Table of Contents

UK Personal Loan Distribution 2005 - Personal loans have seen significant growth in recent years. Within this growth, certain distribution channels have performed better than others. What are the causes behind this and what challenges will lenders face in the future?

Product Code: dmfs1737

Publication Date: 22-Jul-2005

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Overview

Introduction

Within the personal loan market, certain distribution channels have performed better than others. Why have some channels grown well and others declined? What are the challenges to distribution and how will this market look in five years time? This report provides the key answers to how personal loan providers can improve their presence in the direct and indirect market.

Scope

· Sizes distribution channels for both secured and unsecured personal loans, examining the causes and trends behind these findings

· Sizes the intermediary market and looks at the performances of the main lenders within this distribution channel

· Gives insight into the future of personal loan distribution and how lenders could respond to current challenges

Highlights

Direct distribution leads the way in terms of the sale of personal loans. In 2004, £57.4 billion was advanced through direct channels, while only £4.8 billion was sold through indirect means.

The use of the Internet for personal loans has been increasing each year. Datamonitor estimates that in 2004, online distribution constituted approximately 8.5 per cent of the total personal loan market, equivalent to £5.6 billion in total advances.

As an increasing number of mainstream lenders enter the secured loan market, Datamonitor believes that direct distribution will play a greater role. In fact, Datamonitor forecasts that direct distribution will grow from 29.0 per cent in 2004 to 33.5 per cent by 2009f.

Reasons to Purchase

· Understand the intricacies of personal loan distribution, and how major players manage to succeed

· Learn more about how intermediaries choose their main lenders and what it takes to become a top lender

· Gain valuable insight into what personal loan providers can do to ensure their future position in the market

