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UK Online Payday Lending Market Insight Report 2016

  • January 2016
  • 67 pages
  • Apex Insight
Report ID: 3681386


Table of Contents

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– Recently, regulators have taken a great interest in the industry and several lenders have withdrawn from the market.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.

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