In its letter to Provident last week concerning the Scheme of Arrangement by which customers of the Group’s home credit and online loans arms could claim compensation for being sold unaffordable loans after the relevant businesses are closed down, the Financial Conduct Authority (FCA) revealed that Provident has incorporated a new lending entity. In this blog, I try to dissect the FCA’s disclosure to work out what Provident is planning.
The FCA drops in the following details:
The new entity will provide a ‘mid-cost rather than high-cost’ personal loan product and (although it seems it should go without saying) it will not provide High-Cost Short Term Credit
Its products will be ‘separate and different’ to the lending products that are being closed down
It will not use or benefit from existing customer data or other assets although some existing staff will transfer to the new business
The regulator ‘does not currently believe that the group is engaged in ‘pheonixing’ (the term used where individuals carry on the same business or trade successively through a series of companies where each becomes insolvent)
What can we take from this?
The FCA has never, to be best of my knowledge, defined ‘mid cost’ loans. It hasn’t really ever precisely defined ‘high cost’ either, despite using the term frequently.
The closest we’ve come to discovering what the regulator means by 'high cost' is its list of relevant products, that includes guarantor loans, home collected credit, pawnbroking and rent-to-own, among others. The common factors behind these products is that the annual percentage interest rates (APR) are typically between 40% and the High Cost Short Term Credit level of 100%, and the client base is generally sub-prime consumers.
So, I think we can conclude mid cost is below 40% APR. It also seems reasonable to assume it sits above mainstream lending which might include credit cards at APRs of up to 25% APR.
In summary, it seems Provident’ s new business aims to lend at something between 25% and 40% APR. Provident's Moneybarn car lending division and Vanquis credit cards are in this range.
For unsecured fixed-term loans there's not a lot of choice in mid cost loans. One reason is that lending costs - marketing and cost or risk in particular - often exceed the revenue. The FCA’s letter also includes an update on its investigation into Provident's assessment of affordability and sustainability of lending to consumers - a reminder of the regulatory risks involved in non-prime lending when people are involved.
So to me, this all points to either secured loans or other asset-based lending. Secured consumer loans are typically secured either on an asset (as Moneybarn does for vehicles) or on a person, i.e. a guarantor loan (as Provident’s Glo, which has stopped lending and is part of the Scheme of Arrangement) offered.
Could this be a second attempt at guarantor loans, at a lower rate? The UK guarantor sector has virtually shut down with the market leader Amigo having stopped lending. The product does have value to consumers when used appropriately, but that almost certainly means only when the guarantor is in a strong financial situation. The potential guarantor could then in theory lend direct, but they may prefer to have a third-party involved. With a strong guarantor, the rate should be much lower than the norm for this sector. But would a lower-cost guarantor loan be sufficiently distinct from Glo to meet the FCA’s description of ‘separate and different’, and their concerns about pheonixing? Probably not.
So it seems more probable this is an asset-based loan. Given the existing Moneybarn business covering motor finance, this points to the fastest growing part of the consumer credit industry, where Provident currently has a gap in its services: The retail point of sale (POS) finance market, or its shorter-term variant, ‘Buy Now Pay Later’ (BNPL).
To be clear, POS or BNPL, is not secured lending. However, these are asset-based loans in that consumers associate them with a particular good or service, and as such they are more likely to be prioritised for payment. It’s unclear whether this is because consumers wrongly believe the asset could be sized, or whether they simply have the loan front of mind as they are using the asset.
Although short-term BNPL is typically interest-free (the likes of Klarna or Clearpay) longer term POS loans are often charged for, and many are in the mid-cost range (e.g. Very charges 39.9% APR, Argos 34.9% and Currys 24.9%).
In January 2020, nonprime credit card provider Newday acquired of POS / BNPL platform Pay4Later (trading as DEKO), but the outcome of that remains unclear - Newday refers to it only as 'increasing our presence in the digital e-commerce ecosystem'. Is this a similar move by Provident? One small clue may be in the name, as the only new company registered at Provident's Bradford offices is Vanquis No.2 Ltd.
There are plenty of other new entrants in POS/BNPL, including Apple as announced last week, but there aren't specialists in serving the needs of sub-prime customers. If consumers can't borrow using home collected credit, or using guarantors, perhaps it opens up opportunities for non-prime online lending based around asset purchases.
For information on my research with Apex Insight on Retail Point of Sale Finance including Buy Now Pay Later, Non-Prime Consumer Credit and Used Car Finance sectors, please see https://www.assetfinancepolicy.co.uk/consumer-lending-market-analysis