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Home > Market Research > Financial Services > UK Personal Loan Distribution 2008
Introduction
The use of the internet is gaining momentum in personal loan distribution and as a result some other channels are set to decline through 2012. While telephone call centers are expected to remain important, branch networks are evolving to become more advisory oriented. At the same time the intermediary channel has been shrinking due to tougher market conditions.
Scope
*Quantifies the size of the different distribution channels in the UK personal loan market.
*Gives insight into the future challenges lenders and brokers will face.
*Uses Datamonitor's intermediary survey to understand intermediaries attitudes in the market.
Highlights
In 2007, the UK saw personal loan gross advances reach £62.3 billion, 9.6% down from the previous year. The fall in new business was due to a weakening economy, more stringent lending requirements and falling house prices.
Datamonitor estimates that in 2007 direct distribution accounted for 87.6% of all personal loan advances. Direct channels include bank branches, telephone, internet, or post.
There are a small number of lenders in the secured personal loan market.While some lend directly to consumers the majority lend exclusively through intermediaries. Almost all (95%) of intermediaries offer secured personal loans and 61.2% of secured perosonal loans are distributed by intermediaries.
Reasons to Purchase
*Helps lenders understand the dynamics of personal loan distribution and the future developments that are expected to take place.
*Presents the size of the personal loan market and the forecasted change in gross lending for both secured and unsecured loans.
*Gives the reader insight into the views of intermediaries in a variety of areas across the market.
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Table of Contents
Overview 1
Catalyst 1
Summary 1
Executive Summary 2
New lending in the personal loan market fell in 2007 and it is expected to continue to fall 2
Direct distribution is the primary method for distributing personal loans 3
Intermediaries dominate the provision of secured personal loans 4
Lenders' use of bank branches will rise and then fall as the internet becomes more popular 5
Online distribution is expected to grow and account for 22.3% of all unsecured personal loan applications by 2012 5
Other channels will fall in use as result of the internet becoming more popular 6
The immediate future for intermediaries is bleak 6
Intermediaries are most concerned by rising consumer debt and supply drying up 7
Datamonitor has identified some key issues of which intermediaries need to be aware 8
Table of Contents 9
Table of figures 10
Table of tables 11
An Overview of Personal Loan Distribution 12
Introduction 12
New lending in the personal loan market fell in 2007, with both secured and unsecured loan markets performing badly 12
The value of new lending in the personal loan market fell by 9.6% in 2007 12
The UK personal loan market is composed of secured and unsecured products 13
Secured personal loans are generally taken out by customers with existing mortgages 13
Unsecured personal loans are not backed by collateral 14
Both the secured and unsecured personal loan markets have performed poorly in recent years 14
Both the secured and unsecured personal loan markets are forecast to return to a positive growth period by 2012 15
The unsecured personal loan market is forecast to grow by 3.3% from 2008 to 2012 16
The secured personal loan market is forecast to grow by 4.0% from 2008 to 2012 17
Personal loans can be distributed through a variety of channels 17
Direct distribution accounts for the majority of the personal loan market 18
Intermediaries account for the vast majority of secured personal loan distribution 19
The majority of lenders lend exclusively through intermediaries 21
Bank branches account for a large proportion of unsecured personal loans distributed 21
The use of bank branches has fallen in the last three years as online distribution has become more popular 23
The popularity of telephone based distribution channels has fallen in the past couple of years 23
Intermediaries account for only a small share of the unsecured personal loan market 23
Datamonitor predicts that direct lending will become more prominent 23
Intermediaries have been exiting the personal loan market 23
Direct lending will remain the main form of distribution for unsecured personal loans 23
The use of bank branches will grow slightly then fall in popularity 25
Online distribution is expected to grow consistently 26
The use of the telephone will fall in the future 27
The popularity of direct mail as a distribution channel is anticipated to fall 27