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CHAPTER 1 EXECUTIVE SUMMARY	3
Introduction	3
An Overview of Personal Loan Distribution	3
Personal loans continue to grow	3
Within this product, unsecured loans account for the majority of advances	3
There are a number of distribution channels used to sell personal loans	4
Direct distribution leads the way for personal loans	5
The Direct Lending Market	7
Bank branches remain the most widely used method of selling personal loans	7
Online personal lending is growing in importance	8
The Intermediary Market: A Lender's Perspective	8
Intermediaries accounted for £4.8 billion in personal loans in 2004	8
Secured loans accounted for the bulk of these advances	9
Intermediaries look for customer focused lenders	10
What can lenders do to maximize business?	12
CHAPTER 2 INTRODUCTION	24
What is this report about?	24
What is the scope of this report?	24
Who is the target reader?	25
How to use this report	25
CHAPTER 3 AN OVERVIEW OF PERSONAL LOAN DISTRIBUTION	27
Introduction	27
Personal loans have seen substantial growth in recent years	27
Personal loans accounted for a total of £92.8 billion in 2004	27
Unsecured loans account for the majority of advances	28
Yet secured personal loans have grown faster	29
It is important to mention that secured and unsecured personal loans have unique characteristics	31
There are a number of distribution channels used to sell personal loans	32
Direct distribution leads the way for personal loans	32
Yet measuring distribution channels in terms of total personal loans is misleading	34
Most secured loans are sold through intermediaries	34
Meanwhile, bank branches dominate the distribution of unsecured personal loans	36
Yet other direct channels are highly important	38
This could account for the decline in postal applications	38
Future focus	39
Datamonitor's forecasting model	39
Secured personal loans: direct lending is forecast to grow	39
Direct lending will expand...	41
...While indirect lending will contract slightly	43
Unsecured personal loans: the branch is forecast to remain highly dominant	43
Little will change within five years' time	45
CHAPTER 4 THE DIRECT LENDING MARKET	47
Introduction	47
Each distribution channel has its unique challenges and opportunities	47
Bank branches remain the most widely used method of selling personal loans	47
Branches are actually seeing a slight revival in their personal loan business	48
Fundamental characteristics of branches mean they will always be important in the sale of personal loans	49
Branches are facing financial challenges nonetheless	52
Yet branches are benefitting from banks' integration of all distribution channels	52
Personal loans via the Internet are growing in importance	54
The use of the Internet for personal loans has increased dramatically	54
Online distribution allows for many types of lenders to be involved	56
Yet online distribution remains beset with distinct disadvantages	59
Is the market saturated?	62
Call centers are a small staple of personal loan distribution	63
Telephone distribution transcends all other distribution channels	64
Call centers have both strengths and weaknesses	65
Profile: Notwithstanding the challenges, GE will set up a call center in order to enter the unsecured personal loan market	66
Though significant, distribution via post is on the wane	68
Many personal loans purchased by post are sold via direct mail	68
However, distribution via the post is in decline	70
What can lenders do to maximize business and what challenges lie ahead?	70
Lenders should always look to improve customer service and product delivery	71
Regulatory changes affect various aspects of distribution	71
The Consumer Credit Act Review made some changes	71
Does further regulation lie ahead?	73
Nonetheless, many lenders are now focusing on pricing rather than distribution	74
CHAPTER 5 THE INTERMEDIARY MARKET: A LENDER'S PERSPECTIVE	76
Introduction	76
Intermediaries play a significant role in the distribution of personal loans	76
Intermediaries accounted for £4.8 billion in personal loans in 2004	77
It is important to take into account Datamonitor's market sizing methodology	77
Intermediaries view personal loans as a growing market	78
Secured loans accounted for the bulk of these advances	80
Unlike unsecured personal loans, secured loans depend substantially upon the intermediary channel	81
Most intermediaries offer secured loans rather than unsecured personal loans	82
Intermediaries tend to offer secured loans more often because of their non-standard customer base	83
However, only a quarter of intermediaries actually offer personal loans	86
Lenders need to focus on their relationships with intermediaries in order to expand	87
Intermediary size varies across the market, but the typical player is small	87
Most intermediaries only deal with a small number of lenders	90
The top three lenders have a market worth up to £2.8 billion	91
Lenders can be first, second or third choice options	92
Various factors influence an intermediary's choice of lender	97
Intermediaries look for customer focused lenders	97
Product functionalities and support for intermediaries also play an important role	100
However, intermediaries are generally happy with their current lenders	100
Yet intermediaries can still be persuaded to switch lenders' products	102
Lenders must keep intermediaries' customers in mind	104
First off, it is important to know who the typical customer is	104
Face-to-face service is the most widely used intermediary distribution channel	106
Intermediaries use various ways to acquire customers	109
In addition, quality of service drives customer retention	115
What can lenders do in order to maximize business?	117
Lenders need to build up relationships with intermediaries in order to be among their top three favorites	117
Lenders should look to design products that are best suited to intermediaries' customers	117
IFAs are an unexploited opportunity	119
Setting up an intermediary subsidiary	120
Some regulations may come to affect the intermediary market	120
The removal of the £25,000 limit will mean more competition from mainstream lenders	120
The changes in early settlement charges may be damaging for small specialist lenders	121
Notwithstanding, intermediaries are confident about the future of personal loans	121
CHAPTER 6 CONCLUSIONS	123
Introduction	123
Various themes emerge	123
Branches remain important, and are actually seeing a resurgence	123
Personal loans sold via the Internet are set to continue growing	123
The customer is king	124
CHAPTER 7 APPENDIX	125
Supplementary data	126
Chapter 3	126
Chapter 4	126
Chapter 5	129
Sizing methodology	143
Research methodology	143
Forecasting methodology	144
Definitions	145
Bank of England base rate	145
Balances outstanding	145
CAGR	145
Fixed rate personal loan	145
Flexible mortgage	145
Gross advances	145
Loan term	145
Non-standard	146
Remortgaging	146
Rule of 78	146
Second charge mortgages	146
Secured loan	146
Unsecured personal loan	146
Variable rate personal loan	147
Relevant readings	147
Reports	147
Briefings	147
Future readings	147
Reports	147
Briefings	148
Relevant links	148
Datamonitor's custom research capabilities	148
The retail banking team	150
How to contact experts in your industry	150
List of Tables
Table 1: Unsecured and secured personal loan gross advances, 2000-2004	29
Table 2: Value and distribution of personal loans, 2004	33
Table 3: Value of secured loans arranged directly and indirectly, 2004	35
Table 4: Value of unsecured personal loans arranged directly and indirectly, 2000 and 2004	37
Table 5: Datamonitor's forecast for the distribution of secured personal loans, 2004 and 2009f	41
Table 6: Datamonitor's forecast for the distribution of unsecured personal loans, 2000, 2004, and 2009f	45
