Home collected credit is an important and resilient segment of the non-standard finance market.

The non-standard finance market is sizeable and growing

An estimated 10-12m consumers – 20-25% of UK adults – have difficulty accessing credit from mainstream financial institutions1 on account of an impaired or non-existent credit history. The non-prime sector has seen high growth:

"“Gross loan receivables for the largest active firms went up by 41% in 2 years to 2017/18, and net receivables (after impairments) up 32%.”"

Apex Insight - Non-prime Consumer Credit UK Market Insight Report September 2019 3 High Cost Credit Review Annex 1 - July 2017

Although the rate of employment is at an all-time high, large numbers of adults are working part-time while looking for full-time employment, or are on zero-hour contracts, the types of low-paid, insecure work that drive demand for non-prime lending. The number of these ‘underemployed’ people is greater than actual unemployed, as shown in Fig 1. A proportion of the working age population – whether or not in work – relies on benefits, which have been reduced as a result of government austerity policies since 2010.

Although the rate of employment is at an all-time high, large numbers of adults are working part-time while looking for full-time employment, or are on zero-hour contracts, the types of low-paid, insecure work that drive demand for non-prime lending. The number of these ‘underemployed’ people is greater than actual unemployed, as shown in Fig 1 -Unemployment and underemployment* (m). A proportion of the working age population – whether or not in work – relies on benefits, which have been reduced as a result of government austerity policies since 2010.

HCC plays an important role for customers, and demand is resilient

HCC customers typically have low or fluctuating incomes. They take out small, unsecured, short-term loans to finance events such as birthdays or Christmas, or unexpected expenditure. The average loan value in the home collected credit market in 2016 was £770. In its 2019 report into UK Non-Prime Consumer Credit, Apex Insight estimated loans outstanding in April 2019 of £1.0bn gross, £0.7bn net of impairments. In its review of the high-cost credit market, the FCA estimated 1.6m customers and total value of outstanding debt £1.1bn, based on 2016 data.

As Figures 2 (Home Credit lenders revenue) and 3 (Historical and forecast new lending by segment excluding credit cards (m)) show, the HCC sector is mature and also relatively resilient, notwithstanding well documented issues with the largest provider in recent years.

We are closely monitoring the macroeconomic environment and the impact of Covid-19 on the UK economy and the non-standard finance market. While it is difficult to assess the long-term impact on the market at this time, we have successfully adapted our operating model to maintain continuity of customer contact and collection activity.

"“The availability of unsecured consumer credit fell for a 12th successive quarter in the fourth quarter of 2019 … Lenders also further tightened their lending standards for unsecured consumer credit for a 13th successive quarter.”"

Apex Insight - Non-prime Consumer Credit UK Market Insight Report September 2019

Morses Club is a major provider in the fragmented HCC market

Morses Club is 1 of 3 national providers of home collected credit. The remainder of the market remains fragmented, with more than 400 home credit members registered with the Consumer Credit Association5.

The need to comply with increasingly stringent regulatory requirements and to invest in technology to facilitate the assessment of affordability and other administrative processes, present significant barriers to prospective market entrants. These factors have also led to some existing participants choosing to leave the sector.

Recent regulatory changes following the FCA’s review of the high-cost credit market include the need to provide customers with details of the comparative costs of refinancing an existing loan versus taking out a new loan, and new rules were also introduced in relation to when and how an agent is able to discuss a new loan with customers.

Market trends support Morses Club’s strategy

L.E.K Consulting’s view is that there is potential for a more integrated ‘whole of customer’ offering1 aligns with Morses Club’s strategy to diversify into areas adjacent to its core HCC proposition. The consulting firm believes that open banking, may offer opportunities for non-standard lenders to compete at the margins with prime lenders and banks in some product categories.