Table of Contents

UK Personal Lending 2005 - Datamonitor's Personal Lending 2005 report is an invaluable guide to the consumer credit market in the UK, detailing the size of the market, performance of different products, as well as providing competitor information and market forecasts to 2009

Product Code: dmfs1717

Publication Date: 01-Feb-2005

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Overview

Introduction

Despite several interest rate increases and the general uncertainty about the state of the housing market, the consumer credit market has done remarkably well in 2004. This report examines key market trends, provides detailed consumer and competitor data and presents scenario based forecasts to give readers a detailed view of the current state of the UK consumer credit market

Scope

· Provides a wealth of data from a range of primary and secondary sources, including a series of in-depth interviews with industry experts

· Draws on MORI Financial Services data to detail major consumer trends, expectations and preferences in the unsecured personal loans market

· Estimates the market share of leading personal loan providers in terms of outstanding balances and gross advances for 2003 and 2004 H1

· Presents three forecasting scenarios for gross advances in the consumer credit market to 2009

Report Highlights

While the consumer credit market as a whole has shown surprising resilience over the past year, the same cannot be said about some individual product lines. Credit cards still dominate the market and personal loans have recovered from the slump of 2003. However, point of sale retail finance has continued to lose ground in the market

The UK unsecured personal loan market has become highly commoditized in recent years as a result of tough competition and favourable economic indicators. Even as interest rates have risen, average loan prices have continued to move in the opposite direction, thus squeezing lenders' margins on both sides

The large high-street lenders still account for the bulk of the market, both in terms of balances outstanding and new business. Big banks have cemented their position at the top largely as a result of their successful response to the price challenge issued by smaller and direct providers

Reasons to Purchase

· Detailed analysis of the unsecured personal loan market helps you to plan your business strategy with confidence

· In-depth analysis of customer acquisition and retention strategies allows you to successfully target specific consumer segments

· Datamonitor's five-year forecasts provide you with invaluable insight into the future potential of the consumer credit market

