About this report
The high-cost credit market has grown at rapid rates over the last few years with payday loans and pawnbroking being particularly dynamic segments.
Lenders are often criticised for charging high rates of interest to low-income consumers. They are also frequently praised for offering credit to those who cannot obtain it from other sources and giving them an alternative to illegal loan sharks.
This market report aims to probe beneath these two viewpoints, explore the factors which have driven the high rates of growth and provide a view on how likely it is to continue in the future.
This high-cost credit market report combines all the findings and analysis from the four separate market reports we have produced which review each of the main segments which go to make up the UK high-cost credit market. These are:
– Online payday lending
– Pawnbrokers & money shops
– Home credit
– Rent-to-buy retail.
This market report is therefore designed for clients with an interest in all of these high-cost credit markets.
We quantify the market sizes, historical growth rates, segmentation patterns and levels of industry profitability while reviewing key factors behind these figures. We also carry out an in-depth analysis of the relevant drivers of industry growth – in particular the macroeconomic environment, trends in lending, the regulatory environment and other specific factors influencing high-cost credit markets such as the gold price, labour market trends and high-street retail trends – setting out historical patterns and available forecasts.
Our forecast for industry growth by segment is based on this analysis of historical trends and growth drivers.
Who is it intended for?
Payday loan companies
Home credit companies
Investors in those sectors
Government and regulatory bodies
What are the sources and methodology?
This market 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 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.
The high cost credit sector, which consists of internet payday lending, Pawnbrokers & money stores, home credit and rent-to-buy credit, focuses on providing credit to sub-prime consumers. The products have been designed to meet specific customer needs.
– The amounts borrowed are small (less than £1000)
– Applications processes are simple and quick with lending decisions often made on the spot
– Funds also made available very quickly (0-24 hours)
– Repayment periods are short (less than a year, sometimes just a few days).
Lending costs are far higher relative to the amount lent than for mainstream credit
– Loans are for small amounts for short periods
– Arrears and delinquency rates are high
To offset this, interest rates are far higher than conventional credit (from c.30% APR for rent-to-buy to c.4000% APR for payday loans). Both the industry and, to an extent, borrowers tend to focus more on £ repayment cost than APR
Market growth and drivers
The market has grown rapidly in recent years
– All segments have increased
– By far the fastest growing areas have been pawnbroking and payday loans
This rapid growth has resulted from four separate things happening at the same time:
– A significant increase in the number of customers in target segments as a result of the economic downturn
– Significant reduction in the appetite of the mainstream banks for serving sub-prime customers
– A sustained year-on-year rise in the gold price
– 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
Main companies in the sector include:
– Wonga, the UK private-equity backed start-up which has become the leading on-line payday lender in a short space of time with 2011 revenues of £185m
– DFG, the leading US operator of pawnbroking shops which has increasingly diversified to less-regulated markets such as the UK where brands such as The Money Shop chain and the Payday UK and Payday Express loan providers now account for 48% of its revenues (£313m).
– Provident, the leading stock market-listed provider of home credit and other services to sub-prime consumers, which has sales of over £900m
– Caversham, the private equity-owned leader in rent-to-buy retail with sales of over £260m from its fast-growing BrightHouse store network now standing at around 250 locations
In addition to DFG, several of the other leaders in the industry are American companies which have entered the UK to take advantage of what they see as a similar market but less mature and with a more benign regulatory environment
Other leading US-based players include:
– Cash America International, which now owns QuickQuid, the number two player in payday loans, and Pounds for Pocket, which offers longer term sub-prime loans, and previously owned the H & T pawnbroking chain
– Axcess Financial, which operates the Cash Generator and Cheque Centres high street chains and The Loan Store payday loans website
– EZCorp, which owns stakes of 30% and 29% respectively in the Cash Converters and Albermarle & Bond pawnbroking / high street money store chains
–Aaron’s, Inc, which acquired 11.5% of the Perfect Home rent-to-buy chain in 2011
The prospects for the market depend to a large extent on the four key drivers outlined above (numbers of target customers, appetite of mainstream lenders for this segment, the gold price and regulation).
While each of these areas has specific uncertainties and risks, indications are that overall market conditions are likely to remain favourable