Introduction

Some personal loan distribution channels have performed better than others. Bank branches remain central to the sale of unsecured personal loans and have seen a resurgence in the last year. Meanwhile, the intermediary channel is crucial to the success of secured personal loans. This report examines the strategies of lenders and brokers and the outlook for the future.

Scope

*Quantifies the size of the different distribution channels in the UK personal loan market.

*Gives insight into the future challenges lenders and brokers will face.

*Uses Datamonitor's intermediary survey to understand intermediaries attitudes in the market.

*What lenders can do to maximize intermediary business.

Highlights

Most personal loans are distributed though direct channels. In fact, in 2005, Datamonitor estimates that direct distribution accounted for 87.7 per cent of personal loan advances. However, due to the structure of the secured personal loan market, direct distribution is not as common as it is for unsecured personal loans.

There are a small number of lenders in the secured personal loan market. While some lend directly to consumers, the majority lend exclusively through intermediaries. Indeed, there are considerably more credit brokers than there are lenders. A few maintain high profile TV and newspaper marketing campaigns, while others have little brand presence.

Retail banking in the last decade has been defined by branch closures as retail banks have looked to save costs by focusing on cheaper distribution channels. However, in the last 12 to 18 months the tide seems to be turning and a number of banks have been opening branches.

Reasons to Purchase

*In-depth analysis of distribution in the personal loan market showing where the opportunities lie, thus assisting you in devising strategic plans.

*Analysis of the major players in the market, thus allowing you to better plan your strategies.

*Gives the reader insight into the views of intermediaries in a variety of areas across the market.