The indirect channel is forecast to fall then rise 27
Intermediaries' share of the secured personal loan market will fall 27
Direct lending is forecasted to expand 29
Meanwhile, indirect lending will contract slightly because of tighter profit margins 30
Direct Loan Distribution 31
Introduction 31
The credit crunch has raised the profile of face to face channels because of the bespoke advice that it can facilitate 31
Many large lenders have focused on existing customers and are offering help to those in financial difficulty 31
Personal pricing has become more popular as lenders address individual's circumstances 32
Some lenders have noticed a fall in the quality and level of competition 32
Datamonitor believes that consumer demand is falling slightly, but is still outweighing supply 32
Borrowing for new car purchases and home improvement has fallen as consumers focus more on debt consolidation 33
Cutting expenditure on direct distribution channels would be a risky strategy as a response to the credit crunch 33
Bank branches are becoming more sophisticated 34
In 2007, bank branches accounted for almost half of all personal loan applications 34
A number of the major banks have been refurbishing their branches in order to improve the customer experience 34
It has been argued that banks are opening branches in affluent areas and closing branches elsewhere 34
Strong branch networks are very important for banks despite the cost 35
Face to face interactions are fundamental but independent advice given by banks will always be debated 35
Lenders are able to cross sell within branches which offers potential to increase revenue 36
Lenders have faced financial challenges in maintaining their branch numbers 36
The BBA outlines that UK branch networks have been falling steadily from 2001 to 2006 37
There is a continuing trend for banks to move away from traditional branches 38
Barclays' introduction of new flagship branches 38
Integration of all distribution channels is giving a further edge to the branch 38
Integration leads to better individual personal pricing, although this may not be in the interest of customers 39
Which? has accused lenders of using personal pricing as a means to avoid the 66% APR typical rule 39
Varying pricing across different channels is another way to boost profitability 40
The internet is growing and becoming more tailored to the next generation of consumers 40
The internet accounted for 16.5% of the direct personal loan market in 2007 41
Internet arranged unsecured personal loans are far more prevalent than online secured loan applications 41
The internet is leading to higher value loans being taken out online 41
The internet is also used as an information gathering tool 41
PPI has been a very topical issue especially with respect to online lending 42
The FSA has banned point of sale PPI as it may be against consumers' welfare 42
Online distribution has facilitated and spurred on new types of lenders 43
Direct channel lenders now play a significant role 43
Non-financially based lenders haven risen in popularity 43
Zopa has become an attractive source of finance for customers 44
There are significant factors that are limiting the development of online banking services 44
The possibility of fully completing a transaction online is becoming more fashionable 44
Online transactions' security is questionable especially as the number of phishing attacks has been rising 45
Consumers prefer bespoke advice, which is something the internet has not yet offered 46
Many banks have not seen a reduction in the number of their online users 47
Online aggregators are a growing phenomenon in the UK 47
Online aggregators generally earn a fee by linking consumers to banks 47
Aggregators earn the core of their revenues through three ways, depending on their business model 47
Aggregators have become increasingly popular as a direct result of the number of internet users rising 48
Aggregators offer a number of acquisition advantages to lenders 48
Lenders are concerned by aggregators' focus on price and greater non-price differentiation between lenders is becoming more important 49
Aggregators are becoming more sophisticated comparers and need help from lenders to take this further 49
Nevertheless lenders can receive too many applications from the wrong king of customer 50
Customers can often become confused by the wide array of online aggregators 50
Customers acquired via online aggregators yield low profits and offer little cross sell opportunity 50
Aggregators are volume driven and yield a low profit margin 51
Lenders must fully utilize online aggregators in order to stay competitive even in the current climate 51
Only a considerable level of consumer skepticism can hinder this channel's growth, but this is unlikely 51
