UK Point of Sale Finance Market Profile and Forecast 2017
Published: Jan 2017
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Point of Sale Finance Market Profile and Forecast 2017
This report focuses on the UK POS / 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.
The report quantifies the market size in loans outstanding 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. Our forecast for industry growth is based on this analysis of historical trends and growth drivers.
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 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 as well as no interest
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 £4bn per year.
It has been driven by trends in a range of demand and supply factors, including:
– The appetite of consumers for purchasing the kinds of items which tend to be financed in this way, which is likely to be related to the overall level of retail sales but with more of an emphasis on discretionary purchases (big-ticket leisure items) and furniture
– The level of oveall consumer confidence as a factor in determining whether to make larger, discretionary purchases
– Overall performance of the economy as a driver of both retail sales and consumer confidence
– Level of housing transactions, given that many big-ticket purchases, such as furniture, tend to follow a house move
– 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 many online-only stores, currently offer POS finance.
Broker platforms are becoming increasingly important with Pay4Less (operating with a panel of lenders) and V12 (part of Secure Trust Bank) as the most significant players. Klarna and Divido are relatively new entrants with significant potential to capture market share.
Key lenders dealing direct with retailers include Barclays Partner Finance. Close, Creation, Hitachi Capital and Ikano Bank.
Lenders operating mainly through broker platforms include Conister Bank, Honeycomb, Lending Works, Omni, Paybreak and Secure Trust (via V12),
Some larger retailers, such as Home Retail Group and Shop Direct (Argos), provide finance from the resources of their group, often alongside other options including store cards.
Most operators have grown in recent years and all lenders are part of profitable groups with average pre-tax returns on loan books of around 3%.
In our forecast, the outlook for the market remains positive, however, expectations for overall economic growth and hence, consumer appetite for borrowing and retail spending, are less optimistic than a year ago, largely because:
– GDP forecasts have been lowered post-Brexit
– The depreciation in sterling is feeding through to higher inflation
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 as loans became more expensive, this could also lead to those retailers without FCA authorisations, who are only able to offer exempt credit, having to suspend their POS solutions.
Other key potential risks to market growth include UK macroeconomic performance, the development of new potential substitutes given UK fintech innovation and 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
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
About the Market 12
POS finance is consumer credit for the purchase of specific goods or services 12
POS finance is provided as unsecured personal loans 12
Overview of market structure 13
Overview of products 14
Zero per cent finance 14
Lender revenues 15
POS finance is particularly widespread in furniture, jewellery and electrical/electronics retailing 15
Regulation of the POS market 16
Regulation of the sector has now passed to the FCA 16
Regulatory requirements 17
Obtaining FCA authorisations 17
Increasing use of technology for applications 18
Acceptance rates 18
Our survey showed which brokers / lenders were most widely used by UK retailers 19
Interest rates and terms vary significantly 19
Adjacent markets include store cards and credit accounts 21
Store cards and credit accounts 21
Credit cards 21
Personal loans 21
Car finance 21
International comparisons with Europe, the US and Australia 21
Market size and growth 22
The value of new POS lending has increased 22
FLA data 22
Market size since 2013 22
POS revenues of the leading providers 23
Market drivers include consumer preferences as well as a range of indicators 24
Retail sales have increased to reach £346bn 24
Internet retail has grown strongly, year on year 25
Consumer confidence has slipped back in the last year 25
GDP growth has resumed following the patchy recovery 26
