Vanquis Bank

Financial exclusion is rightly a major focus of Government and organisations promoting consumer welfare. Not having access to a credit card makes it increasingly difficult to operate in the modern world. Credit cards allow people to shop conveniently in the high street, by telephone or on the Internet, to manage emergencies, and are useful when travelling abroad. However, many people – including those with little or no credit history, those who have had credit problems in the past but are now over them, and those on lower incomes – can find themselves excluded from this valuable facility.

Vanquis Bank is bringing the benefits of credit cards, in a responsible way, to people who can find themselves excluded by mainstream card issuers. Credit card limits start at £250 and are significantly lower than those of mainstream lenders. A high level of contact with our customers helps them stay in control.

Vanquis Bank started trading in 2003. After a period of market testing, full product launch in the UK commenced in January 2005.

Vanquis Bank operates in the non-standard sector of the UK credit card market. Our customers are on average to below average incomes; typically earning between £12,000 and £25,000 per year. They use our card for the same kinds of things that mainstream card users use their cards for – such as shopping at the major supermarkets and on Internet sites.

We are different from other issuers in that our products are designed for people that most other credit card providers see as being too much of a credit risk. We are more comfortable with this market because of our long experience of home credit, and the experience and skills of Vanquis Bank’s management team, a significant proportion of whom have a background in serving non-standard credit customers.

Vanquis Bank is willing to lend in this market sector but does so with the risks in mind.

We operate a ‘low and grow’ strategy. We are willing to take a sensible risk with people but we want to limit our exposure at the beginning of the relationship, so we set a much lower credit limit than mainstream card issuers. Around half of our accounts start with a credit limit of £250 and £1,000 is the maximum initial credit limit. Credit lines for mainstream card issuers would be much higher than this. We then look at the payment performance on the account and recheck external credit bureau data every month with a view to giving controlled increases, or indeed decreases, in credit limits when it is appropriate to do so.

Two-thirds of our customers are taken on at our typical APR of 39.9%. Given the nature of our customers and products, we have higher default rates than the norm in the UK credit card market. Our interest rates reflect that risk and so our revenue yield is higher. Our default charges are in line with those of the mainstream credit card providers.

Vanquis Bank is also different from other lenders in that it maintains a high level of customer contact throughout the life of the account. For instance, during the application process, any customer taken on with an interest rate higher than 39.9% APR will have a telephone interview with one of our customer support staff before their card is authorised. If we cannot speak to the customer we will turn down the application. Our thinking is that if we cannot contact the customer at this stage, we will probably have trouble contacting them later if they experience problems. This basic, common sense approach is by no means typical with other card issuers. We also contact customers at any time they appear to be struggling to make payments. Our customers also choose to contact us much more frequently than would be typical with other card issuers.

The market

There are over 10 million people in the UK in the non-standard credit market. Within that market we think somewhere between four and five million people are suited to our credit card product. Some of those customers are already with our direct competitors and some are with mainstream credit card providers. With 426,000 customers at present, we have well below 10% of the non-standard market.

Approaching half of the new customers we take on have no other credit cards. The nature of the credit market at present means that mainstream credit card providers may not feel able to continue serving some of their customers – many of whom may have been better suited to our type of credit card in any case.

Vanquis Bank’s strategy

Vanquis Bank’s strategy is to bring the business up to an operational scale that will produce significant profitability. The business’s new, medium-term target is to grow receivables to £450m by the end of 2012 whilst maintaining a post-tax return on equity of 30%.

Key activities in 2009

Vanquis Bank continues to perform well and made significant strides towards its growth and profitability targets in 2009.

Maintaining credit quality

In the current economic environment, with rising unemployment and under-employment, the Vanquis Bank management team has focused heavily on maintaining the quality of the receivables book. Throughout 2009, we have consistently tightened the criteria applied to underwriting applications and therefore whilst demand for a Vanquis Bank credit card remains high, we have turned down 83% of new card applications during 2009. Our primary focus in 2009 has been on lending to good quality existing customers who have already demonstrated a sound payment record and who we know well. As a result, receivables growth in 2009 has been much higher than customer growth. We have supported this approach by cancelling 21,000 inactive accounts to further reduce the exposure to future impairment risk.

Maintaining the revenue yield

We placed particular emphasis in 2009 on ensuring that both new and existing customers’ cards were priced at a level that made an appropriate return for the risks being taken. This allows us to keep serving customers who now present a higher risk but at a rate that reflects that risk. These actions mean we are well positioned for the challenging trading environment in the months ahead and ensures that we can maintain a risk-adjusted margin of 30% which is consistent with achieving a post-tax return on equity of 30%.

Customer welcome call

The Chatham call centre takes 450,000 calls a month and the aim is to talk to every customer as part of the application process; we are the only credit card company to do this. These initial calls do two things. Firstly, they allow us to speak to the customer as part of the underwriting process which includes checking security details to reduce fraud. Secondly, it gives us the opportunity to see if the customer would like to buy any of our ancillary products or services on the day their account is activated. During 2009, we have continued to evolve our product offering and have introduced Identity Theft Insurance. This covers customers against the considerable costs and inconvenience of sorting out their affairs if someone steals their identity. At present, around 20% of new customers take up this option.

Customer recruitment

Customer recruitment channels continued to evolve in 2009 with 61% of customers coming from the Internet where we further increased our use of display advertising. Direct mail activity, which is still a major source of business for us, accounted for 23% of new customers.

We have card-issuing partnerships with other organisations to generate new customers. We also have a number of arrangements to consider applicants who have been declined by other credit card issuers which is another important source of business for us. Together these sources represented 16% of new customers in 2009.

Card development

For the first time, in 2009 we offered customers a choice of pictorial design on their credit card. This has proved very popular and resulted in a 15% uplift in response to our marketing offers. Also, to ensure that we do not lose customers whose financial circumstances now mean they require, and can manage, larger credit limits, we introduced a Gold Card for the small number of customers to whom we have granted a credit limit of £1,500 or more.

Looking ahead

Our main task in 2010 is to continue to grow the business whilst maintaining a cautious approach to lending.

To grow the business we aim to establish new card-issuing partnerships and enter into new agreements to consider applicants who have been declined by other card issuers. Our partnerships have helped us to deliver continued growth in 2009 and we expect this channel to continue to grow in importance in 2010. We will also continue to place a high level of importance on maintaining the flow of credit to good quality existing customers through the credit line increase programme which has been so successful in 2009.

We will seek to develop new products in order to meet our customers’ needs and therefore add yet more new income streams. And we will examine the acquisition of suitable credit card books in order to take advantage of our operational capacity headroom. This would result in the business achieving its full-scale operation sooner.

The systems we have in place provide us with good quality, timely management information which allows us to make any necessary changes to our loan book to keep the level of impairment at an acceptable level. We will continue to analyse the risk that each customer presents, at least every month, and actively amend pricing to respond to that risk.