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UK Online Payday Lending Market Insight Report 2016

  • January 2016
  • -
  • Apex Insight
  • -
  • 67 pages

What does this report contain?

This market involves the provision of high-cost, short-term loans via a website. As well as 30-day, or shorter, loans designed to tide the borrower over until the next payday, we include other loans with interest rates of over 100% and terms of less than one year. We quantify the market size, historical growth rates, segmentation patterns and levels of industry profitability while reviewing key factors behind these figures. We also carry out an in-depth analysis of the relevant drivers of industry growth – in particular the macroeconomic environment and regulatory framework – setting out historical trends and available forecasts. Our forecast for industry growth is based on this analysis of historical trends and growth drivers.

What are the objectives of this report?

Payday lending has emerged and grown into a major industry with customers measured in millions in just a few years. The industry is frequently in the news.

– Lenders are often criticised for charging high rates of interest which exploit low-income consumers. However, many lenders inspire high levels of customer loyalty and enjoy satisfaction rates that would be the envy of the mainstream banks.
– Recently, regulators have taken a great interest in the industry and several lenders have withdrawn from the market.
– This report aims to explore the industry behind these statements, probe the factors which have driven its historical growth and recent decrease in size and provide a view on how the market is likely to perform in the future, setting out the reasons why we believe this is a probable outcome.

Other questions the report considers include:

– Why did payday lending grow so rapidly in the UK and what factors have made it develop more rapidly here than elsewhere?
– Who takes out payday loans and why?
– Who are the main companies in the market, who owns them and how have they performed?
– What impact has the FCA’s price cap had on the market?
– How have lenders adjusted their business models in response to it?
– What further impact might regulation have on the market in future?

The report is intended for:

– Operators of payday lending businesses themselves
– Investors in these businesses
– Potential new entrants to the market
– Market regulators and policymakers
– Banks, analysts, consultants and other parties with interests in the sector

What are the sources and methodology?

This report is based on:

– Interviews with senior-level contacts in the consumer credit industry
– 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, tables and insightful quotes from interviews 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 easily flex them to model alternative scenarios.

Payday Lending Market Summary

Market Background

The market includes 30-day, or shorter, loans intended to offer customers an immediate advance on their wages until payday as well as other high- cost / sub-prime loans with terms of less than a year. The market excludes short-term loans offered via high-street retail outlets as well as excluding home credit loan agreements, credit cards, credit unions and overdrafts. Most borrowers report that they need the money to cope with an unexpected cost such as a car repair or vet bill. Service levels are generally high with well-designed websites, quick and simple application processes followed by an instant decision and transfer of funds shortly afterwards. Being designed for short lending periods, payday loans have particularly high APRs with levels typically being in the region of 1,200%-1,500%. A typical loan for £300 taken out over three months will cost around £460 to repay.

Market Growth and Drivers

The market grew rapidly from start-up to exceed £800m in value in 2012. This growth resulted from the convergence of three key drivers:
– A significant increase in the number of customers in the sub-prime segments as a result of the economic downturn
– Significant reduction in the appetite of the mainstream banks for serving such customers
– The ‘light touch’ regulatory environment in the UK which created an environment more favourable to high-cost credit providers than elsewhere in Western Europe and North America
In the last couple of years the market has reversed as regulation has become much firmer. The key move was the introduction of a price cap by the FCA in January 2015. This limited the total level of interest and fees that lenders can charge to 0.8% of the loan amount per day, capped default fees at £15 per loan and capped the total costs (interest + fees) at 100% of the sum borrowed.

Competitive Landscape

The top 10 lenders had 2014 revenues of c.£700m. The top three are:

– Enova, the US company which operates the QuickQuid and Pounds to Pocket sites
– Wonga, which has been an innovator in the area, driven the market through heavy investment in marketing and rolled out its model to other countries
– Dollar Financial, also US-based, which operates the Payday UK and Payday Express loan brands as well as the high-street chain, The Money Shop. Until recently it was listed on Nasdaq but was acquired by private equity firm, Lone Star Capital, in 2014.

High street lenders such as pawnbrokers and money stores also offer payday loans but evidence suggests that online lenders account for more than 80% of all such loans. High-street loans:

– Have a different customer base (older, more likely to be female, less tech-savvy)
– Are of lower average value

The tightening in regulations led to several lenders, such as CFO Lending and Ariste (Cash Genie), exiting the market. The CMA is keen to see competition increase, including via an independent price-comparison site.


The nature of the UK economy, policies outlined by the main parties and other factors such as the UK housing market and student loan system suggest that there will continue to be demand for payday loans. As mainstream lenders are unlikely to target sub-prime borrowers, there will still be an opportunity. The key area of uncertainty is how tough regulators are on the market in the future.

Table Of Contents

UK Online Payday Lending Market Insight Report 2016
Online Payday Lending UK Market Insight Report 2014 1

About this report 1

What does the report contain? 1
What are the objectives of this report? 1
What are the sources and methodology? 1

Summary 2

Market background 2
Market growth and drivers 2
Competitive landscape 2 Outlook 2

About Apex Insight 3

Company background 3
Consulting services 3
Commercial / operational due diligence 3
Custom market analysis 3
Primary research 3
Growth strategy 3
Related research 3
Research subscriptions 3
List of charts and tables 7

Market overview 8

Description 8
Value drivers for payday lenders 9
History of payday lending 9
Alternatives to online payday loans 10
Payday loans from high street pawnbrokers and money shops 10
Other high-cost credit 10
Conventional lending from banks, credit cards and other sources 10
Credit unions offer a potential alternative but are underdeveloped in the UK 11
Trade unions have made attempts to offer alternatives 12
Borrowing costs 12
Customers and their needs 14
Online payday loan customers are more likely to be younger, male, to have children and to have a variable income 14
Borrowers claim to be borrowing mainly for essential expenses - although many say they could make do without 15
Borrowing patterns and repeat lending 16
Affiliate marketing and ping trees 17