Personal loans arranged through direct mail accounts for only 3.1% of the market 52
Distribution via direct mail is in decline 52
Lenders use direct mail as the primary channel for advertising 52
For unsecured lending direct mail accounts for the majority of total advertising 53
For secured personal lending, post only accounted for 35.5% of all advertising 55
Using direct mail is an effective way to cross sell products 55
Call centers will continue to be a popular method for personal loan distribution 55
Call centers have both strengths and weaknesses 55
Call centers provide customer service without the need of a branch 56
Call centers suffer similar disadvantages as the internet 56
There may be a move towards call centers for specialist enquires rather than distributing personal loans 56
Intermediary Loan Distribution 58
Introduction 58
Intermediaries still have an important role to play in the distribution of personal loans 58
The market's historical non-standard nature and small size explain the high participation of intermediaries 58
Intermediaries only account for a small percentage of the whole personal loan market 59
Most intermediaries use all distribution channels although face-to-face interaction is paramount 60
The average intermediary uses three distribution services 60
Post is used the least by intermediaries but its significance should not be underestimated 61
The average personal loan value distributed by intermediaries is £26,000 62
Intermediaries focus mainly on the secured personal loan market 62
Most intermediaries only offer secured personal loans 63
Secured personal loans are the main form of personal loan for intermediaries which offer both 64
Although a viable alternative to unsecured personal loans, secured lending has some major drawbacks 65
The majority of intermediaries have a customer base of up to 1,000 67
From this customer base, the average age band of a customer using an intermediary is 30-45 years old 67
The average customer using an intermediary falls into the £25,001-£40,000 income bracket 68
Most intermediaries only deal with a small number of lenders 69
Innovation in the secured personal loan market is lagging behind price in terms of importance 71
Competitively priced products is the most important aspect of a number one lender 71
Other features, such as personal relationship with the lender, are of lesser importance 72
The credit crunch may change the importance of the features outlined in selecting a number one lender 73
The credit crunch is causing there to be less lenders and loan products available 74
Intermediaries have reason to worry about the state of the personal loan market 74
Eight secured loan lenders have withdrawn from the secured loan sector since July 2007 75
Falling house prices have contributed to the fall in availability of secured personal loans 75
Intermediaries view the personal loans market as either stagnant or shrinking 75
Most intermediaries have experienced negative or no growth in their business 76
The sub-prime personal loan sector is expected not to grow 77
Intermediaries will face a number of challenges in the near future 78
Intermediaries are most concerned by rising consumer debt and supply drying up 79
Datamonitor has identified some key issues of which intermediaries need to be conscious 80
Consumers are far more aware of the risks involved when taking out a loan 81
Consumers are taking out secured loans for debt consolidation purposes 81
Intermediaries are seeing lower revenues and lower profitability as a result of the credit crunch 82
Most intermediaries are looking for alternative ways to boost their revenue as a result of lower profitability 83
There is no real agreement between intermediaries as to what will happen to the personal loan market after the credit crunch 83
APPENDIX 85
Supplementary data 85
Definitions 92
Balances outstanding 92
CAGR 92
Fixed rate personal loan 92
Gross advances 92
Non-standard 92
Online aggregator 92
Secured personal loan 92
Unsecured personal loan 92
Methodology 93
Further reading 93
Ask the analyst 93
Datamonitor consulting 93
Disclaimer 93
List of Tables
Table 1: Value of personal loans arranged directly and indirectly, 2006 and 2007 19
Table2: Value of secured personal loans arranged directly and indirectly, 2007 20
Table3: Value of unsecured personal loans arranged directly and indirectly, 2006 and 2007 22
Table 4: Datamonitor's forecast for the distribution of unsecured personal loans 2008f and 2010f 25
Table5: Datamonitor's forecast for the distribution of secured personal loans, 2008f and 2012f 29
Table 6: Typical APR charged by a sample of lenders at branch and online, October 2008 40
Table 7: Top 20 direct mail advertisers, 2008H1 54
Table 8: Most intermediaries use all of the main distribution channels, 2008 60
