UK Point of Sale Finance Market Insight Report 2018
Published: Mar 2018
Format: PDF download
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Point of Sale Finance Market Insight Report 2018
This report focuses on the UK POS or point of sale finance market.
Also known as retail finance, in-store credit or store instalment credit, it refers to loans provided by, or on behalf of, a retailer to enable a consumer to make a specific purchase.
This new edition of the report has been updated and extended to take into account recent growth in the market, comment on new entrants including PayPal and to revise our market size estimates and 5-year forecasts. The report quantifies the market size in loans outstanding, new lending and loan provider revenues, historical growth rates and levels of industry profitability. It also includes an in-depth analysis of the relevant drivers of industry growth setting out historical trends and available forecasts.
Objectives of the report
This report aims to answer a series of questions on the POS finance market:
– How does the market work? What changes have there been recently?
– What would be the impact of an interest rate rise?
– Which types of retailers use it most frequently?
– How does it compare with alternative / substitute forms of finance?
– What role has new technology played in the market?
– What is the market size and historical growth rate, in terms of total loans outstanding, new lending and lender revenues?
– What future growth can be forecast? What are the risks to future market growth?
– What hard evidence is there to support views of historical and forecast POS finance market growth? What are the POS finance market drivers and how have they trended?
– How does the market compare with those in other countries?
– Who are the main finance providers and principals, which are most widely used by retailers, how have they performed?
– What do they each do, who do they work for and how do they operate?
Point of sale (POS) finance – also called retail finance, in-store credit or store instalment credit – refers to fixed-term loans provided by, or on behalf of, a retailer to enable a consumer to make a specific purchase.
At present, many retailers choose to subsidise the cost of the credit as a promotional expenditure and offer “interest-free credit” or “zero per cent finance”.
It is used by both national retail chains and independent shops, most commonly in the home and furniture, jewellery and electricals sectors.
– Loans are generally set up as personal loans, not secured on the asset and without a lease arrangement.
– Interest-free loans are generally for 3-12 months with an APR of 0% (i.e. no additional fees are charged)
– Charged-for loans are generally for periods of 12-60 months with an APR of 15-20% being typical.
Market growth and drivers
The market for POS finance has grown quickly in recent years with new lending now over £5bn per year. The combined revenue of leading lenders approached £650m in 2016
It has been driven by trends in a range of demand and supply factors, including:
– The appetite of consumer for purchasing the kinds of items which tend to be financed in this way, which is likely to be related to the overall level retail sales but with more of an emphasis on discretionary purchases (big ticket leisure items) and furniture
– Consumer confidence in driving larger, discretionary purchases
– Overall performance of the economy as a driver of both retail sales and consumer confidence
– Level of housing transactions, which tends to drive big ticket purchases such as furniture
– Availability of this form of credit, influenced to an extent by overall unsecured consumer borrowing levels
– Pricing of POS finance loans, particularly the current wide availability of interest-free deals.
– Impact of technology on the market with new apps enabling far quicker decision-making and higher application acceptance rates.
– Impact of the ongoing shift of retail from the high street to online
– Impact of regulations on the market.
The market consists of retailers, broker platforms and lenders.
In addition to most large retailers in the relevant retail sectors, around 7,000 independent retailers, including online-only stores, currently offer POS finance.
Broker platforms are becoming increasingly important, including Deko (Pay4Later), V12 (part of Secure Trust Bank), Klarna and Divido as the most established, with several new entrants in the last year.
Key lenders dealing direct with retailers include Barclays Partner Finance. Close, BNP Paribas (Creation), Hitachi Capital, Ikano Bank and recent entrant, PayPal Credit.
Lenders operating mainly through broker platforms include Conister Bank, Honeycomb, Lending Works, Omni, Paybreak and Secure Trust (via V12).
Some larger retailers provide the finance from Group companies, including Home Retail Group and Shop Direct (Argos), often alongside other options including store cards.
