Bank Attitudes to Consumer Credit in Europe

SUMMARY

Overview

Introduction

How are banks' attitudes changing and what are banks doing to succeed? Using its survey of 279 branch managers, Datamonitor's Bank Attitudes to Consumer Credit in Western Europe report dissects these issues by analyzing bank attitudes across seven major markets in Western Europe.

Scope

• Sheds light on why some markets are highly developed, while others remain under penetrated
• Measures how important banks consider consumer credit to be
• Profiles best practice cases in the market
• Primary interviews with leading bank executives across Western Europe

Highlights

With consumer credit gross outstanding at 18.3 per cent as a proportion of GDP and advances at 31.9 per cent, the UK is far more developed than other markets. Germany, the next most developed market in Europe, is surprisingly far behind; with outstandings as a proportion of GDP at 10.4 per cent in 2004. Italy and the Netherlands come last.

Survey data paints a picture of Belgian banks as less interested or more reluctant than other banks to offer consumer credit. Most dramatic is the provision of personal loans, whereby 25.2 per cent less of Belgian bank branches offer this product than the average of European branches.

Dutch banks are not involved in the sub-prime sector. In fact, 95.0 per cent of Dutch respondents stated that their bank does not have lending products for the sub-prime market, compared to 74.9 per cent of banks in Western Europe as a whole. Banks have traditionally been credit averse, but have also been wary of entering an unrepeatable market.

Reasons to Purchase

• Understand who the best performers of each market are and why they are at the top
• Plan your strategy knowing what other competitors think
• Understand the intricacies of each consumer credit market in Western Europe and how each can be tapped into