Table 9: Intermediary market of secured and unsecured personal loans, 2007 63
Table 10: How intermediaries perceive the future of the sub-prime personal sector over the next couple of years, 2008 78
Table 11: Secured and unsecured personal loan advances, 2003-07 85
Table 12: Forecasted secured and unsecured personal loan gross advances, 2007-12f 85
Table 13: Number of bank branches in the UK, 2001-06 86
Table 14: Number of reported phishing incidents targeted against UK banks and building societies, 2008 86
Table 15: Total advertising by channel, 2007 86
Table 16: Intermediary secured personal loan business as a proportion of total personal loans, 2008 87
Table 17: Most commonly used lenders by intermediaries, 2008 88
Table 18: Average customer base size of intermediaries, 2008 88
Table 19: Average age band of customers that use intermediaries, 2008 89
Table 20: Top five most important features that influence an intermediary's choice of lender, 2008 89
Table 21: The top five least important features that influence an intermediary's choice of number one lender, 2008 90
Table 22: Growth and decline in intermediary personal loan business, 2008 90
Table 23: Main concerns outlined by intermediaries, 2008 91
List of Figures
Figure 1: Both the secured and unsecured markets will grow by 3.4% from 2008f-12f - 2007-10f 3
Figure 2: Direct distribution is the primary method of distribution for personal loans, 2007 4
Figure 3: Online distribution of unsecured personal loans will rise to 22.3%, 2008f-12f 6
Figure 4: Intermediaries are most concerned by lenders pulling away and rising levels of consumer debt, 2008 7
Figure 5: The value of new lending on personal loans fell by 3.2% between 2003-07 13
Figure 6: The secured personal loan market is considerably smaller than the unsecured personal loan market, 2003-07 15
Figure 7: Both the secured and unsecured markets will grow by 3.4% from 2008f-12f, 2007-12f 16
Figure 8: Direct distribution is the primary method of distribution for personal loans, 2007 18
Figure 9: 61% of secured personal loans are purchased through indirect channels, 2007 20
Figure 10: 87.6% of all unsecured loans are arranged directly, 2007 22
Figure 11: Online distribution of unsecured personal loans will rise to 22.3%, 2008f-12f 24
Figure 12: 77% of customers are worried about staying within their overdraft limit, which is why they are visiting bank branches more for advice, 2008 26
Figure 13: Intermediaries will continue to dominate the secured personal loan market, although their market share will fluctuate, 2008f-12f 28
Figure 14: UK branch networks have decreased by a CAGR of -1.6%, 2001-2006 37
Figure 15: Number of reported phishing incidents targeted against UK banks and building societies 46
Figure 16: Personal loan providers spend the most on direct mail advertising, 2007 53
Figure 17: Intermediaries account for only 6.7% of the personal loan market, 2007 59
Figure 18: Face to face and phone as a distribution channel account for 75% of most used channels, 2008 61
Figure 19: Secured personal loans dominate over unsecured personal loans in the intermediary market, 2007 62
Figure 20: Over half of intermediaries supply only secured personal loans, 2008 64
Figure 21: Secured personal loans are the most common form of personal loans that intermediaries offer, 2008 65
Figure 22: The majority of intermediaries have a customer base of 1,000 or less, 2008 67
Figure 23: 83% of customers fall into the 30 to 45 age band, 2008 68
Figure 24: The vast majority of customers fall into the £15,001 to £40,000 income band, 2008 69
Figure 25: Halifax, First Plus and GE Money are the most popular lenders with intermediaries, 2008 70
Figure 26: The most important features for intermediaries in selecting a number one lender was having competitively priced products and suiting customers needs, 2008 72
Figure 27: The least important features for intermediaries in choosing a number one lender was having a personal relationship with the lender and commission structure, 2008 73
Figure 28: The majority of intermediaries have not seen their personal loans business grow in the last 12 months, 2008 76
Figure 29: Most intermediaries have seen a decline of up to 20% of their business over the past 12 months, 2008 77
Figure 30: Most intermediaries are concerned by lenders exiting the personal lending market and the rising levels of consumer debt, 2008 80
Figure 31: The majority of customers take out personal loans for debt consolidation, 2008 82
Figure 32: Intermediaries agree that high personal indebtedness and low affordability of available personal loans will contribute to the market not returning to previous levels, 2008 84
For full details, please email keithw@cmsinfo.com
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