Moderate

Consumer Finance

Lenders are under increased financial stress as margins reduce and the risk of bad debts increasing with furlough having ended in September 2021.

Sector trends & challenges

  • Bad debt provisions

    As we move towards 2022 with the economy slowly recovering from the pandemic and furlough support ending, there is a growing risk of bad debt from consumers. UK employment as at July 2021 was 1.5% lower than in February 2020.

  • Increased regulation

    New regulations aimed at treating consumers fairly may result in increased costs and operational challenges, such as increased credit checking scrutiny. Although this should reduce bad debt provisions the cost may become material.

  • Innovation

    The sector has been highly innovative, with the development of digital ‘Buy Now, Pay Later’ finance providers a clear example. Continued investment in new platforms and services will be important for the larger players.

Sector rating profile

The sector has been under significant stress in recent years, firstly following a wave of mis-selling complaints and a tightening of regulation that increased operating costs. The innovation shown by new digital entrants to the market, partnering directly with retailers to provide simple finance products, and more recently steps announced by the FCA to increase regulation of the “Buy Now, Pay Later”, shows how the sector continues to evolve. The pandemic has further increased what was already mounting pressure on bad debt provisions throughout the sector.

Consumer Finance

The impact of the pandemic continues to be felt across the consumer finance sector throughout 2021 and we expect the slow recovery to extend well into 2022. A fall in demand for discretionary purchases has had an adverse impact however government support schemes such as furlough have masked the true economic impact. With the end of furlough in September 2021, and with employment statistics still lagging behind pre-pandemic levels, we expect to see increasing levels of bad debt impacting on both top and bottom lines.

Lenders remained focused on liquidity and minimising risk of future mis-selling claims in a post-COVID landscape. The likelihood of increased regulation over the coming months and years has the potential both to increase operating costs for finance providers, as well as making the services they provide more cumbersome for consumers to use, such as increased credit checking scrutiny. Adapting to a new regulatory landscape and continuing to provide simple, good-value products will remain a priority for responsible lenders. Any upside for the sector will come from the post-pandemic record public saving rate highs, funds from which still haven’t fully returned back into the UK and global markets.

Find Your Expert

Ed Boyle is Interpath Co-Lead for the Financial Services sector, which includes Consumer Finance as one of four core segments. Ed also leads our approach to Consumer Finance nationally for Interpath alongside Alex Watkins.

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