As part of it’s Q1 results announcements last week, Barclays announced a deal to offer credit to Amazon customers in the UK, building on its existing arrangements in Germany where Barclaycard offers Amazon customers charged-for financing options on terms between 3 - 48 months. This was presented by Barclays Chief Executive Jes Staley as part of the bank’s move to double its revenue from payments over the next three years.
This follows recent decisions by Barclays to shift away from secured motor finance and asset finance business, together with various media reports about lending issues in Barclay’s Point of Sale retail finance business.
So how should we understand Barclays’ strategy, and the apparent move away from secured credit towards what is described as ‘payments’ but sounds more like conventional unsecured credit? Here’s my attempt to make some sense of it all.
In September 2019, Barclays Partner Finance announced its decision to cease to originate new business in motor dealer finance, where it was previously among the top five lenders.
It was widely speculated in the trade press that the decision reflected concerns over the difficulties in ensuring car dealers follow FCA regulations when broking business. That followed a review of the motor finance market by the FCA, and the regulator stating that it sees dealers as ‘agents’ of finance companies (even though the dealers are themselves regulated).
Barclays isn’t alone in moving away from car dealer finance in the last two years. Those still in the market were already raising their lending criteria before the pandemic. This might have contributed to non-prime motor finance lending becoming a fast growing part of the used car finance market.
Barclays announced in October 2020 it would introduce its one million SME customers looking for asset finance to Propel Finance, rather than offer loans itself.
Then last month, PEAC Finance has acquired Barclays’ remaining asset finance business. The deal included total assets of £1.15 billion but just 1,500 customers.
Of course these announcements were huge boosts for PEAC and Propel, both of which previously had market shares of less than 1% of the UK leasing market, although it does appear that Barclays has clearly not been actively offering leasing options to its SME business customers for several years.
Why would a leading bank with over a million business customers quit leasing? One reason is likely to be that leasing often doesn’t attract a standard preferential risk weighting treatment for capital purposes, despite the security that the product brings to the lender. Where some banks’ internal models have been used to achieve lower weightings for asset finance - it's not clear whether Barclays had achieved this - regulators are in the process of putting in place constraints on the differences between the standardised and internal model-based capital treatments.
Strong arguments are being made by the leasing industry in Europe to secure fair capital treatment for leasing under the Basel rules for specialised lending products. This is as part of the preparations for the third European Capital Requirements Regulations, so even if this is achieved, it won't directly help UK banks.
Retail point of sale finance
Having withdrawn from the two largest specialist lending options for consumers and small businesses, the future of Barclays Partner Finance’s other business, retail point of sale finance (POS) where it is market leader was beginning to look unclear.
The POS business has faced sizeable write-offs in recent years, with the latest published accounts showing £31.5m litigation and conduct expenses in its latest published accounts for 2019 and further issues were reported in the national press in 2020 concerning timeshare sales in Malta.
Buy Now Pay Later
Banks are missing out on card transaction fees as more and more consumer purchases are financed by Buy Now Pay Later providers such as Klarna, Clearpay, or PayPal, so the Amazon deal was seen as a response to this rapidly growing sector.
It's not the first deal announced with Amazon. Hitachi Capital, launched a new pay monthly credit option for Amazon UK customers in 2016, providing credit over four years at a representative APR of 16.9%. The scheme was withdrawn in 2017. Since then there's been plenty of speculation that Amazon might set up its own international bank.
The rationale for the Amazon deal seems to be to help Barclays compete with the BNPL providers, using the expertise of Barclaycard’s credit card business rather than Barclays Partner Finance. Yet what seems to be on the table here - assuming the UK offer follows the Barclaycard Germany model - is not short-term BNPL credit (typically interest-free credit for anything from a couple of weeks to three months) but rather a rolling credit line for future purchases from Amazon.
Competing with BNPL
Up to now, BNPL providers have been seen as outside of the scope of FCA regulation, as they could take advantage of the exemption from consumer credit regulation for fixed-sum interest-free credit up to 12 months. That is now destined to change, with the Government expected to issue a consultation over the details of how BNPL providers will be regulated by the FCA shortly (see footnote for more on this).
So It seems likely that Barclays, spotting that BNPL providers could struggle to deal with new FCA regulation, plans to promote Barclaycard services as an alternative convenient way of paying for purchases over time - albeit over a longer period and interest-charged)? This would be winning business back from short-term BNPL providers by offering a more conventional credit solution at the retail POS (even if it suits the Chief Exec to call it a payments service).
Perhaps all of this points to Barclays being more of a tactical player in responding to regulation - both its threats and the opportunities that arise from it - than other banks. It probably makes sense for their bottom line. Yet it seems an odd outcome of the regulation if it creates incentives for banks to shift away from secured lending to unsecured, and from business lending to consumer.
Footnote: In my view, the 12-month interest-free exemption doesn’t actually apply to what the BNPL providers are doing, which is closer to revolving than fixed-sum credit. On that basis the new regulation isn’t actually needed and could cause significant unnecessary extra regulatory burdens for smaller retailers and service providers who currently use the exemption to offer interest-free options to their customers. We'll know more when the draft rules are announced, which could be later this month. More on this here: https://www.assetfinancepolicy.co.uk/post/the-woolard-review-has-got-it-wrong-we-need-smarter-not-more-regulation-of-retail-finance
For more information on the retail point of sale finance market and used car finance market, see my reports for Apex Insight here: https://apex-insight.com/consumer-credit-market/