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CHAPTER 1 EXECUTIVE SUMMARY	3
Introduction	3
Market context	3
Overview of the consumer credit market	3
Performance of individual consumer credit products	4
Customer focus	5
Profiling an unsecured personal loan customer - 2004	5
Competitive dynamics	6
Market share of leading lenders	6
Customer acquisition tactics	7
Cross-selling tactics	10
The future decoded	10
Growth in the consumer credit market is forecast to slow down over the next years	10
What will happen to the consumer credit market under a pessimistic forecasting scenario?	11
CHAPTER 2 INTRODUCTION	26
What is this report about?	26
Who is the target reader?	26
How to use this report	27
CHAPTER 3 MARKET CONTEXT	28
Introduction	28
Notes on the sizing methodology used	28
The consumer credit market has continued to grow in 2004	29
Key economic drivers contributing to the growth of the consumer credit market have remained strong	30
GDP growth has been healthy in 2004	31
Unemployment levels have continued to fall	31
The Bank of England's interest rates have gone up by 1.25 per cent since the end of 2003	32
There are signs that the UK housing market has turned a corner	33
The performance of individual products in the consumer credit market	34
Consumer credit: outstanding balances	34
Consumer credit: gross advances	38
Gross advances in unsecured personal loans return to growth in 2004	42
Credit cards: another exceptional year of growth	44
Is the fight for customers hitting credit card providers' profitability?	44
Credit cards are fast becoming one of the most popular methods of payment	46
Overdrafts cement their position as the third most popular consumer credit product in terms of gross advances	46
Motor finance: difficult market conditions lead to the diminishing share of the consumer credit market	47
New and used car finance - performance of individual product lines	49
Point of sale retail finance - increasing competitive pressure and regulatory attention means the market is being squeezed on both sides	55
Outstanding balances in point of sale retail finance have experienced a marginal recovery in 2004	55
The situation in point of sale retail finance gross advances underlines the decline of this market	57
Personal overindebtedness is an ever-present issue for the UK consumer credit industry	61
Over the past year the media has been explicitly focusing its attention on this issue	62
However, according to some industry sources, the situation is not as dramatic as it suggested	63
While largely rejecting the accusations of irresponsible lending, providers are nevertheless worried about increasing bad debt	64
Providers of long-term unsecured personal loans feel this dilemma particularly strongly	64
Some providers are opting for more stringent credit scoring techniques	66
Sharing of customer data is a major issue when it comes to credit scoring	67
CHAPTER 4 CUSTOMER FOCUS	68
Introduction	68
MORI Financial Services data	68
Profiling unsecured personal loan customers	69
Unsecured personal loan customers in 2004	69
Profiling an unsecured personal loan customer - conclusions	73
Examining unsecured personal loan usage in 2004	73
Car purchase remains the most common reason for taking out a loan	73
Examining unsecured personal loan usage across leading providers	76
A number of key points can be highlighted from this analysis:	78
Profiling unsecured personal loan customers by loan usage	79
Customer acquisition: why and how customers choose their unsecured personal loan provider	81
Customers' choice of a lender - current account providers are still in the driving seat	81
Profiling unsecured personal loan customers according to their choice of a provider in 2004	83
Customers' choice of a distribution channel	88
Profiling an unsecured personal loan customer - the choice of a distribution channel	89
Customer retention - levels of satisfaction and attitudes to cross-selling	93
Customers are generally satisfied with their existing loan providers	94
Customers' attitudes to cross-selling	95
Customers' uptake of PPI has declined slightly on the previous year's levels	95
Profiling an unsecured personal loan customer - customers' uptake of PPI	96
Why some customers are not taking out PPI	98
CHAPTER 5 COMPETITIVE DYNAMICS	102
Introduction	102
Large high-street lenders continue to dominate the unsecured personal loan market	102
Big banks have successfully responded to the price challenge from direct providers	102
Is the current market environment too much for new entrants?	103
The end of 2003 saw the big banks cementing their domination of the unsecured personal loan market	105
Notes on the estimation process used	106
Market share of leading providers - balances outstanding	106
Market share of the leading providers - gross advances	108
The situation changed little in 2004	110
Market share of leading lenders - balances outstanding	110
Market share of leading providers - gross advances	112
Conclusion	113
Customer acquisition tactics - pricing, advertising and product differentiation	114
Pricing war shows no signs of abating	114
Average loan prices have continued to fall in 2004	114
Providers with the largest share of the market are now also at the most competitive end of the market	120
Pricing structure as a tool for customers' acquisition	121
The majority of lenders in the UK employ price for risk strategy	122
Have price wars finally spelled the death for alternative product differentiation tactics?	124
Promotional tactics	126
Total advertising expenditure by the leading providers has increased yet again in 2003	126
The top four unsecured personal loan providers have increased their personal loans advertising in 2003	130
Varying promotion strategies	131