Housing transaction growth has steadied in the last couple of years 26
Credit card penetration levels are now stable 27
Overall levels of consumer borrowing are once more increasing 27
Interbank rates have remained low since 2009 28
We analyse the relationship between retail sales, loan books and market revenues 28
Comparison with the US market suggests significant potential for further growth 30
Decreasing bad debt rates may have bottomed out 30
Competitive landscape 31
Review of the financial performance of the leading operators 31
Overall market shares by lender 33
Market share of independent retailers 33
Broker platform provider profiles 35
Divido Financial Services Ltd. 35
Example clients 35
Key UK clients 36
Recent news: 36
Pay4Later Limited 37
Key clients 37
Recent News 37
V12 Retail Finance Ltd 38
Key clients 38
Lender profiles 39
Home Retail Group Card Services Ltd. 39
Recent News 39
Azule Ltd (t/a Azule Finance) 40
Key Clients: 40
Clydesdale Financial Services Ltd (t/a Barclays Partner Finance) 41
Types of Funding Structures: 41
Key Clients: 41
Close Brothers Ltd 42
Key clients: 42
Creation Consumer Finance Ltd 43
Key POS clients 43
Hitachi Capital 44
Key clients: 44
Recent news: 44
IKANO Bank AB 45
Key clients 45
OMNI Capital Retail Finance Ltd 47
Key clients 47
Secure Trust Bank Plc 48
Key clients 48
Recent news 48
Shop Direct 49
Recent news 49
Other lender profiles 50
Honeycomb Finance Limited 50
Conister Bank 50
Lending Works Limited 50
First Senior Finance Limited 50
Paybreak Limited 50
Key drivers remain broadly favourable 51
GDP forecasts have been revised downwards 51
Continued retail sales growth depends on consumer borrowing and HDI recovery 51
Inflation is expected to rise in 2017 53
Our forecast scenario takes into account the outlook for interest rates 53
Market revenue is a function of loan books and interest rates. 55
Rapid interest rate rises could have a significant impact on the market 55
There are other market risk factors 56
List of abbreviations 57
Charts and figures
Scope of Point of sale (POS) finance market - types of credit 12
Scope of Point of sale (POS) finance market - channels 13
Usage of POS finance by leading UK retailers / number of retailers per sector vs penetration by sector 15
Key FCA regulatory requirements relevant to POS finance 17
Usage of POS finance companies by retailers / mentions 19
POS terms offered by 50 leading retailers (December 2016) 20
Lending to relevant segments by FLA members (new business) 22
New POS lending by year 22
POS lending / £m 23
Leading lender / broker POS finance revenue / £m 23
Retail sales and household disposable income / annual % change 24
Internet retail as % of total retail sales 25
UK consumer confidence 25
UK real GDP / % annual changes 26
UK housing transactions volume (‘000) and average value (£’000) 26
Number of credit cards in issue, spending on credit cards / m, £bn 27
UK outstanding unsecured consumer credit / £bn 27
Interbank interest rates 28
Loan book size of leading POS loan funding providers / £m 28
Combined loan book value as a percentage of retail sales 29
Combined revenues as % of combined loan book value: top lenders 2009-14 29
Bad debt ratio as % of loan book 30
Revenue growth of top UK POS finance lenders, CAGR 2010-15 31
2015 pre-tax profit margins of leading POS finance companies / % 31
Sector margin trends / % 32
Return before tax on net working assets / % 32
POS lenders’ market shares 33
POS firms’ retailer shares 33
V12 Retail Finance Ltd summary financials 38
Home Retail Group Card Services Ltd. summary financials 39
Azule Ltd summary financials 40
Clydesdale Financial Services Ltd summary financials 41
Close Brothers Ltd summary financials 42
Creation Consumer Finance Ltd summary financials 43
Hitachi Capital (UK) Plc summary financials 44
IKANO Bank AB summary financials 45
OMNI Capital Retail Finance Ltd summary financials 47
Secure Trust Bank Plc summary financials 48
Shop Direct Finance Company Limited summary financials 49
UK real GDP / annual changes 51
Unsecured consumer credit / £bn 51
Retail sales and real household disposable income / annual % changes 52
UK housing transactions volume (‘000) and average value (£’000) 52
UK Consumer Price Inflation (CPI) / % annual change 53
Combined loan books of leading POS finance lenders as a percentage of retail sales 53
Combined loan books of leading POS finance lenders / £m 54
POS finance revenue as a % of loan book 54
POS finance - forecast market size (aggregate revenues of top lenders) / £m 55