Changing face of credit and credit exclusion

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Changing face of credit and credit exclusion
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Financial Health Forum 30th January 2009
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Credit and credit exclusion

• What is the problem?
• Shape of the credit market
• Low income lenders how are they faring?
• The return of credit exclusion?
• What recent action has there been?
• Mortgages
• Unsecured lending?
• What more could be done?

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The UK retail credit market
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Consumer credit brands
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Consumer credit brands
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Bank of England Credit Conditions Survey Q4 2008

• Secured loans
• Lenders reduced availability more than expected
• Larger than expected decline in approvals
  (lowering maximum Loan To Value ratios and
  tightened scoring criteria)
• Lenders expect further reduction in availability
  over next three months
• Demand remained stable for house purchase and
  remortgaging
• Defaults risen and expect to rise further
• For the first time since such figures were
  recorded, in 1965, banks and building societies
  will collect more in mortgage payments than will
  be lent to new customers.
• Unsecured loans
• Lenders reduced availability
• Credit scoring criteria tightened
• Approval rates unchanged for credit cards
• But fallen for unsecured lending
• Lenders expect further reductions in
  availability, further tightening of criteria
• Driven by economic outlook and reduced appetite
  for risk
• Small increase in demand for credit card
  borrowing
• Against expectations decline in demand for other
  unsecured lending
• Now expect demand to fall further
• Non credit credit e.g. housing arrears
  rising?, bill payments being delayed further?

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Mortgage lending growth
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Consumer credit growth
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Banks

• Mainstream banks
• Dont usually lend small amounts (personal loans
• And when they do . 1,000 typical rates are 20
  to 22 APR
• Mainstream credit card rates blurring edges of
  non standard rates e.g. Northern Bank (NI) 36.2
  Typical APR, MBNA 34.9 Typical APR
• Increasingly credit card limits reduced
  dramatically for customers with no notice
• Unauthorised overdraft costs compare can be more
  expensive than payday lending
• 200 for 21 days now costs between 222 and 417
  to repay (Jan 2009)
• Not subject to APR disclosure
• Bank subsidiaries not faring well
• HFC Bank - 13bn total losses since HSBC acquired
• Beneficial Finance typical APR 39.9
• Credit through Currys, PC World, Halfords etc
• Hamilton Direct bank
• Black Horse Finance Lloyds TSB
• GE Capital Bank storecards, credit cards and
  car finance bought by Santander
• GE Money still separate but no longer do
  unsecured loans

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Provident Financial plc

• Majority of home credit market 70
• Interim report 08 (October 08)
• Price inflation key factor in credit decisions
  over last two years
• Impact of interest rises is limited. Vast
  majority of customers dont have mortgages
• Impact of unemployment negligible so far
• Applications hugely increased although approvals
  down
• Tightened lending criteria on both
• Nevertheless rates increased 189 typical APR
• Customer numbers up 7 in year to 1.66 million
  good quality, reservable customers
• Growth in customers numbers is being
  deliberately moderated in order to reinforce
  credit quality
• Arguably there is not a huge growth in numbers or
  volumes only returning better home credit
  customers
• Move to quality and returning further upmarket
  what about those displaced at bottom?
• Piloting Real Personal Finance their Direct
  Debit equivalent to Welcome Finance
• with 2/3 of customers ex Home Credit
• Vanquis Credit Card very high refusals, as only
  available to those without another card
• Home credit is a cash generating business, not
  reliant on wholesale funding and debt not
  maturing till March 2010

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Cattles plc

• Welcome Finance brand now majority of business,
  Shopacheck (Home Credit) only 2 of receivables
• Welcome had double digit growth for last 15 years
  and increased profitability hugely
• Now severe liquidity problems have reduced
  lending dramatically
• Rolling 5 year funding periods now a major
  weakness in current wholesale credit market
• 500m to renew or repay in July 09 and 135m in
  December 09
• Twin strategy to replace wholesale funds with
  retail deposits
• Pursued new banking licence with FSA to raise
  1bn by end 2010
• Pursued purchase of London and Scottish Bank
• Both unsuccessful
• Basle II increased capital requirements and then
  Northern Rock meant FSA reluctant to grant any
  new banking licences
• Negotiations with London and Scottish Bank
  stopped by FSA
• 20 Banks unable to tell them whether they will
  renew
• Therefore have to assume they need 500m in cash
  to repay
• Prior to crisis in Autumn 08 were approving only
  52 out of 1000 applications
• Lending dramatically reduced and have cut by 75
  to ration funds
• 20 staff redundant in April
• Using only 1 broker for leads, many sole traders
  gone bust
• January loans exhausted by 15th of the month
• Welcome website says server down for routine
  maintenance

