Member Article

Will regulation lead to different markets?

As April fast approaches, the challenges that the high cost credit industry are facing will be making a lot of lenders nervous and considering their options, perhaps as some of those casualties of the OFT review did. The FCA regime will be much stricter with more stringently enforced regulation. Add the complication of a possible rate cap into the mix and it calls into question the future for lenders operating in this space.

Independently commissioned research into today’s consumers and their attitudes to credit highlights that the cost of credit is the biggest influencer in the decision making process, to the extent that 68% of consumers said that they would use a self service function exclusively if it meant they could get a cheaper loan. With the focus on keeping the cost of credit low, yet still being able to operate with the same margins, we anticipate that lenders will invest in technology to take advantage of higher levels of automation. However – some lenders have implied that the cost of compliance is likely to be so high that it will render some business models unsustainable, and we predict that the industry will also see increasing consolidation over the next year with a number of high cost lenders exiting the market.

Another path that some lenders will take will be new product development. Our research also showed that awareness levels of payday loans were 84%, with only 12% of respondents saying they would take out such a loan in the next 12 months. 47% had heard about guarantor loans and 8% would take one out. The guarantor lending sector has more capacity to grow, and we predict that payday lenders will start to offer longer term instalment and guarantor loans. The main benefits for lenders moving into this sector is that collection costs and default rates are minimised. Couple this with being able to avoid the negative publicity around the high cost credit sector and there’s a clear competitive advantage.

Even though guarantor loans are not a like for like substitute for payday loans, there will be a surge in demand in 2014 as consumers become more aware of the different lending products available to them, and are more diligent in comparing these different options on the basis of interest rates and the overall cost of credit.

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