Market size and growth 19

Apex Insight market estimates show rapid growth to 2012 and significant falls in 2014 and 2015 19
Leading company revenue trends support our market size and growth estimates 20
Voluntary exit of lenders 21
Research shows that there is still significant demand for payday loans 22
US market comparison 23

Market drivers 24

Discussion of key drivers 24
Until 2014-15, the UK offered a more favourable regulatory environment 24
The target consumer segment has grown 24
Availability of other forms of credit has decreased 24
A combination of factors led to the rapid growth in the market, but the situation has now changed 24
Macroeconomic trends 25
The economy has now seen six years of growth 25
The increase in the numbers of people in work has been driven mainly by an increase in the workforce from immigration 25
Real wages have increased recently thanks to low inflation 26
Personal insolvencies remain at high levels 27
Student debt levels continue to increase 28
UK housing costs remain high 28
Further government fiscal tightening and benefit cuts are expected 28
Access to mainstream banks and credit sources 29
The number of bank branches has decreased, reducing access to those not online 29
Other countries have more bank branches 29
Consumer credit is once again increasing 31
Credit cards 32

Regulation 33

The FCA is currently assessing applications for permanent licences 33
The CMA is keen to see price comparison sites to promote price competition 35
The BCAP is concerned about marketing of payday loans to, or via, children 36
The industry has made arguments against stricter regulation 36 The Consumer Finance Association set out a self-regulation framework 37 The previous regulator, the OFT, carried out reviews of the market 38 Payday lending is more regulated in most other countries 40

Competitive landscape 42

10 leading operators had 2014 revenues of almost £700m 42
Interviews report interest in the market from private equity, debt purchasers and start-ups 43
The industry has high levels of revenue per employee 44
Margins were previously high but have fallen as the market has turned down 44
Wonga still has the most popular website 45
Customer reviews show most, but not all, lenders having high satisfaction ratings 46

Profiles of leading operators 47

Wonga (WDFC UK Ltd) 47
EuroCashNet UK (Enova, formerly Cash America) 49
Dollar (owned by Lone Star, owns MEM, Instant Cash Loans and Express Finance Bromley) 50
MEM Consumer Finance (Dollar Financial Corporation) 51
Express Finance (Bromley) 51
Instant Cash Loans Ltd 52
Wage Day Advance / SRC Transatlantic / Speedy Cash 53
Lending Stream / Zebit 54
Elevate Credit International Ltd (formerly Think Finance) 55
Myjar 58

Forecasts 59

Overview 59
Driver forecasts 59
GDP forecasts are for growth to continue 59
Employment is expected to grow while unemployment remains at similar levels 60
The expected rise in inflation will mean real wage growth will fall, despite expected higher average earnings growth 61
Housing costs 61
Government fiscal tightening and benefits cuts are expected to continue 61
Interest rates are expected to rise - but the expected timing has slipped back 61
Availability of other forms of credit appears unlikely to change significantly 61
Impact of regulation on the forecast 62
Apex Insight market forecast 62
Assumptions 62
Number of customers 62
Average revenue per customer 64
Market forecast 65
Risks to the forecast 66

List of charts and tables

1 High cost credit types APR / % 13
2 Total amounts repaid (including principal) for £300 loan over 3 months / £ 13
3 Proportion of parents who have taken out a payday loan by age of parent 14
4 Reasons for taking out agreement 15
5 Five most common reasons for choice of loan 16
6 % of revenue from payday loans rolled over or refinanced 17
7 Internet payday lending market size / £m 19
8 Change in total revenue of the set of leading lenders from previous year / % 20
9 Enova: Percentage of revenues by type of lending product, 2009-15 / % 21
10 UK vs US payday loan company revenue 2012 per head /£ 23
11 UK real GDP / % annual changes 25
12 Historical number of unemployed and underemployed / m 25
13 Number of people in employment / m 26
14 UK median earnings and real household disposable income annual growth rates / % annual change 26
15 Historical number of new personal insolvencies per year / '000 27
16 UK student loan total outstanding balance /£bn 28
17 Historical UK number of bank branches 29
18 European countries' number of bank branches per million people in 2011 29
19 European countries' bank branches CAGR (1999-2011) / % 30
20 Number of adults without a bank account/cannot access credit 30
21 UK outstanding consumer credit / £m 31
22 Number of credit and charge cards in issue / m, end of year 32
23 Percentage of gross lending not repaid / year average 32
24 Leading lender revenues by 2014 revenue / £m 42
25 Revenue per employee/ £'000 44
26 Combined Pre-tax profit margins of leading payday lenders 44
27 Pre-tax profit margins of leading payday lenders 45
28 UK Alexa ranking 45
29 TrustPilot ratings 46
30 Wonga Group summary financials 47
31 Cash America summary financials 49
32 DFC Global revenue segmentation, 2009-13 / % 50
33 MEM Consumer Finance: summary financials 51
34 Express Finance (Bromley): summary financials 51
35 Instant Cash Loans Ltd: summary financials 52
36 Wage Day Advance Ltd: summary financials 53
37 Lending Stream Ltd: summary financials 54
38 Think Finance (UK) Ltd summary financials 55
39 PDL Finance Ltd summary financials 56
40 Cash on Go Ltd summary financials 57
41 UK real GDP / annual changes 59
42 Unemployment and underemployment / m 60
43 Number of people in employment / m 60
44 UK real household disposable and average income / % annual change 61
45 Historical and forecast number of customers / millions 63
46 Average historical and forecast annual revenue per customer / £ 64
47 Market forecast / £m 65

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