CHAPTER 1 INTRODUCTION 12
What is this report about? 12
What is the scope of this report? 12
Who is the target reader? 13
How to use this report 13
CHAPTER 2 AN OVERVIEW OF PERSONAL LOAN DISTRIBUTION 14
Introduction 14
New lending in the personal loan market fell in 2005, with both the secured and unsecured loan markets performing poorly 14
The value of new lending in the personal loan market fell by 5.6 per cent in 2005 14
The secured personal loan market has outperformed the unsecured personal loan market 15
Unsecured loans account for the majority of the market but the secured loans market has grown rapidly in recent years 16
New lending in the personal loan market is forecast to return to a growth period 17
The unsecured personal loan market is forecast to grow by 3.2 per cent 18
The secured personal loan market is forecast to grow by 4.1 per cent 19
Numerous channels are used to distribute personal loans 19
Direct distribution accounts for the majority of the personal loan market 20
However, most secured personal loans are distributed through intermediaries 22
Meanwhile, bank branches dominate the distribution of unsecured personal loans 24
Direct lending is forecast to remain the dominant form of distribution for unsecured personal loans, while intermediaries continue to focus on secured personal loans 26
Direct lending will remain the main form of distribution for unsecured personal loans 26
Intermediaries will continue to dominate the secured personal loan market, but their share of the market is forecast to fall 29
Direct lending is expected to expand 30
Meanwhile, indirect lending will contract slightly 32
CHAPTER 3 DIRECT LOAN DISTRIBUTION 33
Introduction 33
Banks have once again realized the importance of branches after a number of years of branch closures 33
A number of banks have announced plans to expand the number of branches 33
However, banks are opening these branches in more affluent areas 34
Banks are opening branches that are moving away from the traditional bank branch 35
A strong branch network is beneficial for banks despite the cost 37
The opportunity of face-to-face contact is fundamental to the branch proposition 37
Cross-selling is another branch asset 37
Branches are facing financial challenges nonetheless 38
Clydesdale and Yorkshire are just the most recent examples of this trend 39
After buying Woolwich in 2000, Barclays Bank has just recently announced plans to close 200 Woolwich branches 39
Yet branches are benefitting from banks' integration of all distribution channels 39
The Internet has proved to be important, but not as important as once predicted 41
The Internet was once heralded as the future for personal banking 41
The use of the Internet for personal loans has increased dramatically 41
Online distribution has allowed new types of lenders to enter the personal loan market 45
Online distribution has distinct disadvantages, which mean that it will never be the dominant form of distribution 47
Credit agreements still have to be signed and returned by post or in person 47
Electronic signatures are lawful, but have yet to be used by mainstream lenders 47
Furthermore, consumers have concerns about the security of online transactions 48
Despite rising expenditure on online advertising it still remains marginal 48
The Internet has found a role, but branches will dominate for the foreseeable future 51
The Internet can be expected to contribute more to the unsecured personal loan market than the secured personal loan market 51
Other forms of distribution are of less importance 52
Call centers are a popular method of personal loan distribution, but their popularity is falling with the rise of the Internet 52
Telephone distribution transcends all other distribution channels 53
Call centers have both strengths and weaknesses 54
In future, call centers will be used mostly to service loans 55
Post is a little used method for setting up personal loans 56
Despite direct mail being one of the primary methods of advertising, consumers do not respond to direct mail by post 56
Furthermore, distribution via post is in decline 57
Because the distribution of personal loans is not expected to change significantly, lenders are looking for other ways to improve their businesses 57
Customer service is a key area for lenders to focus on 58
Regulatory changes will impact on the way lenders do business 59
Exclusion of secured personal loans under the FSA means that the market is regulated by the Consumer Credit Act 59
The Consumer Credit Act has reformed legislation that will greatly affect the secured personal loan market 60
Payment protection insurance is now regulated by the FSA 61
Pricing is still the main focus for lenders 62
CHAPTER 4 INTERMEDIARY LOAN DISTRIBUTION 64
Introduction 64
Intermediaries have an important role to play in the distribution of personal loans 64
However, intermediaries only account for a small proportion of the personal loan market 64
Intermediaries view personal loans as a growing market 65
Over half of all respondents felt their personal loan business had grown between zero and twenty per cent 66
Intermediaries focus on the secured personal loan market 68
Unlike unsecured personal loans, secured loans depend substantially upon the intermediary channel 69
Most intermediaries offer secured personal loans rather than unsecured personal loans 70
Lenders should focus their attention on intermediaries in order to expand 73
Intermediary size varies across the market, but the typical player is small 74
The majority of intermediaries have a customer base of up to 1,000 74
The value of the average secured personal loan is above the threshold covered by the Consumer Credit Act 76
Intermediaries are not selling PPI as a matter of course on personal loans 78
However, there has been no real change in the level of PPI sold on personal loans 79
Most intermediaries only deal with a small number of lenders 80
Profile: Nemo Personal Finance has also been successful since entering the market 81
While intermedaries are aware that Halifax is a major player in the market, they are not so aware of Nationwide 82
The suitability and pricing of a secured personal loan is the primary concern for intermediaries when choosing a lender 83
The quality of service and support provided to intermediaries from lenders was also an important factor 84
Fees and commissions paid to intermediaries are the least important factors when an intermediary chooses a lender 84
Overall intermediaries are happy with the service they get from their main lender 89
Face-to-face service is the most widely used intermediary distribution channel, but the Internet is rising quickly in popularity 91
Intermediaries use various methods to acquire customers 93
In addition, quality of service drives customer retention 99
What can lenders do in order to maximize intermediary business? 100
Lenders need to build up relationships with intermediaries in order to be among their top three favorites 100
Lenders should look to design products that are best suited to intermediaries' customers 101
IFAs are an unexploited opportunity 101
Setting up an intermediary subsidiary 102
Some regulations may affect the intermediary market 102
When the £25,000 limit is removed there will be more competition from mainstream lenders 102
The changes in early settlement charges may be damaging for small specialist lenders 103
However, intermediaries are confident about the future of personal loans 103
CHAPTER 5 CONCLUSIONS 105
Introduction 105
Various themes have emerged 105
A number of banks are increasing their branch networks 105
Personal loans sold via the Internet are set to continue growing 106
Competition in the personal loan market is expected to increase with intermediaries coming under the most pressure 107
CHAPTER 6 APPENDIX 109