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Payday lenders

• 6 major players (2 new in UK, 4 from US)
• 250,000 customers
• Online growing fast since first legalised 2004
• Bricks and mortar static in size
• Demographic mostly males, 25-45, many single
• Average loan size 230 but range 100 to 800
  (usually maximum 400 first loan)
• Typical 1344 APR
• Two models
• Bricks and mortar hand over cheque for 100
  receive 75 to 85 in cash
• Online - 200 on debit card but pay back 250
• Online more expensive argument is lots of
  fraudulent applications which all have to be
  processed exceed cost efficiencies of not
  maintaining bricks and mortar
• Margins of both models?
• US companies seeking UK and then European
  penetration
• (In US more payday lenders than branches of
  Starbucks and McDonalds together)
• Believe they can crack credit averse European
  countries with small amount, short term loans
• Payday loans dont appear on credit files so
  difficult for other lenders to factor in risk and
  act responsibly

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Brighthouse

• Caversham Finance Limited
• Rent to own over 3 years, no credit checks
• Weekly repayments Typical APR 30 but
• High initial cost of products
• - Nintendo DS Lite Pink 208 vs 98 at Argos
• 140,000 customers
• Last year 60 rise in pre-tax profits to 20.1
  million
• 11.5 increase in like-for-like sales across the
  board.
• 23 new retail branches opening in the UK within
  the last 6 months. Total now 180 shops
• Potential for another 200 stores to serve
  500,000 of the 5.2 million target audience
• Plans to double stores in Yorkshire from 19 to 36
  in 3 years
• Cash generative so not dependent on wholesale
  credit market

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Why is credit getting more expensive while base
rates fall?

• Two types of lenders (those funded primarily or
  entirely by retail deposits, those funded by
  wholesale funds)
• Lenders reliant on wholesale funds having to pay
  more for money to lend and finding it harder to
  access in present marketplace
• For retail deposit takers the cost of funds is
  falling as interest rates paid on retail deposits
  fall
• However credit card, personal loans and
  alternative credit products are all seeing rates
  rise
• Possible explanations for rates rising
• Hugely increased applications but many less
  approvals means massively increased
  administration costs to be paid by successful
  borrowers
• Increased defaults means much greater expenses to
  be borne by lender
• Increased margins?

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Government Affordable Credit initiative

• DWP Growth Fund started July 2006
• Over 120,000 loans made upwards of 52 million
  in value.
• 90 through credit unions
• Average loan amount of 440
• Targeted well on traditionally excluded groups
• Saving to customer 250- 350 in interest
  charges, approximately 36m in total
• Average cost to Government per loan 90
• Proof of concept that credit unions can
  successfully serve many of those most
  disadvantaged on a larger scale
• Significant crossover with Social Fund clients
• However no resources for innovation, investment
  or infrastructure development

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Growth Fund Demographics
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Challenges of Growth Fund

• Customer service
• Many more difficult customers to serve
• Some violent and aggressive customers
• Perception of entitlement to loan
• Impact upon other customers and staff
• Savers dont want to save with an institution
  perceived to offer high risk credit
• Costs of staff training and safety improvements
  in shop
• Financial health of credit union not improved by
  scheme overall
• 10 default target makes sustainability
  impossible and government subsidy essential
• E.g. 10 x 300 loans produces maximum 190 loan
  interest to cover all costs
• 1 out of 10 defaulting loses any remaining loan
  interest and 300 capital
• Costs exceed income without government subsidy
• Financial stability means broadening deposit base
  and making more bigger loans
• Need to grow Non Growth Fund as quick as Growth
  Fund business

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Government action?

• Mortgages prioritised for good reason
• 10-12 million people in non standard finance
  being squeezed out?
• Where are they going? People can stop
  discretionary spending but essentials?
• Treasury Select Committee calling for action but
• No clear actions for unsecured lending from
  Government
• More companies disappearing
• Not attractive market place and impact of
  Competition Commission on home credit
• Many small home credit companies selling out as
  more difficult to operate, 75 were sole traders
• Its all black or white theres no grey anymore
  subprime disappearing
• Vacuum in credit market what will fill it?
• Less discretionary spending. A good thing?
• Illegal lending?
• New providers no appetite?
• Payday lending for small amounts?
• Credit unions

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Other remedies?

• Reform of credit referencing systems
• - Recognition that present systems designed
  entirely for mainstream e.g. monthly data,
  inflexible recording of missed payments
• Ability to pay not as useful as propensity to
  pay
• Some recognition of need to have completely new
  approach to include utility payments, rent
  payments etc
• Could better systems encourage lenders to lend
  more in the comfort of better risk prediction?
• However its not core bread and butter,
  mainstream brings in all the money, will they
  invest to do it?
• Invest in post office and credit unions?
• Peoples Bank?
• Post office has no low income credit product only
  Bank of Ireland mainstream savings and loan
  products
• Credit unions need broader branch structure for
  universal coverage
• Joint investigations between POL and ABCUL
• Submission to BERR select committee on the Future
  of the Post Office