INSIGHTS ¦ A new way to view the UK consumer credit market

Oplo Whitepaper

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 The report, prepared by Oplo in July 2021, challenges outdated segmentation models and calls for a more dynamic approach to consumer credit, advocating for a focus on consumer potential rather than past credit problems.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#

  1. Emergence of ‘The New Mainstream’: This new category represents consumers who straddle traditional prime and near-prime segments.
  2. Shift in Consumer Behaviour: Rapid changes in consumer behaviours and credit access are influencing market dynamics.
  3. Outdated Segmentation Models: Traditional customer profiling in the credit industry fails to accommodate the fluid nature of consumer financial situations.
  4. Influence of Technological Innovations: The advent of fintech innovations like ‘buy-now, pay-later’ schemes and digital banking are reshaping consumer expectations and experiences.
  5. Economic Impact of COVID-19: The pandemic has significantly altered consumer financial profiles, pushing more individuals towards near-prime status.
  6. Regulatory Changes: Tighter regulations are affecting the credit availability, particularly impacting prime consumers who are facing stricter credit assessments.
  7. 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.
  8. Financial Exclusion: Significant numbers of consumers are either unbanked or underbanked, highlighting a gap in the current financial system.
  9. Digital Adoption Among Younger Consumers: Younger demographics show a higher inclination towards digital-only lenders, influenced by the poor digital capabilities of traditional banks.
  10. Role of Open Banking: Open Banking is poised to play a crucial role in integrating financially excluded segments into the mainstream.
  11. Increasing Financial Instability: Many consumers are experiencing greater financial instability, which is not fully captured by traditional credit scoring.
  12. Demand for Responsible Lending: There is a growing consumer demand for responsible lending practices that consider the broader financial health of individuals.
See also  [INSIGHTS]: BoE Consumer Credit Conditions Deterioration

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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