Supplementary data 110
Sizing methodology 123
It is important to take into account Datamonitor's market sizing methodology 123
Research methodology 123
Forecasting methodology 124
Definitions 124
Bank of England base rate 124
Balances outstanding 125
CAGR 125
Fixed rate personal loan 125
Flexible mortgage 125
Gross advances 125
Loan term 125
Non-standard 125
Remortgaging 126
Rule of 78 126
Secured personal loan 126
Unsecured personal loan 126
Variable rate personal loan 126
Relevant readings 126
Reports 126
Relevant links 127
Datamonitor's custom research capabilities 127
The retail banking team 129
List of Tables
Table 1: Value of personal loans arranged directly and indirectly, 2004 and 2005 22
Table 2: Value of secured personal loans arranged directly and indirectly, 2005 23
Table 3: Value of unsecured personal loans arranged directly and indirectly, 2004 and 2005 25
Table 4: Datamonitor's forecast for the distribution of unsecured personal loans, 2005 and 2010f 28
Table 5: Datamonitor's forecast for the distribution of secured personal loans, 2005 and 2010f 30
Table 6: Personal loan advertising, split by type, 2005 57
Table 7: Intermediary market of secured and unsecured personal loans, 2005 68
Table 8: Intermediary and total advances for secured and unsecured personal loans, 2005 69
Table 9: Unsecured and secured personal loan gross advances, 2001-2005 110
Table 10: Forecasted unsecured and secured personal loan gross advances, 2005-2010f 110
Table 11: Online advertising and total advertising expenditure in the personal loans market, 2002-2005 111
Table 12: Total advertising expenditure and online advertising expenditure for selected companies operating in the personal loan market, 2005 112
Table 13: Growth and decline in intermediary personal loan business, 2006 113
Table 14: Intermediary secured personal loan business as a proportion of total personal loans, 2006 113
Table 15: The reasons why intermediaries believe that customers use them for personal loans, 2006 114
Table 16: The most commonly used lenders by intermediaries, 2006 115
Table 17: Lenders with the strongest presence in the intermediary market, 2006 116
Table 18: The features intermediaries find important in their choice of lender, 2006 117
Table 19: Factors that would tempt an intermediary to offer another lenders loans more often, 2006 118
Table 20: The key features of personal loans for customers, 2006 119
Table 21: Intermediaries' thoughts on changes to lenders' lending criteria, 2006 119
Table 22: Intermediary distribution channels that intermediaries use, 2006 120
Table 23: Reasons why customers choose a particular intermediary, 2006 120
Table 24: The methods used by intermediaries to target customers, 2006 121
Table 25: Split of advertising depending on if the personal loan is secured or unsecured, 2006 121
Table 26: The methods used by intermediaries to retain customers, 2006 122
List of Figures
Figure 1: The value of new lending on personal loans fell in 2003 and 2005, 2001-2005 15
Figure 2: The secured personal loan market is considerably smaller than the unsecured personal loan market, 2001-2005 17
Figure 3: Growth in both the secured and unsecured personal loan markets results in CAGR 06f-10f of 3.3 per cent for the whole personal loan market, 2005-2010f 18
Figure 4: Direct distribution is the primary method of distribution of personal loans, 2005 21
Figure 5: 71.5 per cent of secured personal loans are purchased through indirect channels, 2005 23
Figure 6: 94.3 per cent of all unsecured loans are arranged directly, 2005 24
Figure 7: In Datamonitor's view, online distribution of unsecured personal loans will increase the most, 2005 and 2010f 27
Figure 8: In Datamonitor's view, intermediaries will continue to dominate the secured personal loan market, however, their market share will fall marginally, 2005 and 2010f 30
Figure 9: PPI is included in the original quote for a loan from Lloyds TSB, thus encouraging borrowers to take this option, August 2006 44
Figure 10: Online advertising expenditure of personal loans rose in 2005 as did its proportion of total advertising expenditure on personal loans, 2002-2005 49
Figure 11: Unsurprisingly, direct lenders spend the highest proportion of their budget on online advertising, 2005 50
Figure 12: Alliance & Leicester's call back service allows the bank to capture key personal details about the customer, August 2006 54
Figure 13: Personal loan providers spend the most on direct mail advertising, 2005 56
Figure 14: Intermediaries account for a small proportion of the personal loan market, 2005 65
Figure 15: The majority of intermediaries have seen their personal loans business grow in the last 12 months, 2006 66
Figure 16: Most intermediaries saw steady growth in their business in the last 12 months, 2006 67
Figure 17: Secured personal loans dominate over unsecured loans in the intermediary market, 2005 68
Figure 18: Over half of intermediaries supply only secured personal loans, 2006 70
Figure 19: Secured personal loans are the most common form of personal loans that intermediaries offer, 2006 71
Figure 20: Trust and the advice intermediaries can give are the main reasons for customers to choose intermediaries, 2006 72
Figure 21: The majority of intermediaries have a customer base of 1,000 or less, 2006 74
Figure 22: The personal loan intermediary market is populated by a large number of relatively small entities, along with a small number of very large players, 2006 76
Figure 23: The average unsecured personal loan is of much lower value than the average secured personal loan, 2006 77
Figure 24: Most intermediaries only sell a limited amount of PPI on personal loans, 2006 78
Figure 25: There has been little change in the level of PPI sold on personal loans in the last year, 2006 80
Figure 26: Halifax and Nationwide and the most popular lenders with intermediaries, 2006 81
Figure 27: Halifax is perceived by intermediaries to have the strongest presence in the intermediary market, 2006 82
Figure 28: The suitability of a product's characteristics and its pricing are the most important attributes for intermediaries, 2006 83
Figure 29: The opportunity to offer better products to their customers is the main incentive for intermediaries to look at new lenders, 2006 85
Figure 30: Interest rates are the most important factor when choosing a loan for a customer, 2006 87
Figure 31: Most intermediaries think that lenders have not changed their lending criteria recently, 2006 88
Figure 32: Most intermediaries are generally happy with their main current lender, 2006 90
Figure 33: The most popular way intermediaries distribute personal loans is by face-to-face meetings, 2006 91
Figure 34: Online distribution has had a mixed effect on intermediaries' business, 2006 93
Figure 35: Reputation and trust are the main reason that intermediaries think that customers use their particular company, 2006 94
Figure 36: Most intermediaries do not target specific groups, but the ones that do, mostly target the non-standard/credit impaired market, 2006 96
Figure 37: Intermediaries find that word of mouth is the most successful way to target customers, 2006 97
Figure 38: Of the leading intermediary advertisers, most only offer secured personal loans, 2005 98
Figure 39: The quality of service given by intermediaries is the main method used in the retention of customers, 2006 99
Figure 40: The majority of intermediaries expect their personal loan business to grow over the next few years, 2006 104
Figure 41: The Internet was heralded as the future of personal loan distribution; it has in fact, become an important secondary channel, 2006 107
Figure 42: Datamonitor's personal loan intermediary survey took a cross section of intermediaries in the market, 2006 124
Figure 43: Datamonitor's core consulting capabilities 129