Internet advertising expenditure has increased significantly in 2003	135
Cross-selling strategies	137
Despite recent bad publicity, PPI remains relatively popular among consumers	137
The majority of lenders seem to be positioning themselves mid-table when it comes to PPI pricing	138
The market is bracing itself in the wake of major regulatory change	142
CHAPTER 6 THE FUTURE DECODED	144
Introduction	144
Datamonitor's forecasting model	144
The growth of the consumer credit market will slow down over the next five years under a "neutral" view of the economy	145
Under this scenario, the consumer credit market will grow at 2.8 per cent on average each year over the next five years	148
Credit cards and overdrafts will grow at a faster rate than the total consumer credit market	149
Credit cards will continue to dominate the market despite slower rates of growth	151
Unsecured personal lending will grow steadily but at a slower rate	151
Overdrafts will experience the highest growth in the consumer credit market	152
Point of sale motor finance is forecast to grow steadily but will lose some of its market share	152
Point of sale retail finance will continue to decline	154
Forecasting the performance of the consumer credit market under the pessimistic scenario	155
Under the pessimistic scenario, the consumer credit market will grow by an average of just 2.7 per cent a year to 2009	158
The majority of individual product lines will struggle under this scenario	158
The growth of credit card gross advances will slow	160
Unsecured personal loans will experience very modest rates of growth	160
Overdrafts will again experience the best growth rates in the market	161
Point of sale motor finance market will struggle as a result of falling new and used car sales	161
Point of sale retail finance will face a dismal five years under such economic conditions	162
The performance of the consumer credit market under the optimistic scenario	164
Under the optimistic scenario, the consumer credit market will grow on average by six per cent each year to 2009	166
The majority of individual products are forecast to put in a strong performance under the optimistic scenario.	167
Gross advances in credit cards will enjoy strong uninterrupted growth	169
Unsecured personal loans will experience similarly strong levels of growth	169
Overdrafts will outperform the market in terms of growth levels	170
Point of sale motor finance grows strongly, marginally increasing its share of the consumer credit market	170
Despite the benign economic climate, individual products in the retail finance market will fail to return to growth	171
Conclusion	173
CHAPTER 7 APPENDIX	174
Supplementary data tables	174
Data tables relating to Chapter 3 Market Context	174
Data tables relating to Chapter 3 Customer Focus	177
Data tables relating to Chapter 4 Competitive Dynamics	185
Further information	195
Datamonitor's research methodology	195
MORI Financial Services data	196
Datamonitor's loans and credit forecasting methodology	196
Choice of economic variables	196
Changes on the 2002 model	197
Scenario forecasting	197
Model outputs	198
Bespoke scenario based forecasting	198
Definitions of point of sale motor and retail finance products	198
Motor finance products available at the point of sale	199
Retail finance products available at the point of sale	200
Useful links	202
Datamonitor's custom research capabilities	205
The retail banking team	206
List of Tables
Table 1: Gross written premiums for non-mortgage PPI, 1999-2004e	10
Table 2: Total consumer credit gross advances and outstanding balances, 1995-2004e	30
Table 3: Consumer credit outstanding balances by product, 2000-2004e	35
Table 4: Market share of outstanding balances in consumer credit by product, 2000-2004e	37
Table 5: Consumer credit gross advances by product, 2000-2004e	39
Table 6: Market share of consumer credit gross advances, 2000-2004e	41
Table 7: Gross advances for secured and unsecured personal loans, 2000-2004e	43
Table 8: Value of motor finance arranged at the point of sale for private new car purchases by product, 2000-2004e	52
Table 9: Value of motor finance arranged at the point of sale for private used car purchases by product, 2000-2004e	54
Table 10: Retail finance outstanding balances by product, 2000-2004e	56
Table 11: Retail finance gross advances by product, 2000-2004e	58
Table 12: Gross advances in unsecured personal loans by loan usage, 1999-2004e	75
Table 13: Why do customers choose their personal loan providers, 1999-2004	82
Table 14: Gross advances by loan distribution channel, 1999-2004	89
Table 15: The main reasons for not taking out PPI, 1999 & 2004	98
Table 16: The "big four" have cut their rates heavily, 2001 & 2004	119
Table 17: Competitors' unsecured personal loans pricing strategy, Oct-04	123
Table 18: Competitors' unsecured personal loan product offerings, Oct-04	125
Table 1: The change in advertising expenditure between 2002 and 2003	126
Table 19: Advertising spend by product for the leading market competitors, 2003	128
Table 20: The percentage of advertising spend by product for the leading competitors, 2003	129
Table 21: The top four providers by their advertising expenditure on personal loans, 2002-2003	130
Table 22: Gross written premiums for non-mortgage PPI, 1999-2004e	138
Table 23: PPI premiums and typical APRs of the leading personal loan providers, Oct-04	140
Table 24: Forecasted performance of the consumer credit market drivers under the 'neutral' scenario, 2004e-2009f	147
Table 25: Forecasted gross advances in the consumer credit market (neutral scenario), 2000-2009f	149
Table 26: Forecasted consumer credit gross advances by product (neutral scenario), 2004e-2009f	150
