
Home collected credit fills an important niche for small amounts of unsecured credit 10
Home collected credit provides short-term, unsecured cash loans typically in the region of £200 to £400 10
Home collected credit customers are part of a broader set of non-standard individuals 10
An element of subjectivity is needed with any definition of non-standard 11
Datamonitor estimates that there were 7.0 million non-standard individuals in 2006 12
The home credit market is a sub-sector of the non-standard unsecured personal loans market 13
Things are looking up for home collected credit, but growth remains sluggish 14
Datamonitor's methodology for sizing the home collected credit market is based on two measures 14
Lenders implemented new accounting standards in 2005-6, which has caused market figures to change 14
Balances outstanding increased by 5.3 per cent in 2006 after a number of years of weak growth 14
Challenging economic conditions helped to push the market forwards in 2006 15
Higher household bills made life more difficult for home credit consumers 16
Mainstream lenders tightened their lending criteria 16
But the UK home collected credit market remains mature 16
The home collected credit market has contracted over the last five years, in contrast to other credit markets 17
Its prospects have improved modestly, but the market's future outlook still reflects its mature nature 18
Datamonitor's forecasts consist of three different scenarios of the UK economy 18
Datamonitor's forecasting model calculates home credit's penetration of the non-standard population 18
Datamonitor's bespoke forecasting model also considers drivers specific to home collected credit 19
In the Datamonitor View scenario, the market will grow at a slow pace over the next five years 20
In the Optimistic economic scenario, the market will decline gradually over the next five years 21
In the Pessimistic economic scenario, the market will grow substantially over the next five years 23
The competitive dynamics of the UK home collected credit sector create further challenging conditions 25
The market continues to be dominated by the 'big four' 25
Provident leads the market with a significant 60.5 per cent share in terms of balances outstanding 25
The big four have maintained their dominant position for many years 26
The majority of competitors experienced a rise in business over 2006 27
Most of the large players in the market saw a rise in balances outstanding in 2006 27
Consolidation is providing some larger lenders with opportunities 30
London Scottish Bank was the target of a number of potential acquisition bids, but nothing materialized 30
Park Group sold its book to Cattles in 2006 after battling with bad debt and difficulty entering the market 30
While some lenders reduce their exposure to the market, others are refocusing on it anew 31
Provident is renewing its focus on home credit, in addition to continuing diversification 31
Provident will be demerging its international division in 2007 32
Provident is renewing its focus on UK home credit as it will be a major part of its business going forward 32
But diversification in the UK will still remain a priority 33
Cattles continues to disengage from the home collected credit market in search of better returns 33
Cattles is instead focusing on its more profitable divisions 34
London Scottish Bank is restructuring its unsecured loan business and focusing on faster growth markets 35
The company is reducing its number of branches as a way of trimming losses 36
Instead it is developing its debt collection and secured lending businesses 36
Home credit still remains its core product, but S&U continues to diversify into other markets 36
Lenders need to stay ahead of challenges to benefit from what limited growth the market has to offer 37
Lenders are relieved by proposed regulation, but it will still be difficult for smaller players 37
Regulatory scrutiny has been intense in recent years 37
2003 saw the first damning report on home collected credit appear 37
The market then came under scrutiny by the Competition Commission 37
Most lenders were satisfied and relieved by the Competition Commission's final report in November 2006 38
Four remedies are to be implemented that will substantially increase the competitiveness of the market 39
Data sharing will aid in credit decisioning for lenders 39
A price comparison website will ultimately lead to thinner margins 39
Customers will be able to access better information 40
Early settlement rebates will reduce lender profits substantially 40
Importantly for lenders' survival, price maximums have been ruled out 40
But regulatory costs are going to cause difficulties especially for smaller lenders 41
The jury is also still out on whether regulation will help in the long-run if small lenders leave the market 41
In the end, it could be that consumers pay the highest price in the form of less competition 42
With bad debt remaining an issue, lenders are having to readjust their acquisition models 42
Bad debt began rising in 2005 and continued in 2006 42