TABLE OF CONTENTS

• CHAPTER 1 INTRODUCTION
  • What is this report about?
  • Who is the target reader?
  • How to use this report
• CHAPTER 2 TO WHAT EXTENT HAVE THE ATTITUDES OF BANKS HELPED TO SHAPE EUROPEAN CONSUMER CREDIT MARKETS?
  • Introduction
  • Despite numerous similarities between Western European economies, the role that consumer credit plays varies considerably
    • Consumer credit plays a more important role in the UK economy than it does in any other Western European market
      • As a side point, if other markets were this developed, the Western European consumer credit market would be twice its current size
    • Western European consumer credit markets have developed very differently over the past ten years
      • Measured on a per capita basis, the UK has easily the most developed consumer credit market in Western Europe
      • Based on a simplistic analysis of this data, a number of clusters can be observed
      • Over time, markets progress from introduction stage, to growth and finally to maturity
      • Taking this concept one step further, we can attempt to map consumer credit markets onto the Product Life Cycle
      • The fact that consumer credit markets do not fit neatly into the Product Life Cycle suggests that there must be a number of factors that alter their development over time
  • A number of factors explain the considerable disparities in the development of consumer credit across Western Europe
    • Factors can be grouped into those that affect demand and those that affect supply
      • Supply side factors are more influential in the development of a consumer credit market than they are in most other markets
    • Socio-demographic, economic, political and attitudinal factors all have an effect on demand for consumer credit
    • On the supply side, bank attitudes to lending, legislation and the level of competition are influential in determining the development of consumer credit
  • The extent to which these factors have influenced market development varies considerably from one country to the next
    • The Belgian consumer credit market suffers from a lack of innovation and significant consumer protection
      • In terms of demand, poor economic performance and averse consumer attitudes to debt have stifled the Belgian consumer credit market
      • In terms of supply, a consolidated market and strict consumer protectionism has stagnated the market
    • The French consumer credit market is inhibited by a lack of competition and a constraint in supply
      • High unemployment and considerable social stigma attached to borrowing have restricted demand for consumer credit
      • On the supply side, a weak credit referencing system and structural issues have constrained the French consumer credit market
    • Germany's consumer credit market is developed, but not to its full potential because banks do not focus on consumer credit
      • Poor economic performance and negative attitudes towards debt have stifled demand for consumer credit in Germany
      • Consumer protectionism and structual issues in the German banking industry have hindered supply
    • Italy's consumer credit market remains underdeveloped mainly as a result of formerly high interest rates and high saving rates
      • Despite weak economic performance, attitudes to borrowing are changing
      • Despite a weak legal system, competition in the Italian consumer credit market is increasing
    • The Netherlands has a weak consumer credit market thanks to high mortgage debt and hesitant bank attitudes
      • Demand is hampered by weak economic performance, credit averse consumers and exceptionally high mortgage debt
      • Bank attitudes do not encourage the consumer credit market to grow
    • Spain's consumer credit market is on the path towards maturity thanks to positive bank attitudes and consumer demand
      • Strong economic performance and changing consumer attitudes have cemented the consumer credit market in Spain
      • In terms of supply, competition in the Spanish market has increased considerably despite a relatively poor credit reference system
    • The UK benefits from strong demand and a fiercely competitive market
      • The UK market is highly competitive
  • Bank attitudes to lending have had a considerable impact on the development of consumer credit in Western Europe
    • A visual comparison is useful to understand the relative importance of demand and supply side factors in the development of consumer credit in each market
    • Bank attitudes have played a major role in shaping the Belgian, German, Spanish and British consumer credit markets
  • So what shapes the attitudes of domestic banks to consumer credit?
    • The economic situation of a market can attract or deter banks
      • Example: Spanish banks have recently pushed consumer credit partly due to the strength of the economy
      • Example: A lower interest rate in Italy has seen banks pick up interest in consumer credit
      • Example: A more pessimistic outlook for the UK economy in 2005 has resulted in a more hesitant approach from the leading high street banks
    • High returns on other financial products has meant that interest in consumer credit was sometimes delayed
      • Example: Belgian and German banks have only recently begun paying attention to consumer credit
    • Problems in the past affect bank attitudes
      • Example: Problems with retail finance in the mid 1980s and 1990s have made Italian banks more cautious in their approach to consumer credit
    • The competitive landscape has affected how banks look at consumer credit
      • Example: the dominant role of finance houses in France has affected bank involvement in consumer credit
      • Example: entrants from abroad have stimulated domestic attitudes in the UK
    • Regulation has had a significant impact on bank attitudes to the supply of credit
      • Example: usury ceilings have suppressed the development of a sub-prime market in various countries
      • Example: Italy's legal system makes it more difficult to reclaim on defaults, making extending credit more risky
    • Protectionism has undermined bank innovation and competition
    • Lack of credit scoring information can ward off bank involvement
  • Conclusions
• CHAPTER 3 THE ROLE OF CONSUMER CREDIT WITHIN RETAIL BANKS TODAY
  • Introduction
    • Datamonitor's findings are based on a survey of 280 branch managers and interviews with senior head office staff
  • While consumer credit is clearly a key product for European banks, most place greater emphasis on mortgage products
    • Most retail banks in Western Europe view consumer credit products as very important
      • The extent to which banks rate consumer credit products as important speaks volumes for the role that consumer credit plays in the market
  • While many Spainish banks still see savings products as important, the vast majorty of Italian banks are focusing on consumer credit products
    • Belgian banks still prefer to concentrate on savings and investments
    • Survey data for Italy suggests banks may have turned a corner
    • Many Spanish savings banks remain partial to savings and investment products