Table 27: Forecasted performance of the consumer credit market drivers under pessimistic scenario, 2004e-2009f	157
Table 28: Forecasted consumer credit gross advances by product under pessimistic scenario, 2004e-2009f	160
Table 29: Forecasted performance of the consumer credit market drivers under optimistic scenario, 2004e-2009f	166
Table 30: The performance of individual product lines within the consumer credit market under optimistic scenario, 2004e-2009f	169
Table 31: Average house price in the UK, 1995-2004e	175
Table 32: Value of motor finance for private new and used cars purchases at the point of sales, 2000-2004e	175
Table 33: Market share of the four main product lines in the new car finance market (gross advances), 2000-2004e	175
Table 34: Market share of the four main product lines in the used car finance market (gross advances), 2000-2004e	176
Table 35: Market share of the three main product lines in the point of sale retail finance (balances outstanding), 2000-2004e	176
Table 36: Market share of the three main product lines in the point of sale retail finance (gross advances), 2000-2004e	176
Table 37: Consumer credit balances outstanding per UK adult, 1995-2004e	177
Table 38: The type of loans held by respondents according to their age and income groups, 2003-2004	177
Table 39: The number of loans held by respondents according to their age and income groups, 2003-2004	178
Table 40: Unsecured personal loan usage expressed as a percentage of the total loan customer base across the leading providers, 1999-2004	179
Table 41: Unsecured personal loan usage across the three main categories by age and income groups of respondents, 2003-2004	180
Table 42: Main reasons for choosing an unsecured personal loan provider across customers' gender, age and income groups, 2003-2004	181
Table 43: Main loan distribution channels across customers' age and income groups, 2003-2004	182
Table 44: Financial products arranged online across respondents' age and income groups (indexed, 100=average population), 2003-2004	183
Table 45: The level of satisfaction with their loan provider across respondents' age and income groups, 2003-2004	184
Table 46: Customers' uptake of PPI, by age and income groups, 2004	184
Table 47: The popularity of the three main reasons for not taking out PPI across customers' age and income groups, 2004	185
Table 48: Estimated market share of the leading providers by balances outstanding, 2003	186
Table 49: Estimated market share of the leading providers by gross advances, 2003	187
Table 50: Estimated market share of the leading providers by balances outstanding, H1 2004	188
Table 51: Estimated market share of the leading providers by gross advances, H1 2004	189
Table 52: Frequency of distribution of APRs for £5,000 loan, Oct-02 - Oct-04	190
Table 53: Unsecured personal loan rates for the leading UK loan providers, Oct-03 - Oct-04	191
Table 54: Standard APRs of the "big four" for unsecured personal loans, Oct 2002 - Oct 2004	192
Table 55: Advertising spending on unsecured personal loans by channel, 2002-2003	192
Table 56: Various promotional strategies employed by the leading unsecured personal loan providers, 2003	193
Table 57: Percentage of internet advertising spend out of the total advertising expenditure, 2003	194
Table 58: Frequency distribution of PPI premiums, October 2003-October 2004	195
Table 59: PPI premiums for the four least competitive and the four cheapest loan providers, October 2004	195
List of Figures
Figure 1: Male customers tend to see a competitive interest rate as a more important reason for choosing a loan provider than female customers, 2004	6
Figure 2: The number of providers offering APRs of less than 8 per cent has increased considerably since 2002, 2002-2004	8
Figure 3: Advertising spending on unsecured personal loans by channel, 2002-2003	9
Figure 4: The consumer credit market has been growing strongly over the past ten years, both in terms of new business and balances outstanding, 1995-2004e	29
Figure 5: The UK GDP growth has been strong, reaching 3.2 per cent in 2004, 1995-2004e	31
Figure 6: Unemployment claimant count reached a record low in 2004, 1995-2004e	32
Figure 7: The price of an average house in the UK has increased by 145 per cent over the last ten years, 1995-2004e	33
Figure 8: Unsecured personal loans and credit cards account for the bulk of the total outstanding balances, 2000-2004e	35
Figure 9: Unsecured personal loans and credit cards continue to dominate the market in terms of balances outstanding, 2000-2004e	37
Figure 10: Credit cards is the dominant product category in the market in terms of new business, 2000-2004e	39
Figure 11: Credit cards and unsecured personal loans now account for 81.3 per cent of total new business in the consumer credit market, 2000-2004e	41
Figure 12: The growth of secured personal loans is estimated to have slowed down considerably in 2004, 2000-2004e	43
Figure 13: Outstanding balances in used car finance cemented their dominance of the market in 2004, 2000-2004e	48
Figure 14: Gross advances in new car finance fell sharply in 2004, 2000-2004e	49
Figure 15: Hire purchase has slightly increased its share of new business in the new car finance market over the last five years, 2000-2004e	51
Figure 16: Hire purchase continues to dominate the used car finance market, 2000-2004e	53
Figure 17: In terms of outstanding balances, store cards have increased their share of the retail finance market over the past five years, 2000-2004e	56
Figure 18: Following a promising 2003, store cards experienced a terrible year in 2004 in terms of new business, 2000-2004e	58
Figure 19: The average UK adult now owes £4,004 in unsecured personal debt, 1995-2004e	62
