Partner Article

2014 Predictions

The increase in UK consumer confidence is driving further spending growth whether that be on new cars or traditional domestic expenditure, all of which manifests in increased finance take up, a trend that we’d expect to continue over the course of 2014. Additionally, the return of funding facilities, either through bond issues, securitisation or wholesale lines being made available will allow both existing lenders to grow and also assist new lenders to launch.

We see the availability of liquidity having the greatest overall impact on the provision of finance over the course of the year, driving further price competition in headline rates for prime borrowers. The sub-prime unsecured loans market will remain underserved during 2014 as funding facilities remain tough to non-existent, though with securitisation for sub-prime auto receivables returning in the US during 2013, we’d expect to see the same in the UK towards the end of 2014. Whilst some near-prime unsecured lending has taken place in 2013, the opportunity for further controlled growth is present and will be witnessed in 2014.

Those lenders that are better able to demonstrate portfolio understanding and predictability are likely to take earlier benefit from increasing advance rates and lower funding rates, irrespective of the funding source.

Funding for near-prime customers with some form of security, either from a vehicle secured on hire purchase (typically with starter interrupter technology) or a guarantor is strong and will strengthen over the course of the year supporting growth for established lenders and new entrants alike.

This year sees the handover of consumer credit regulation from the OFT to the FCA. We believe that for the majority of lenders this will prove to be a difficult, but not life threatening transition for their operations. Clearly, increased investment in compliance will be required across the board, the impact being felt more by the smaller firms than the larger ones.

That said, it is clear that political and media pressure on the high cost, short term credit sector will continue unabated resulting in significant market consolidation with many smaller players continuing the exodus experienced in 2013. This is a market where operational scale is fundamental and only smaller players with a specific niche will survive.

Interestingly ,our market research in late 2013 showed a high level of awareness of payday loans, but low levels of intended take up. The return of overdraft facilities (albeit slowly) coupled perhaps with the stigma associated with payday loans driven by press attention, will reduce loan volumes in 2014 over previous years; alternative sources of credit such as guarantor lenders and, to an extent, peer-to-peer lenders will benefit.

Ironically, payday lenders have more recent credit information than the majority of other lenders in the UK which presents further opportunities for them, though outside of the high cost credit identifier. We’d expect to see some tie up between lenders and retail organisations to provide retail credit to an otherwise excluded base where payment by instalments is essential.

The obligations being imposed by the FCA on high cost lenders may stimulate them to create entirely new, unrelated entities for units that operate outside the high cost credit definition allowing them to benefit from, relatively, lighter touch regulatory oversight and acting as a precursor to them exiting more stringently controlled products.

In the guarantor loans space, we foresee a number of new market entrants, driven by both the availability of funding and a clear demand from the product, again highlighted in our research in late 2013. The current market dominance by a small handful of players will be challenged during 2014. We predict that this will be achieved through a combination of better use of technology allowing loans to be underwritten and paid out within minutes and interest rate compression. Indeed, better use of technology that consistently delivers known loan outcomes will assist lenders to reduce rates whilst maintaining margin.

The use of technology as a differentiator will play a significant role in the fortunes of many lenders. New start operators having the benefit of adopting newer technologies and processes from the outset can establish critical competitive differentiators whereas some established lenders which have failed to invest in systems will be left behind. Further adoption of electronic signatures, sub-hour funding and true multi channel customer servicing will become the standard in 2014 with further innovation being showcased by lenders later in the year.

The inexorable rise of social media penetration and footprint provides lenders with the ability to augment thin credit files that exist in certain sections of the demographic and we predict that social media data will be used elsewhere in the credit process during 2014; followed no doubt by data privacy commentary.

The arrival of peer–to-peer lending as a viable alternative to traditional bank credit was clearly heralded last year with further growth expected in 2014 from both the existing platforms and the new start operators offering an increasingly broad range of business models.

The evolution of peer-to-peer from the initial consumer funded operations to being backed with more institutional money is at an advanced stage for some US based platforms, and we can expect the transition from consumer beyond pro-sumer to institutional investors in the UK market over the course of this year. The availability of significant funding increases coming in via this route brings a further dimension to the sector and we’d expect to see a number of the platforms imposing thresholds on minimum investments, in total and per loan bid.

Whilst the move to the FCA will provide a stronger regulatory framework, the overall protection for consumer investors in P2P platforms remains broadly unchanged and with many platforms referring to the investors as ‘savers’, despite there being no Financial Services Compensation Scheme in place. This is likely to change over the course of 2014 and we’d expect to see further regulatory requirements being announced during the year, most probably in relation to a failure of a platform and negative media pressure.

In summary, 2014 has the portents of being a defining year for lenders, with new operating models and markets combining with transformational technology and increased funding availability; new or established – opportunities abound.

This was posted in Bdaily's Members' News section by Nostrum Group Ltd .