    • UK banks are now focusing less on consumer credit
  • Mortgages remain the most important product for most retail banks in Europe
    • The Dutch mortgage market is growing faster than that of consumer credit
    • UK banks have been attracted by the strong housing market of recent years
    • Spanish banks continue to tap into the housing market's sustained growth
    • Yet German commercial banks do not focus on mortgages because of the banking system's structure
  • Attitudes towards product development and differentiation
    • Price is a key differentiator
      • For example, risk-based pricing is relatively new to most European markets, showing that most markets still have scope for development
      • Moreover, banks focus on pricing because value for money is a priority for customers
    • Product design is an important aspect of innovation
      • Norisbank's easyCredit: an innovator on various fronts in the German market
      • Citibank: an innovative and proactive performance in the Belgian and German markets has led it to success
    • Bank attitudes towards the sub-prime lending sector also help to indicate the level of a market's maturity
      • There is a wide disparity between banks across Europe in terms of lending to consumers with minor credit problems
      • The sub-prime market is small in most European markets
      • Moreover, the majority of banks are unlikely to get involved in this market in the future
      • Nevertheless, banks do believe there is scope for development
  • Attitudes towards selling and advertising
    • Branches are crucial to selling and advertising banks' products
      • Most branch staff remain unincentivized to sell consumer lending products
      • Moreover, branches focus on advertising mortgages first and foremost
    • The speed at which credit is available varies across Europe
      • Banca Intesa: relying on advertising and cross-selling to increase market share
  • Attitudes towards customer retention
    • Customers shop around for financial services products more than they used to
      • Consumers are shopping around more because of increased awareness of financial services products
    • German consumers are most likely to shop around for financial services products
      • Within these four product lines, mortgage customers are most likely to shop around
    • In order to increase customer retention, banks are focusing on customer service
      • Nationwide is refurbishing its branches for a more sales oriented approach
      • ABN AMRO: changing from transaction-based branches to advice centers
      • BBVA provides an excellent example of a well constructed loyalty scheme
  • Attitudes towards cross-selling
    • The majority of banks make it standard practice to offer a credit card or an overdraft facility on the opening of a new account
      • Yet mortgages and other products remain more important than consumer credit products when cross-selling
    • Most banks also try to sell PPI alongside consumer lending products
      • French customers take up PPI with consumer lending products most often
  • Conclusions
• CHAPTER 4 APPENDIX
  • Supplementary data
    • Supplementary data tables related to Chapter 2
    • Supplementary data tables related to Chapter 3
  • Research methodology
  • Definitions
    • Bank of England base rate
    • Balances outstanding
    • CAGR
    • Consumer credit
    • Fixed rate personal loan
    • Gross advances
    • Installment credit
    • Loan term
    • Mail order credit
    • Motor finance
    • Non-standard
    • Point: sale retail finance
    • Retail finance
    • Unsecured personal loan
    • Variable rate personal loan
  • Relevant readings
    • Reports
    • Briefings
  • Future readings
  • Relevant links
  • Datamonitor's custom research capabilities
  • The Retail Banking team
  • List of Tables
    • Table 1: Total consumer credit gross advances, 2000-2004e
    • Table 2: Total consumer credit balances outstanding by country, 95-04
    • Table 3: Total consumer credit balances outstanding per capita by country, 95-Table 4: Population by country, 2000-2004
    • Table 5: GDP per country, 2000-2004, EUR millions
    • Table 6: Consumer credit balances outstanding as a proportion of GDP, 2000-2004
    • Table 7: Consumer credit balances outstanding and theoretical balances outstanding if all markets had the same proportion of GDP as the UK, 2004
    • Table 9: To what extent do you agree with the following statement about your company: 'Consumer lending products are very important to the bank'?
    • Table 10: Are there any of these following products that you do not offer in the branch?
    • Table 11: What proportion of your total consumer lending business is accounted for by current account customers versus customers that have their primary bank account with another bank?
    • Table 12: To what extent do you agree with the following statement about your company: 'Savings and investment products are a greater priority at present than consumer lending products'?
    • Table 13: Which products are currently highest on the branch sales agendas?
    • Table 14: Does the bank have credit scoring systems in place that automatically establish the possible credit limit on a credit facility or credit card for existing customers should they wish to apply for one of these products in order to speed up the approval?
    • Table 15: Would the bank automatically refuse to grant credit to people with a minor history of credit problems (i.e. they have been in arrears in the past)?
    • Table 16: Does the bank have lending products available (such as debt consolidation loans) for people that have a poor credit rating with either serious credit problems in the past or are currently in arrears?
    • Table 17: Do you think the bank would consider developing a lending product in the future for customers that have a poor credit rating?
    • Table 18: Are you aware of any banks or credit providers in your market that provide credit to people that would traditionally be refused credit from mainstream providers (that is those people with a poor credit record or history of credit or mortgage arrears)?
    • Table 19: To what extent do you think the market for lending products to people with a poor credit rating will grow over the next five years?
    • Table 20: Approximately what proportion of the bank's customers would you estimate would be accepted for a personal loan, credit card, or overdraft facility/ revolving line of credit?
    • Table 21: Are branch staff currently incentivized to sell consumer lending products within the branch?
    • Table 22: What incentives are they offered?
    • Table 23: When a customer applies for a credit facility, overdraft or personal loan, on average how long would they need to wait before the money is available in their account?
    • Table 24: Has the speed at which credit is available increased in the past couple of years?
    • Table 25: As far as you are aware, in the last twelve months has the bank used the following media channels to run individual advertising campaigns for the following products?
    • Table 26: On a scale of one to five, in your opinion how aggressively is the bank currently looking to cross-sell the following products to bank customers compared to other banks in your market?