Figure 20: Customers between 25 and 34 years of age and those earning between ₤25,000 and ₤39,000 are the group most like to hold a personal loan, 2004	70
Figure 21: Customers in the most affluent income group are the most likely to hold multiple personal loans, 2004	72
Figure 22: Car/motorbike purchase remains the main reason why customers take out a personal loan, 1999 - 2004e	74
Figure 23: Debt consolidation has increased in popularity as a loan usage across all the examined providers, 1999-2004	77
Figure 24: Older and more affluent customers are more likely to use their loans for home improvement, 2004	79
Figure 25: Male customers tend to see competitive interest rate as more important reason for choosing a loan provider than female customers, 2004	83
Figure 26: While being high on the list across all age and income groups, existing bank account is most important for younger customers and those on low income, 2004	85
Figure 27: 57 per cent of all unsecured personal loans were arranged face-to-face in 2004, 1999-2004	88
Figure 28: Customers in the lowest income group are more likely to arrange their loan face-to-face, 2004	90
Figure 29: When it comes to arranging personal loans online, customers aged 25-34 and those in mid-income groups are most likely to do so, 2004	92
Figure 30: The overwhelming majority of the respondents are either very or fairly satisfied with their loan providers, 2004	94
Figure 31: Older and more affluent customers are less likely to take out PPI with their loans, 2004	97
Figure 32: The price is the major obstacle to taking out PPI for less affluent and younger customers, 2004	100
Figure 33: Lloyds TSB heads the market in terms of outstanding balances, though where group market share is concerned, HSBC is the leader, 2003	107
Figure 34: Barclays Bank and Lloyds TSB share the top spot when it comes to the highest share of new unsecured personal loan business, 2003	109
Figure 35: Tesco has put in the best performance in terms of a percentage increase in its balances outstanding between December 2003 and June 2004	111
Figure 36: Lloyds TSB heads the market yet again in terms of gross advances, H1 2004	113
Figure 37: The number of providers offering APRs of less than 8 per cent has increased considerably since 2002, 2002-2004	115
Figure 38: Some of the biggest falls in average APRs have occurred among the least competitive lenders, Oct-03 - Oct-04	116
Figure 39: Three out of the 'big four' have implemented price cuts over the last two years, October 2002 - October 2004	118
Figure 40: Two out of three providers with above the average relative market share were also at the most competitive end of the market, June 2004	120
Figure 41: Advertising spending on unsecured personal loans by channel, 2002-2003	132
Figure 42: The majority of the leading unsecured personal loan providers employ a targeted marketing strategy, 2003	134
Figure 43: Leading unsecured personal loans providers spend on average 3.2 per cent of their advertising budget on Internet promotions, 2003	136
Figure 44: There were less lenders offering cheapest PPI premiums in 2004 than in 2003, October 2003- October 2004	139
Figure 45: The least competitive providers also tend to charge higher PPI premiums, October 2004	141
Figure 46: Performance of the key economic drivers will result in a slower growth of the consumer credit market over the next five years	146
Figure 47: The consumer credit market is forecast to grow by 4.7 per cent on average each year to 2009 according to the neutral scenario, 2004e-2009f	148
Figure 48: Credit cards are forecast to continue dominating the consumer credit market according to the neutral scenario, 2004e-2009f	150
Figure 49: Used car finance is forecast to overtake new car finance in terms of gross advances under the neutral scenario, 2004e-2009f	153
Figure 50: Installment credit will face the biggest decreases in gross advances over the next five years according to the neutral scenario, 2004e-2009f	154
Figure 51: Under the pessimistic scenario, below the par performance of the key economic drivers will have a negative impact on the growth of the consumer credit market over the next five years	156
Figure 52: The consumer credit market will grow on average by 2.5 per cent each year to 2009 under the pessimistic scenario, 2004e-2009f	158
Figure 53: While suffering from slower growth, credit cards will continue to be dominant in the consumer credit market under the pessimistic scenario, 2004e-2009f	159
Figure 54: Under pessimistic scenario, used car finance will fare slightly better than new car finance, 2004e-2009f	162
Figure 55: Under the pessimistic scenario, gross advances in point of sale retail finance products are forecast to decline considerably over the next five years, 2004e-2009f	163
Figure 56: Under optimistic scenario the performance of key economic drivers will have a positive impact on the growth of the consumer credit market over the next five years	164
Figure 57: Under optimistic scenario, the consumer credit market is forecast to grow on average by 6 per cent each year to 2009, 2004e-2009f	167
Figure 58: Under the optimistic scenario, the dominance of credit cards as the most popular consumer credit product is forecast to become even more pronounced, 2004e-2009f	168
Figure 59: Under the optimistic forecasting scenario, gross advances in both new and used car finance will register strong growth levels, 2004e-2009f	171
Figure 60: Under the optimistic scenario, gross advances in retail finance products are still forecast to decline, albeit at gentler pace, 2004e-2009f	172
Figure 61: Point of sale product aggregations used within this report	199
Figure 62: Datamonitor's core consulting capabilities	206

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