Summary
This document outlines the profound shifts within the UK consumer credit market, identifying an emergent category called “The New Mainstream.” This category encapsulates a significant portion of British consumers who no longer fit traditional prime or near-prime classifications due to evolving credit behaviours and economic conditions. The report, prepared by Oplo in July 2021, challenges outdated segmentation models and calls for a more dynamic approach to consumer credit, advocating for a focus on consumer potential rather than past credit problems.
Key Points
- Emergence of ‘The New Mainstream’: This new category represents consumers who straddle traditional prime and near-prime segments.
- Shift in Consumer Behaviour: Rapid changes in consumer behaviours and credit access are influencing market dynamics.
- Outdated Segmentation Models: Traditional customer profiling in the credit industry fails to accommodate the fluid nature of consumer financial situations.
- Influence of Technological Innovations: The advent of fintech innovations like ‘buy-now, pay-later’ schemes and digital banking are reshaping consumer expectations and experiences.
- Economic Impact of COVID-19: The pandemic has significantly altered consumer financial profiles, pushing more individuals towards near-prime status.
- Regulatory Changes: Tighter regulations are affecting the credit availability, particularly impacting prime consumers who are facing stricter credit assessments.
- High-Cost Credit Markets: There’s a notable shift away from high-cost credit options due to regulatory scrutiny and consumer preference for more favourable financial products.
- Financial Exclusion: Significant numbers of consumers are either unbanked or underbanked, highlighting a gap in the current financial system.
- Digital Adoption Among Younger Consumers: Younger demographics show a higher inclination towards digital-only lenders, influenced by the poor digital capabilities of traditional banks.
- Role of Open Banking: Open Banking is poised to play a crucial role in integrating financially excluded segments into the mainstream.
- Increasing Financial Instability: Many consumers are experiencing greater financial instability, which is not fully captured by traditional credit scoring.
- Demand for Responsible Lending: There is a growing consumer demand for responsible lending practices that consider the broader financial health of individuals.
Key Statistics
- 81% of UK adults used some form of regulated consumer credit in 2020.
- 26 million UK consumers potentially fall within the ‘new mainstream’ category, significantly more than previously classified near-prime consumers.
- Impact of COVID-19: 11 million people borrowed for everyday expenses since the pandemic began, with 2.8 million using high-cost credit.
- Digital Trends: Over double the usage of digital credit services among younger consumers compared to the rest of the population.
- Financial Exclusion: Approximately 1 million UK residents are unbanked.
Key Takeaways
- The UK consumer credit market is undergoing significant transformations, necessitating a reassessment of customer segmentation and credit scoring.
- ‘The New Mainstream’ represents a critical and growing segment that defies traditional classification into prime and near-prime categories.
- Economic and regulatory changes, intensified by the COVID-19 pandemic, are driving shifts in consumer credit usage and preferences.
- Technological advancements, particularly in digital banking and Open Banking, are critical to addressing the needs of a changing consumer base.
- Financial institutions need to adopt more inclusive and dynamic lending practices to cater to the evolving financial landscapes of consumers.
- The role of trust and responsibility in lending is becoming increasingly important, with consumers favouring institutions that prioritize ethical practices.
- Traditional banks may need to revise their strategies to avoid losing relevance in an increasingly digital and segmented market.
- Understanding and integrating financially excluded groups into the mainstream can significantly expand market opportunities for lenders.
- Regulatory pressures and consumer advocacy are prompting a shift towards more sustainable and consumer-friendly credit options.
- The impact of economic shocks, such as the COVID-19 pandemic, calls for a more resilient and adaptable credit system.
- Younger consumers are leading the charge towards digital lending solutions, indicating a shift in future banking trends.
- The industry must pivot from a profit-centric approach to one that genuinely aids in the financial betterment of consumers.
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