Table 7: Intermediary and total advances for secured and unsecured personal loans, 2004	82
Table 8: Typical APRs for main secured and unsecured loan lenders, May 2005	103
Table 9: Secured and unsecured personal lending gross advances, 2000-2004	126
Table 10: Value of secured lending and second charge loans, 2000-2004	126
Table 11: Advertising spend on personal loans by channel, 2002-2004	127
Table 12: Percentage of Internet advertising spend out of the total advertising expenditure, 2004	128
Table 13: How do you think your loan business has grown in the last 12 months?	129
Table 14: By what percentage do you feel your personal loan business has grown over the last 12 months?	129
Table 15: Of those intermediaries offering personal loans, do you offer?	130
Table 16: Of your total personal loans offering, what percentage do you estimate are...?	130
Table 17: Why do your loan customers use an intermediary?	131
Table 18: What is your approximate customer base size?	131
Table 19: By share, which three lenders do you most commonly use?	132
Table 20: Applied to the top six lenders, how important are a wide lending criteria and high commission levels in your choice of number one lender?	132
Table 21: Applied to the top six lenders, how important are competitive pricing, quick decision making on loan applications and a high level of support to intermediaries in your choice of number one lender?	133
Table 22: Which of the following features are very important in your choice of number one lender?	134
Table 23: How would you rate the following features to your customers when choosing a loan?	134
Table 24: Concentrating on your main lender, how happy are you with the following?	135
Table 25: How important are the following in tempting you to offer another competitor's loans more often?	135
Table 26: What age band do your customers fall into?	136
Table 27: Is the customer typically?	136
Table 28: What personal income band would you say your average customer falls into?	137
Table 29: What is the working status of a typical secured and unsecured loan customer?	137
Table 30: What personal income band would you say your average secured and unsecured customer fall into?	138
Table 31: Do you feel that your typical loan customer is different from your overall average customer?	138
Table 32: Why do your customers choose your company in particular?	139
Table 33: Which of the following distribution channels do you use?	139
Table 34: Have you changed your distribution options on personal loans?	140
Table 35: Do you target a specific customer base and if you do which customers do you target in particular?	140
Table 36: How do you target your customers?	141
Table 37: Top ten intermediaries in terms of advertising spend, 2004	141
Table 38: How do you try to retain customers?	142
Table 39: Have you launched any new products in the last year?	142
Table 40: How do you see your personal loans business developing in the next few years?	143
List of Figures
Figure 1: Unsecured personal loans still count for almost twice as many advances, 2000-2004	4
Figure 2: The vast majority of personal loans are distributed directly, 2004	6
Figure 3: Personal loans advanced through intermediaries accounted for 7.3 per cent of the total personal loan market in 2004	9
Figure 4: Secured personal loans dominate over unsecured loans in the intermediary market, 2004	10
Figure 5: Customer-focused attributes are intermediaries' highest priority when choosing a lender	11
Figure 6: Personal loans have grown each year, 2000-2004	28
Figure 7: Unsecured personal loans still count for almost twice as many advances, 2000-2004	29
Figure 8: Second charge loans accounted for 18.4 per cent of total secured lending in 2004	30
Figure 9: The vast majority of personal loans are distributed directly, 2004	33
Figure 10: 71. 0 per cent of secured loans are purchased through indirect channels, 2004	35
Figure 11: 92.5 per cent of all unsecured personal loans are arranged directly, 2004	37
Figure 12: In Datamonitor's view, the direct Internet and branch channels will see growth within the secured personal loan market, 2004 and 2009f	40
Figure 13: In Datamonitor's view, online distribution will increase the most but branches will remain level, 2000, 2004, and 2009f	44
Figure 14: Leading personal loan providers spend on average 4.0 per cent of their advertising budget on Internet promotions, 2004	61
Figure 15: Halifax's Personal Loans Callback Service offers a unique telephone distribution strategy, June 2005	65
Figure 16: Direct mail remains the most dominant method of advertising personal loans, 2002-2004	69
Figure 17: Personal loans advanced through intermediaries accounted for 7.3 per cent of the total personal loan market in 2004	77
Figure 18: More than half of intermediaries have seen their personal loans business grow in the last 12 months, March 2005	79
Figure 19: The most common level of growth reported by intermediaries was in the region of 0-20 per cent, March 2005	80
Figure 20: Secured personal loans dominate over unsecured loans in the intermediary market, 2004	81
Figure 21: Of those intermediaries offering personal loans, secured loans are their main focus	83
Figure 22: The main reason for a customer going to an intermediary is due to their difficulty in getting finance from mainstream lenders	85
Figure 23: Just a quarter of intermediaries actually offer personal loans to customers, 2005	86
Figure 24: Most intermediaries have a customer base of up to 1,000	88
Figure 25: The personal loan intermediary market is populated by a large number of relatively small entities, along with a small number of very large players, 2005	90
Figure 26: 1st lenders stand to gain up to 22.9 per cent of total intermediary business	92
Figure 27: GE Consumer Finance is used mostly as a first choice option	93
Figure 28: Intermediaries are most likely to use GE Consumer Finance as first choice lender due to its wide lending criteria and high commission levels	94
Figure 29: Northern Rock excels in competitive pricing, quick loan application decisions and providing a high level of support to intermediaries	96
Figure 30: Customer-focused attributes are intermediaries' highest priority when choosing a lender	98
Figure 31: Interest rates are regarded as most important when choosing a loan for a customer	99
Figure 32: Most intermediaries are generally happy with their main lender	101
Figure 33: Better rates and better product terms are "most important" in regards to tempting intermediaries to switch loan providers	102
Figure 34: Most personal loan customers are couples between the ages of 30 and 60	105
Figure 35: Almost all intermediaries do not see their typical personal loan customer as being any different to their overall average customer	106
Figure 36: Face-to-face contact is the most commonly used distribution channel for intermediaries	107
Figure 37: Intermediaries have not changed their personal loan distribution strategies	109
Figure 38: Reputation and trust have the strongest effect on customers' decisions of which intermediary to use	110
Figure 39: Most intermediaries do not target a specific customer type, though when they do, professionals are most sought after	112
Figure 40: When intermediaries do target customers, they primarily use word of mouth to do so	113
Figure 41: Of the leading ten intermediary advertisers, most only offer secured loans, 2004	115
Figure 42: According to intermediaries, customer service is the clear way to retain customers	116
Figure 43: Virtually all intermediaries have not launched any new products in the last year	118
Figure 44: Intermediaries are optimistic about the future of their personal loan business	122
Figure 45: What type of loan intermediary are you?	144
Figure 46: Datamonitor's core consulting capabilities	149

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