Most operators have grown in recent years, and aggregate margins across the sector grew steadily – until a decrease in 2016 coincided with the need to step up compliance efforts to meet the FCA’s regulatory requirements.
The outlook for the market remains positive, however, expectations for overall economic growth and hence, consumer appetite for borrowing and retail spending, have been revised downwards in the last couple of years:
– GDP forecasts have been lowered since the Brexit referendum
– Depreciation in sterling has led to higher inflation
– The housing market is more uncertain
We see the key risk to the market being if, as a result of high inflation or otherwise, interest rates were to rise significantly. As well as potentially damping down demand, this could also lead to retailers without FCA authorisations, who are only able to offer exempt credit, having to suspend their POS solutions.
Other key risks to market growth include UK macroeconomic performance, a significant fall in the housing market reducing demand for big-ticket purchases, the development of new potential substitutes given UK fintech innovation and possible further regulation of POS finance products.
Who is the report intended for?
Operators of point of sale businesses themselves
Investors in these businesses
Market regulators and policymakers
Banks, analysts, consultants and other parties with interests in the sector
What are the sources and methodology?
Interviews with senior-level contacts in the consumer credit industry
A survey of the top 1025 UK retailers to establish whether they were using this form of finance and which providers they used
A case study on retailers in the city of Salisbury
Extensive research into published industry sources
In-depth analysis of the macroeconomic environment and relevant market drivers
Financial analysis of the accounts of companies in the industry
Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions
Market forecasts have been constructed using simple assumptions which are clearly stated. Supporting evidence is provided for our assumptions but readers can flex them where required to model alternative scenarios.
About this report 2
About Apex Insight 5
List of charts and tables 11
About the Market 13
POS finance is consumer credit for the purchase of specific goods or services 13
POS finance is provided as unsecured personal loans 13
Overview of market structure 14
Overview of products 15
Zero per cent finance 15
Use of POS finance 16
Local case study: Salisbury 17
Market size by number of retailers 18
Physical stores 18
E-Commerce sites 19
Total retailers 19
Regulation of the POS market 19
Regulation of the sector has now passed to the FCA 20
Regulatory requirements 20
Obtaining FCA authorisations 21
Increasing use of technology for applications 21
Acceptance rates 22
Our survey showed which brokers / lenders were most widely used by UK retailers 22
Interest rates and terms vary significantly 23
Adjacent markets include store cards and credit accounts 25
Store cards and credit accounts 25
Credit cards 25
Personal loans 25
Car finance 25
Mobile phone subscriptions 25
Medical and associated finance 26
International comparisons with Europe, the US and Australia 26
Market size and growth 27
Market size trends 27
Market size since 2013 27
Lender revenues 29
Market drivers 29
Market drivers include consumer preferences as well as a range of indicators 29
Retail sales have increased to reach £346bn 30
Internet retail has grown strongly, year on year 30
Consumer confidence fell after the Brexit referendum but has since stabilised 31
GDP growth has resumed following the patchy recovery 31
Credit card penetration levels are now stable 32
Overall levels of consumer borrowing are once more increasing 32
Interbank rates have remained low since 2009 33
Loan books are growing as a proportion of retail sales 33
Lenders yields are rising 34
Decreasing bad debt rates may have bottomed out 34
Competitive landscape 35
Financial performance of the leading operators 35
Overall market shares by lender 37
Market share of independent retailers 38
Volumes per independent retailers 38
Broker platform provider profiles 39