    • Table 27: Is it standard practice to offer a credit card or offer to arrange an overdraft facility when a customer opens a new account with the bank (assuming the customer does not have a poor credit history)? Table 28: Does the bank currently advertise the following products in the branch using posters or leaflets?
    • Table 29: Which of the products below have been given the greatest visibility in the branch over the past 12 months?
    • Table 30: Which of the products below will be given the greatest visibility in the branch over the next 12 months?
    • Table 31: Which of the following do you think is the most important feature for a customer in terms of selecting a credit card (with a revolving facility)?
    • Table 32: Which of the following do you think is the most important feature for a customer in terms of selecting a personal loan?
    • Table 33: In your opinion which bank performed best in your market last year in terms of attracting new credit card customers?
    • Table 34: In your opinion which bank performed best in your market last year in terms of attracting new personal loan customers?
    • Table 35: For the following four product categories, could you give us your estimate of what percentage of customers you think will shop around different providers rather than buying from their main bank automatically?
    • Table 36: Do you think more customers shop around in general for financial services products than they used to a few years ago?
    • Table 37: Which of the following factors have influenced consumers to shop around more for financial services products than they used to a few years ago?
    • Table 38: Likelihood of customers shopping around rather than buying from their main bank automatically when looking for mortgages, savings accounts, personal loans and credit cards
    • Table 39: Is it standard practice to offer creditor insurance when a customer applies for a consumer lending product?
    • Table 40: In your opinion, approximately what proportion of customers that take out credit cards, mortgages and personal loans, also take out credit insurance from you?
  • List of Figures
    • Figure 1: The UK has the largest consumer credit market in Western Europe measured as a proportion of balances outstanding to GDP, 2004
    • Figure 2: If all markets were as developed as the UK, the European consumer credit market would be twice its present size, 2004
    • Figure 3: The UK and German consumer credit markets are by far the largest in Western Europe, although they have grown at very different rates over the past 10 years, 1995-2004
    • Figure 4: Expected progression of consumer credit markets over time
    • Figure 5: Most markets are still in a growth phase of development
    • Figure 6: High mortgage debt as a proportion of GDP and per capita means that consumers are less willing to take on additional forms of debt, 2004
    • Figure 7: Bank attitudes have had a considerable impact on consumer credit markets in Belgium, Germany, Spain and the UK
    • Figure 8: Unsurprisingly, most banks in Western Europe view consumer credit products as very important to their retail business, 2005
    • Figure 9: German, Italian, French and Dutch banks are now concentrating more on consumer lending products than on savings and investment products, 2005
    • Figure 10: Mortgages are clearly the product of highest priority for most bank branches, 2005
    • Figure 11: Value for money and customer service are most important to customers choosing a credit card, 2005
    • Figure 12: Dutch branch managers believe that convenience of a single provider is most important to customers, while access channels are important for French consumers, 2005
    • Figure 13: For customers choosing a personal loan, value for money is the most important feature, 2005
    • Figure 14: Alliance & Leicester is just one of many European banks which compare its prices to competitors in an attempt to gain custom, August 2005
    • Figure 15: Many banks are not willing to lend to those with a history of minor credit problems, 2005
    • Figure 16: The majority of banks do not have products available for the sub-prime population, 2005
    • Figure 17: Dutch sub-prime lending remains small and dominated by a few main lenders, 2005
    • Figure 18: Most banks do not see themselves getting involved in the sub-prime lending market in the future, 2005
    • Figure 19: Over 80 per cent of branch managers think that the sub-prime lending market will grow over the next five years, 2005
    • Figure 20: The majority of branch staff are not incentivized to sell consumer credit products, although there are some considerable variations from one country to the next, 2005
    • Figure 21: Sales targets are used most often to incentivize branch staff, 2005
    • Figure 22: Belgian and Spanish branch staff incentivization does not conform to the European average, 2005
    • Figure 23: Mortgages and personal loans are currently advertised most often in the branch using posters or leaflets, 2005
    • Figure 24: Mortgages and mutual funds, followed by personal loans have been given the greatest visibility in the last 12 months, 2005
    • Figure 25: According to branch managers, mortgages and savings accounts, followed by personal loans, have been the most advertised on media channels in the last twelve months, 2005
    • Figure 26: A significant proportion of customers only have to wait less than two days before their money is available in their account when they apply for a credit facility, overdraft or personal loan, 2005
    • Figure 27: Italian and Spanish branch managers feel that the speed at which credit is available has increased most in the past couple of years, 2005
    • Figure 28: Banca Intesa attempts to differentiate its personal loan from others in the market by focusing on speed, 2005
    • Figure 29: Virtually all branch managers believe that customers shop around for financial services more than they used to, 2005
    • Figure 30: Increased consumer awareness is the main reason as to why consumers are shopping for financial services products more than they used to, 2005
    • Figure 31: German customers are more likely to shop around than buying with their current bank automatically when looking for mortgages, savings accounts, credit cards and personal loans, 2005
    • Figure 32: Mortgage customers are much more likely to shop around for different providers rather than buying from their main bank automatically, 2005
    • Figure 33: BBVA's strategy encourages and rewards closer relations with the bank, 2005
    • Figure 34: Most banks do make it standard practice to offer a credit card or an overdraft facility upon the opening of a new account, 2005
    • Figure 35: Mortgages and mutual funds are cross-sold more aggressively than consumer credit products, 2005
    • Figure 36: For the majority of banks, it is standard practice to offer PPI when a customer applies for a consumer lending product, 2005
    • Figure 37: French consumers have particularly high PPI take up rates, 2005
    • Figure 38: Datamonitor's core consulting capabilities