Consumer Credit Division

Home credit succeeds by offering simple, transparent financial products to customers on average or below-average incomes, some of whom may find it difficult to obtain or manage other forms of credit. The service is popular for very clear reasons: it's personal, friendly and flexible, and is well suited to the needs of our customers.

How home credit works

Provident is the UK and Ireland’s leading home credit lender operating through the Provident Personal Credit and Greenwood Personal Credit brands which share a national network of over 400 branches. Provident and Greenwood provide small, unsecured cash loans, typically for sums of between £300 and £500. These are delivered to the customer’s home by self-employed agents who then call every week to collect repayments. Unlike other forms of lending, home credit includes all the costs upfront. There are no extra charges whatsoever, even if a customer misses a payment. For those managing on a tight budget, it’s important to know that the amount to be repaid is fixed at the start and will never go up. 86% of our customers consider our products to offer them good value for money.

Another advantage of home credit is the part played by the agent. Agents are paid commission on what they collect, not what they lend, so they have every reason not to lend more than their customers can afford to repay. That’s good for the customer and a valuable check on impairment for the business. The agent’s weekly visit is not only convenient for the customer but also acts as a useful reminder to put the money aside for the repayment. If customers get into difficulty, they know they’ll get a sympathetic response from their agent. The home credit product is one that customers trust and positively want to use – which helps to explain why our customer satisfaction rates are consistently high. 94% of customers say they are satisfied with the Provident home credit service, and the vast majority say they would recommend Provident to family or friends.

The market and economic environment

There are over 10 million non-standard credit consumers in the UK, of which the home credit industry serves around three million. Provident Financial has 1.8 million home credit customers.

The picture is changing, however. The tightening of lending criteria in response to the global scarcity of credit and increasing impairment has meant that mainstream lenders are not advancing credit to those at the margins of their lending models – many of whom would have been more suited to high service level, small-sum, home credit lending in any case. This presents an opportunity for us to win back some of the customers we have lost to more mainstream lenders over recent years. As a result, combined with the changes we have made to the business, after several years of gradual decline, home credit customer numbers have started to grow: up 2.1% in 2006, 5.3% in 2007, 6.2% in 2008, and 5.1% in 2009.

This continuing tightening of lending criteria by mainstream credit providers is leading to a growing non-standard market in the UK and presents a growing opportunity for home credit.

Home credit strategy

The strategy of the home credit business is to be the leading community-based lender in the UK and Ireland and to deliver profitable growth by lending responsibly and meeting customer needs.

Key activities in 2009

The main focus of our home credit business during 2009 has been to maintain the balance between growth, credit quality and collections performance. This is particularly important in the current difficult economic environment.

Increase in front-line management

In order to maintain an appropriate focus on collections activities during 2009, we created approximately 120 new field-based management roles and 30 new branches. This reinforces the spans of control over collections and arrears activities. The investment was made possible through stringent control over non field-based costs which has restricted the overall increase in the cost base to just 1.7% in 2009.

Cautious approach to underwriting

In anticipation of the marked deterioration in the economy, the home credit management team has maintained a cautious approach to lending for over two years now whilst continuing to maintain the flow of credit to our customers. To ensure the correct focus to manage bad debt risk, new customer growth was slowed in the first half of 2009 and greater selectivity through tougher scoring has been applied to the issue of further credit to existing customers. This has been supported by the continued development and deployment of analytical tools for assessing credit decisions together with the increased use of external data.

Tailored products

Only by applying a sufficient margin to our products can we remain profitable and so continue to supply our customers with the small amounts of credit they need. In deciding how much to charge for our products we take many factors into account including customer behaviour, market conditions, the competitive environment, and the current and forecast state of the economy. In 2009, we launched a new 50-week core product to replace the old 57-week product. The new product has a higher rate than the old product but provides a better fit with our customers’ needs for a loan of around a year in length and better reflects customer behaviour and the current, turbulent state of the market and the economy. We also decided to restrict new customers from taking out some of our lower margin home credit products until they have established a good payment history with us.

We are not alone in adjusting prices in the non-standard (and indeed whole) credit market. Our customers continue to tell us that we offer good value for money and all of our home credit products remain highly competitive in the marketplace. Our customers can find a comparison of the price of home credit loans and other small cash loans available in their local area at www.lenderscompared.org.uk, an independent price comparison website.

Stability of the agency force

Our agency force has become more stable in terms of length of tenure and turnover. This is partly as a result of spans of control reducing from 12 agents per Development Manager at its peak to nine agents per Development Manager and partly due to an improved agent commission system which has proved popular with agents. Agent turnover improved markedly in 2009 and agencies currently without an agent, and so being handled by a Development Manager, fell from 4.5% of all agencies to 3%.

Park Group Love2Shop vouchers

We have replaced our own brand shopping voucher which we had offered for a number of years, with the popular, market leading Park Group Love2Shop voucher. Sales of the Provident-branded shopping voucher had been falling slowly over the years because it did not have the appeal of the market leader and was not accepted in as many stores. This change has led to increased sales and shopping vouchers are now again an important element in our product portfolio.

Direct repayment loans

Direct repayment loans are a logical extension of the home credit model into a much larger market sector, adjacent to the weekly-collected home credit sector. Our approach capitalises on the strengths of our home credit business, not least of which is conducting the initial assessment interview in the customer’s home, with payments collected through monthly direct debit. This model responds to customers’ preferences for personal contact, and the home visit also means that each customer’s circumstances can be individually assessed.

In 2009, we continued to test this market sector using the Real Personal Finance brand, offering larger loans than traditional weekly-collected home credit – from £750 to £6,000 – with typical APRs of between 80% and 120%. We ran the business within the Consumer Credit Division so it could share the resources of the home credit business, in particular its 400-strong branch network, thereby keeping overheads to a minimum.

The ongoing depressed state of the economy in 2009, together with the virtual collapse of the direct repayment, non-standard loans market, following the demise or withdrawal of a number of competitors, has led to the collapse of most of the credit brokers which had supplied a large proportion of our non group-introduced leads. There are no signs that credit brokers or other alternative intermediaries will return to the market in the short to medium term to allow a flow of good quality, new customer prospects. In January 2010, we decided therefore to restrict our offer of direct repayment loans to customers with whom we already had a good relationship. We will market these loans under the Provident Direct and Greenwood Direct brands.

Looking ahead

There continue to be opportunities to grow the home credit business in 2010 as mainstream lenders continue to restrict the flow of credit. However, there are also risks associated with continuing high unemployment and under-employment, and the unknown effects of UK macroeconomic policy as the Government raises taxes and cuts expenditure. The issue is one of striking the right balance between growth, credit quality and collections capacity. We will continue to monitor our financial information carefully to make sure we get this balance right. We benefit from getting excellent data back very quickly from our staff and home credit agents. By the middle of each week we have a detailed picture of the previous week’s performance which means we can identify trends early and change our lending and collections strategies if necessary.

We will continue to test the direct repayment loans concept and when market conditions improve we will decide how to take forward our approach to this potentially rewarding market sector. In the meantime, we are rolling out direct repayment loans as a product extension of our core home credit business consistent with our ‘low and grow’ approach to lending.

2010 will also see our headquarters move to new, purpose-built offices in the centre of Bradford. The new building will support the next phase in the company’s development and underlines our commitment to the regeneration of the Bradford area.