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