Point of Sale Finance Market: UK Market Profile and Forecast 2015

What does this report contain?

• This report focuses on the UK market for point of sale, or POS, finance.
• Also known as retail finance, in-store credit or store instalment credit, it refers to loans provided by, or on behalf of, a retailer to enable a consumer to make a specific purchase.
• The report quantifies the market size, historical growth rates and levels of industry profitability. It also includes an in-depth analysis of the relevant drivers of industry growth 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 report?

• This report aims to answer a series of questions on the POS finance market:
  • How does the market work? What changes have there been recently
  • Which types of retailers use it most frequently?
  • How does it compare with alternative and substitute forms of finance
  • What role has new technology played in the market?
  • What is the market size and historical growth rate? What future growth can be forecast? What are the risks to future market growth?
  • What hard evidence is there to support views of historical and forecast POS finance market growth? What are the POS finance market drivers and how have they trended?
  • How does the market compare with those in other countries?
  • Who are the main finance providers and principals, which are most widely used by retailers, how have they performed?
  • In simple terms, what do they each do, who do they work for and how do they operate?

The report is intended for:

• • Operators of rent-to-own retail businesses themselves
  • Investors in these businesses
  • Retail property-owners, developers and landlords
  • Market regulators and policymakers
  • Banks, analysts, consultants and other parties with interests in the sector

What are the sources and methodology?

• Interviews with senior-level contacts in the consumer credit industry
• A survey of the top 1,025 UK retailers to establish whether they were using this form of finance and which providers they used
• Extensive research into published industry sources
• In-depth analysis of the macroeconomic environment and relevant 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
• Market forecasts have been constructed using simple assumptions which are clearly stated. Supporting evidence is provided for our assumptions but readers can easily flex them to model alternative scenarios.

Market Background

• Point of sale (POS) finance – also called retail finance, in-store credit or store instalment credit – refers to loans provided by, or on behalf of, a retailer to enable a consumer to make a specific purchase.
  • Some retailers choose to subsidise the cost of the credit as a promotional expenditure (ie interest free credit)
  • It is used by both national retail chains and independent shops, most commonly in the furniture, jewellery and electricals sectors.
  • Loans are generally set up as personal loans, not secured on the asset and without a lease arrangement.
  • Loan periods are generally from 6-60 months with an APR of 10-20% being typical.

Market Growth and Drivers

• The market for POS finance has grown quickly in recent years as penetration of this form of finance has increased.
• It has been driven by trends in a range of demand and supply factors, including:
  • The appetite of consumer for purchasing the kinds of items which tend to be financed in this way, which is likely to be related to the overall level retail sales but with more of an emphasis on discretionary purchases (big ticket leisure items) and furniture
  • Consumer confidence in driving larger, discretionary purchases
  • The overall performance of the economy as a driver of both retail sales and consumer confidence
  • The level of housing transactions, which tends to drive furniture purchases
  • The availability of this form of credit, influenced to an extent by overall unsecured consumer borrowing levels
  • Pricing of POS finance loans
  • The impact of technology on the market with new apps enabling far quicker decision-making
  • The impact of regulations on the market.

Competitive Landscape

• The market consists of finance providers and those which act as a principal or broker. Those most widely used by the leading 1,000 UK retailers are Finance providers Hitachi Capital, Barclays Partner Finance and Ikano Bank
• Principals, V12 and Pay4Later
• A significant proportion of retailers provide the finance themselves (eg Next, Home Retail Group)
• Most operators have grown in recent years and all are profitable. Average pre-tax margins across the sector are around 12%

Outlook

• The prospects for the market depend to a large extent on how the market drivers perform.
• The outlook for economic growth, and hence consumer appetite for borrowing and retail spending, is positive
• There appears to be potential for penetration to continue to rise in the future with many retailers in key segments not yet offering POS finance
• Rising interest rates should lead to industry revenues growing at a faster rate than loan books
• There is no immediate prospect of tighter regulation although we believe there are risks which mean this cannot be ruled out.
• As well as regulation, key risks to market growth include UK macroeconomic performance, the development of new potential substitutes given UK fintech innovation and potential for further delay in interest rate rises.