About this report
This report reviews the UK Home Credit market, or doorstep lending, as the industry is sometimes known. It quantifies the market size, historical growth rates, segmentation patterns and levels of industry profitability while reviewing key factors behind these figures.
It also contains an in-depth analysis of the relevant drivers of industry growth – in particular the macroeconomic environment and supplier trends – setting out historical trends and available forecasts. Our forecast for industry growth is based on this analysis of historical trends and growth drivers.
What are the objectives of this market report?
Home credit remains a major industry providing finance to large numbers of people throughout the country. The industry is frequently in the news but is not always well understood. Lenders are often criticised for charging high rates of interest which exploit low-income consumers. They are also frequently praised for offering credit to those who cannot obtain it from mainstream sources and giving them an alternative to illegal loan sharks. This report aims to probe beneath these two statements, explore the factors which drove historical growth of the market and provide a view on how likely it is to continue in the future
We believe that, in order for those involved in the home credit market to make the best decisions in this complex and changing environment, they need to have access to the best information. The aim of this report is to provide this.
It is intended for:
– Operators of Home Credit businesses themselves
– Investors in these businesses
– Market regulators and policymakers
– Banks, analysts, consultants and other parties with interests in the sector
What are the sources and methodology?
This report is based on:
– Interviews with senior-level contacts across the high-cost credit market
– Extensive research into published industry sources
– In-depth analysis of the macroeconomic environment and relevant Home Credit market drivers
– Financial analysis of the accounts of companies in the industry.
Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions.
Home credit market forecasts have been constructed using simple assumptions which are clearly stated. Supporting evidence is provided for our assumptions but clients can flex them to model alternative scenarios.
Summary
Market background
Home Credit lenders provide small-sum loans via an agent who comes to the customer’s residential address to collect payments. The sector is also called ‘doorstep lending’. The home visit gives the lender visibility of the circumstances of the borrower as well as some direct influence and control over repayments. The repayment period is usually less than a year and payments are typically made weekly.
Most loans are paid in cash and clients do not require a bank account or a debit card.
Interest rates are high and depend on the length of the loan. A 12-month loan would typically have an APR of around 270% while for a 14-week loan it is likely to be 500-1000%. As might be expected, smaller loans
tend to have higher APR, reflecting the fixed costs associated with setting up a securing a loan.
Market growth and drivers
The market grew during the period leading to 2010 steadily to exceed £1bn in value.
It has benefitted from three key trends:
– A significant increase in the number of consumers in sub-prime segments as a result of the economic downturn
– Significant reduction in the appetite of mainstream banks for serving such customers
– The ‘light touch’ regulatory environment in the UK which has created an environment which is more favourable to high-cost credit providers than elsewhere in Western Europe and North America
The market has slowed since 2010. This has coincided with the strong growth in payday lending and it is likely that some customers who formerly used Home Credit have switched to this new form of finance.
Competitive landscape
The clear market leader is Provident Financial which operates both the Provident Personal Credit network and Greenwood Personal Credit and is believed to have around 60% of the market.
Other providers include
– S&U plc,
– Mutual Clothing and Supply,
– Morses Club.
Outlook
The prospects for the market depend on the three key drivers outlined above (numbers of target customers, appetite of mainstream lenders for this segment and regulation).
While each of these areas has specific uncertainties and risks which are examined individually and taken into account in our forecast, indications are that overall market conditions are likely to remain favourable for high cost credit as a whole.
Payday lending, which is likely to show resilience, is likely to represent ongoing competition. However, Home Credit has certain advantages including:
– A model which can serve a broader range of customers including those who payday lenders typically reject.
– Lower APRs.
– Significant stickiness resulting from personal relationships of agent networks.