The “man from the provvy” cliché that encapsulated more than 140 years of doorstep lending seems to have been comprehensively put to rest by Provident Financial (PFG).
Even if the doorstop routine was continuing, it would be the Vanquis Banking Group knocking, although the company announced it would stop the practice in 2021.
While the change does not mean that Vanquis will end its focus on what is basically sub-prime lending, regulatory pressures and a political focus on high interest rates meant that the traditional doorstep model was simply no longer viable for a listed company.
It also shines a light on where Vanquis thinks that growth will come, which is why the non-standard lending market in the UK, which is another term for sub-prime, has been attracting new players as interest rates rise and the cost-of-living crisis forces more to seek short-term credit.
More UK adults than ever – up to 20mn, according to a recent report by PWC – are lumped into the category of the “financially under-served”, with another 9mn not far off this definition. It is this group that has most need of non-standard lending and the higher-interest-rate credit cards that Vanquis specialises in.
Fundamentally, the sector craves respectability, and turning up on doorsteps demanding cash is not seen these days as the done thing, along with interest rates in the thousands of per cent – something that payday lenders such as the now-defunct Wonga (backed by the Church of England’s pension fund) made their trademark.
Interestingly, while still seen in the UK as a subscale high-street venture, usually situated between a betting shop and a cash converter, by contrast, the US payday market has some decent-sized listed players.
For instance, Curo (US:CURO), based out of Wichita, Kansas, has a market cap of $167mn (£147mn). However, even in the US, regulatory scrutiny has increased, and meant that firms like Curo have had to offer massive coupons to get investors to buy their debt. The company has also sold off its direct consumer lending business, in a shift toward longer-term and lower-rate loans. Its market capitalisation has also tumbled by two-thirds since 2018.
A broad lending church
The non-standard lending market encompasses a broad range of lender and loan types. At the upper end, the big banks have started muscling in on a customer base that might have personally excellent credit scores, but which are tainted by their self-employment status, or in unpredictable professions such as acting, but who can reliably earn an income by whatever means – the prime/sub-prime customer, if you like.
Anyone who has been self-employed will recognise the feeling when tempting lending deals are pulled after you declare your status on the application form. Banks typically demand several years of filed accounts as proof of earnings before even considering a loan.
The reality is that the self-employed, even with immaculate credit ratings, still pay a premium, and a host of specialist firms have arisen to meet the demand. This is why Barclays (BARC) snapped up specialist lender Kensington Mortgages in June 2022 in a deal that adds a reliable interest premium to its net margins as rates go up. Keen users of online shopping will also have noticed Barclays' specialist presence in the increasingly competitive buy-now-pay-later market.
Rising competition
A trend to watch this year is whether Vanquis, and other sub-prime lenders, figure out how to partner with fintech companies to drive down their costs and raise their margins, or, indeed, end up in competition with firms that can offer direct loans to small businesses and individuals on a much lower cost base.
Listed companies such as Lendinvest (LINV), which originates loans through its own proprietary platform for developers and landlords – seems to have cornered its own area of the market, but even companies such as Banking Circle, which offers prospective lenders a basic banking structure spine and back-office support, are lowering the threshold for entry for new competitors.
With consumers under more pressure than ever in their personal finances, it can only be a matter of time before a consumer loan fintech, perhaps in partnership with an existing lender, establishes itself and starts to build market share. Amigo’s (AMGO) lending ban and share price collapse should serve as a warning to investors, however: the company is allowed to lend again but said this month that raising cash to do so was proving tough.
The “man from the provvy” may have faded into history, but the questions over the long-term direction of the sub-prime personal lending market have not gone away with a corporate makeover and a new chief executive. Vanquis will need to find its feet quickly to dispel doubts over the long-term strategy.