Divido Financial Services Ltd. 39
Example clients 39
Key UK clients 40
Recent news: 40
Pay4Later Limited (Deko) 41
Key clients 41
V12 Retail Finance Ltd 43
Key clients 43
Lender profiles 45
Home Retail Group Card Services Ltd. 45
Recent News 45
Azule Ltd (t/a Azule Finance) 46
Key Clients: 46
Clydesdale Financial Services Ltd (t/a Barclays Partner Finance) 47
Types of Funding Structures: 47
Key Clients: 47
Close Brothers Ltd 48
Key clients: 48
Creation Consumer Finance Ltd (BNP Paribas) 49
Key POS clients 49
Hitachi Capital 50
Key clients: 51
IKANO Bank AB 52
Key clients 52
OMNI Capital Retail Finance Ltd 54
Key clients 54
Secure Trust Bank Plc 57
Key clients 57
Shop Direct 58
Recent news 59
Other lender profiles 60
Caledonian Consumer Finance 60
Carnegie Consumer Finance 60
Conister Bank 60
Flexplans Limited (PayitMonthly) 60
Honeycomb Finance Limited 60
Lending Works Limited 60
First Senior Finance Limited 60
Paybreak Limited (afforditNOW) 61
Payment Assist Limited 61
Rematch Limited (DivideBuy) 61
Shawbrook Bank 61
Social Money Ltd (Payl8r) 61
Specialist Lending Ltd (Duologi) 62
Vanquis Bank 62
Key drivers remain broadly favourable 63
GDP forecasts have been revised downwards 63
Continued retail sales growth depends on consumer borrowing 63
Inflation is expected to stabilise in 2018 64
Forecast lending levels 65
Market revenue forecasts. 66
Significant interest rate rises could have a significant impact on the market 67
There are other market risk factors 68
Appendix - List of abbreviations 69
List of charts and tables
Scope of Point of sale (POS) finance market – types of credit 13
Scope of Point of sale (POS) finance market - channels 14
Usage of POS finance by leading UK retailers / number of retailers per sector vs penetration by sector 16
Usage of POS finance by leading UK retailers / number of retailers per sector vs penetration by sector (2018) 17
Number of independent stores offering POS finance 18
Key FCA regulatory requirements relevant to POS finance 20
Usage of POS finance companies by retailers / mentions 22
POS terms offered by leading retailers 23
Lending to relevant segments by FLA members (new business) 27
Loan book size of leading POS loan funding providers / £m 27
New POS lending by year 28
Total market new POS lending / £m 28
Total market POS revenues / £m 29
Retail sales / annual % change 30
Internet retail as % of total retail sales 30
UK consumer confidence 31
UK real GDP / % annual changes 31
Number of credit cards in issue, spending on credit cards / m, £bn 32
UK outstanding unsecured consumer credit / £bn 32
Interbank interest rates 33
Combined loan book value as a percentage of retail sales 33
Combined revenues as % of combined loan book value: top lenders 2013-16 34
Impairments ratio as % of retail POS loan book 34
Leading lender / broker POS finance revenue / £m 35
Revenue growth of top UK POS finance lenders / 2012-latest year CAGR % 35
Latest pre-tax profit margins of leading POS finance companies / % 36
Sector margin trends / % 36
Return before tax on net working assets / % 37
POS lenders’ market shares (new business) 37
POS firms’ retailer shares 38
Pay4Later Ltd. summary financials 41
V12 Retail Finance Ltd summary financials 43
Home Retail Group Card Services Ltd. summary financials 45
Azule Ltd summary financials 46
Clydesdale Financial Services Ltd summary financials 47
Close Brothers Ltd summary financials 48
Creation Consumer Finance Ltd summary financials 49
Hitachi Capital (UK) Plc summary financials 50
IKANO Bank AB summary financials 52
OMNI Capital Retail Finance Ltd summary financials 54
Secure Trust Bank Plc summary financials 57
Shop Direct Finance Company Limited summary financials 58
UK real GDP / annual changes 63
Unsecured consumer credit / £bn 63
Retail sales / annual % changes 64
UK Consumer Price Inflation (CPI) / % annual change 64
Combined loan books of leading POS finance lenders as a percentage of retail sales 65
Combined loan books of leading POS finance lenders / £m 65
Total market new POS lending / £m 66
POS finance revenue as a % of loan book 66
POS finance - forecast market size (aggregate revenues of top lenders) / £m 67