Banking the under-banked: the growing demand for near-prime credit

Who will step in to serve the customers of the more than 1,400 consumer credit firms that have either been refused authorisation or withdrawn their applications since the Financial Conduct Authority began regulating the sector in April 2014? While the FCA’s efforts to drive out sub-standard practices and improve customer outcomes are to be welcomed, the regulator must be mindful of where consumers previously served by such firms will now find credit – in particular, there is a risk people will turn to unauthorised lenders.

There are large numbers of such customers. PwC’s research suggests there may be between 10 million and 14 million, around a quarter of the total adult population who may find it difficult to access credit from mainstream sources, despite having only relatively minor blemishes on the credit history. This large number of ‘near-prime’ borrowers, who may find it difficult to access credit from mainstream lenders, are currently relatively underserved. The consumer credit industry has a responsibility to intervene – and, in doing so, an opportunity to build greater trust with its customers and wider society.

It should be said that there is no standard definition of a near-prime customer. But broadly speaking, we consider three distinct groups of borrower as falling into this category:

Existing borrowers who are currently paying near-prime interest rates on their credit cards – typically, these are annual percentage rates (APRs) ranging from 29.9% to 39.9%;

Consumers who have certain near-prime characteristics – they might have a thin credit history because they haven’t previously applied for credit; or a mildly adverse credit history, such as a record of having missed a small number of payments; or an incomplete credit record, because of an inconsistent address history, for example;

Consumers who perceive themselves to be near-prime – these are borrowers who do not expect to be able to borrow from mainstream lenders, irrespective of their actual credit rating or history.

Even allowing for overlaps between the groups mentioned above, near-prime borrowers represent a very substantial segment of the market of all adults potentially looking for credit – somewhere between 20% and 27% of all UK adults on the basis of a survey of 3,000 people conducted by PwC in 2015.

Moreover, over time, this customer base has increased in size very significantly. It is not just that so many firms have disappeared from the consumer credit industry since FCA regulation began, significant though these numbers are; in addition, mainstream lenders have become more targeted in their lending in the wake of the financial crisis.

It’s clear that this is an under-served group. Near-prime credit card customers are now predominantly served by just four main providers, which tend to specialise in this area of the market. Near-prime cards account for only 8% of all credit cards held in the UK, despite our estimate that 20-27% of UK adults would fall into the group eligible for such facilities.

Now is the time for lenders to remedy this relative lack of service. For one thing, there is a societal responsibility to ensure such a large group of people have safe and fair access to credit – to deny people borrowing facilities in such large numbers would make difficult for these individuals to fully participate in the economy and limit their ability to deal with unexpected events. Moreover, while progress has been made, financial services companies in general – and consumer credit organisations in particular – have much work to do to improve their standing with customers, who have been rocked by scandals ranging from the miss-selling of payment protection insurance to excess in the payday lending sector. Working harder to serve the near-prime marketplace represents an opportunity to regain lost trust.

There is also a commercial imperative at stake. The proposed reforms to the Basel III regulation have the potential to fundamentally change the returns available from lending to different types of customer (using Probability of Default bandings as a proxy for sub, near and prime) – as the reforms currently stand, the adverse impact on near-prime borrowing will be significantly less marked than on lending to prime customers, making near-prime customers relatively more attractive

Lenders that do not develop solutions for the near-prime market should expect to see such customers migrate to other providers, as their rivals rise to the responsibility of meeting an evolving consumer need. Near-prime lending is also likely to be an area where non-banking competitors are well-placed to capture an increasing share of the market, with new entrants, particularly in the FinTech space, more likely to have the agility and low cost operating models required to successfully service this segment.

The bigger picture, however, is that a very substantial number of adults in the UK now fit the profile of a near-prime borrowers; these consumers should not be denied access to credit – lenders must find new ways to serve them.

Contact us

Simon Westcott

Retail and commercial banking, PwC United Kingdom

Tel: +44 (0) 7595 610434

Isabelle Jenkins

Banking and Capital Markets Leader, PwC United Kingdom

Tel: +44 (0)7711 773 030

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