Lenders are looking to balance quality and volume 43
Lenders are investing in order to make better credit decisions as well as relying increasingly on automation 43
Customers are increasingly depending on more than one provider for their credit needs 43
Customer retention is an emerging issue that will increasingly affect lenders 43
Lenders must look to exploit the advantages of home credit in order to retain customers 44
Credit cards in particular are becoming an increasing competitive and substitutionary force 44
Competition from mainstream lenders has eased up lately due to more difficult economic conditions 44
The future of home credit will nevertheless eventually be in plastic, so lenders should make the move now 45
Though other sources of external credit still remain a small threat, lenders cannot be complacent 45
Government initiatives still pose little competitive threat 45
Overdrafts and basic bank accounts for non-standard individuals are not a replacement for home credit 47
Credit unions do not pose a real competitive threat just yet 47
Alternative commercial sources of credit nonetheless have the potential to pose greater competitive threat 48
Technology will become ever more important to success for the larger lenders 50
Large lenders are rolling out handheld computers to their agents in order to become more cost efficient 50
Though small lenders will not be able to afford such technology, it will not hurt them substantially 50
Lenders are also relying more on automation to improve their credit decisioning 50
APPENDIX 52
Supplementary data 52
Definitions 53
AAGR 53
Balances outstanding 53
Bank of England base rate 53
CAGR 53
CCJs 53
Gross advances 54
Non-standard 54
Methodology 54
Sizing methodology for the UK non-standard population 54
Reasons for credit rejection 54
Elimination of double counting 55
Datamonitor uses seven steps to size the UK non-standard population 55
Bankrupts are excluded because of double counting 57
Further reading 57
Relevant links 58
Ask the analyst 58
Datamonitor consulting 58
Disclaimer 58
List of Tables
Table 1: Forecasted UK home collected market gross advances and the UK non-standard population in the Datamonitor View scenario, 2006-2011f 21
Table 2: Forecasted UK home collected market gross advances and the UK non-standard population in the Optimistic economic scenario, 2006-2011f 22
Table 3: Forecasted UK home collected market gross advances and the UK non-standard population in the Pessimistic economic scenario, 2006-2011f 24
Table 4: Estimated market share of the four leading providers in the home collected credit market in terms of balances outstanding, 2002-2006 27
Table 5: Estimated UK home collected credit balances outstanding by competitor, 2002-2006 29
Table 6: Home collected credit gross advances and balances outstanding, 2002-2006 52
Table 7: Proportion of total group balances outstanding for each of Provident's divisions, 2002-2006 52
Table 8: Cattles' direct repayment and home collected credit customer receivables and numbers, 2004-2006 53
List of Figures
Figure 1: The home collected credit market saw an improved performance in 2006 after a number of years of stagnation, 2002-2006 3
Figure 2: Under the Datamonitor View scenario, the home collected credit market will grow slowly up to 2011, 2006-2011f 4
Figure 3: The 'big four' players remain in control of the home collected credit market, with almost 90 per cent of market share in 2006 in terms of balances outstanding 5
Figure 4: Datamonitor's definition of non-standard 11
Figure 5: A certain degree of subjectivity is needed in a definition of the non-standard population because some lenders are inevitably willing to accept greater risk than others 12
Figure 6: The non-standard population increased for the first time in many years in 2006, 2002-2006 13
Figure 7: The home collected credit market saw an improved performance in 2006 after a number of years of stagnation, 2002-2006 15
Figure 8: Compared to most mainstream lending markets, the home collected market has performed very poorly over the last five years in terms of new lending, 2002-2006 17
Figure 9: In the Datamonitor View scenario, the home collected credit market will grow slowly up to 2011, 2006-2011f 20
Figure 10: In the Optimistic economic scenario, the home collected credit market will decline over the next five years, 2006-2011f 22
Figure 11: In the Pessimistic economic scenario, the home collected credit market is forecast to grow significantly over the next five years, 2006-2011f 23
Figure 12: The 'big four' players remain in control of the home collected credit market, with almost 90 per cent market share in 2006 in terms of balances outstanding 26
Figure 13: The majority of large players saw a rise in balances over 2006, 2002-2006 28
Figure 14: Provident's international home collected credit division and Vanquis Bank have become increasingly important to the company's book, 2002-2006 32
Figure 15: Cattles continues to focus upon its direct repayment division at the expense of home collected credit, 2004-2006 35