Speaking on the developing relationship between consumers and the financial sector, here Tracey Follows, Chief Strategy & Innovation Officer of The Future Laboratory, offers her take on the future of the consumer finance sector.
Money. It is something that is in the back of most normal people’s minds most of the time.
But the brands involved in money are not generally amongst the public’s favourite or most salient brands. Stop anyone in the street and ask them to name their favourite brand, and it is not likely to be a bank, an insurer, or an aggregator. And if people are happy with their bank or insurance, they don’t talk about it.
What does peak consumer interest though, is the prospect of making something onerous or boring a little bit simpler, quicker, more convenient or better value. And it’s around these benefits that we see the consumer finance sector pivoting and changing.
The arrival of so called FinTechs, companies offering new technology and ways to manage money – Apple Pay, PayPal and Circle, or Bot based automated savings services like Digit – is changing our relationship with money and finance. And with 40% of Brits believing that the image of big name banks has deteriorated in the past year, it’s no surprise that money clubs and a new generation of digital alternatives are beginning to be used in place of the traditional banks.
As the march towards a cashless society continues, and as new entrants and non-financial brands begin to offer real replacements to traditional financial services, the traditional finance brands are going to have to adapt.
So how fit are the category players and their brands to face the future?
The Future Laboratory has identified six key behaviours that make a business ‘fit for the future’. These include: Long Term Planning, Brand Stretch, Innovation, Conscious Business, Thriving Employees, and Agility.
Within the sector of consumer finance there are some very different types of business. Traditional banks, Insurers, and payment firms such as PayPal, Visa and Mastercard are all there. But there are some common themes and challenges despite their obvious differences.
For the purposes of comparison, we’ve looked at the brands in this sector in two broad groups: Banks and building societies and ‘Others’ – a more eclectic group made up of insurers, aggregators and payment gateways.
All the brands in this sector score above average on Agility, a measure of the brand and businesses ability – in financial terms, to actually make its ideas come to fruition. Only eight of the 45 brands making up these two groups fall outside the top 50% of all 547 brands in this study. To be expected, given the nature of these businesses.
Where these groups start to pull apart is when you look at Brand Stretch and Conscious Business. The last couple of years has seen consumer trust and the reputations of banks fall away as tales of scandal, collapse, failure and huge salaries have been paraded through the media. While some individual brands fare better than others, as a group every single brand falls well outside the top 50% of all brands in the study on Brand Stretch with banks being pulled down by poor reputation scores.
Presumably, in an attempt to correct their failing reputations and to answer to ever greater calls for transparency and honesty in the sector, these same banking brands score very well on our Conscious Business behaviour. This is a measure which assesses if a company or brand is behaving in an ethical way that doesn’t have adverse effects on people, wherever they are in the world. Consumers understand that they are part of a “whole system” and they increasingly don’t want to buy from companies that are having a bad impact on the environment or on people. They increasingly expect brands to publicly own their impact on both.
On this measure, the overwhelming majority of banking brands are fully compliant with the GRI – the global reporting initiative that provides a method for companies to assess and report their impacts on the environment and society.
The other, non-banking business and brands simply haven’t faced the same pressures and it shows when you look at their Brand Stretch scores, making allowances for the general apathy to finance brands, they score much better. They are much less concerned with ethical behavior (and so far, haven’t had to be)
The comparison between PayPal and Halifax – the two best brands in each sub group within consumer finance – shows that each group needs to learn from the other if they are to be fit for the future.
The traditional retail banks need to look towards servicing their consumer and future consumer in ever more innovative ways while continuing to rebuild trust, reputation and therefore their brand.
The others can’t afford to ignore the lessons of the last few years and that includes the drivers of Conscious Business. They could bolster their brands by doing so and help to insulate themselves against any future scandal in the eyes of the ultimate judge – the consumer.
Last week reports indicated that UK inflation had reached its highest point in two-and-a-half years in December, after an unexpected rise in core prices pushed top levels upwards 1.6%. Here Finance Monthly benefits from an exclusive in-depth breakdown by Market Analyst Jonathan Watson at currencies.co.uk, who explains how recent spikes in inflation can have a dramatic effect on consumers, business and the rest of the public.
Inflation, the rate at which prices increase is in itself not a bad thing. However, in certain economic circumstances it can cause problems, particularly for the public at large. The UK as a net importer buys more from overseas than it sells. That means that when the Pound is weak or has a big fall as has happened since the Referendum vote, the cost of importing goods goes up. With the Pound expected to remain weak Inflation is expected to push higher in 2017. The good news is that wage rises are increasing as well, the bad news is that it might not be enough to keep pace with the headline rates of inflation in the wider economy meaning the public will overall have less money in their back pocket.
UK Inflation
Inflation is the rate at which prices rise. In an economy prices are continually changing according to various economic, political and social reasons. A degree of Inflation is acceptable and welcome in an economy since the opposite ‘deflation’, where prices fall is most unwelcome as it can severely hamper an economy as consumers and business delay purchases, anticipating their purchase will be less costly in the future.
In the UK Inflation is targeted at 2% and the main measure used is the CPI or Consumer Price Index. This looks at a continuous ‘basket of goods’ and assesses their changes in price over time. The latest Inflation report showed 1.6% which is the highest reading since July 2014. Throughout history there have been some big swings in Inflation, in the 70’s it was over 25%.
How does it affect the public?
Rising Inflation pushes up prices so the main effect on the public is to make goods and services more expensive for consumers and business. Rising prices therefore puts more of a squeeze on consumers as they have less money to spend. It puts pressure on businesses because they have to make a decision on either raising prices to cover their increased costs or reducing their profits. This negative impact on business impacts the public with either higher prices to the consumer or the prospect of workers being laid off as the business has to cut costs. Overall spending in the economy therefore declines as consumers and business have less money to spend as a result of the higher prices.
For example, fuel prices have been rising since oil is priced in US Dollars. The price of oil has risen globally (in itself an inflation boosting factor) but the fact the price of US Dollars has increased over
20% since the Referendum result further exacerbates this issue. Rising fuel prices will be an unescapable cost to the some 30 million cars on conventional roads. Businesses reliant on road haulage will see increased costs. Much of the UK’s food in supermarkets is delivered by road and therefore affected by fuel costs. Rising fuel inflation is a classic example of a negative effect for the public. It will mean the individual consumer will have to shell out more to fill their tank to drive to and from work and to take the kids to school. And when they finish work and stop to pick up their food to eat, there is a good chance Inflation will be making their weekly shop more expensive too.
There have been numerous high profile cases of rising food prices themselves. Back in October Tesco and Unilever fell out famously over the price of Marmite amongst others. We were told this would be the beginning of many such cases and almost weekly we are hearing fresh news of a household brand putting up prices. This weekend reports Nestle put up prices of coffee 14% will not be the last in this ongoing saga. One way or another rising prices feed into the wider economy. According to the Sunday Times Sainsbury’s raised the price of Nestle coffee by 14% this weekend whilst raising another Nestle product Pure Life Spring water 22%.
But it is not just necessities such as fuel and water that has risen. Luxury goods as such have also risen as international brands not only respond to the fact a weaker Pound means less value in their own currency, but also to try and keep prices harmonised globally. It was reported that Brexit saw a surge in luxury product sale in London as wealthy foreign shoppers arrived to take advantage of the cheaper products. Examples include Rolex, Burberry and other luxury items. Many of these brands have increased the price of their goods. Rolex last year raised prices by 10%, Apple increased the price of all their products last year too. And more recently raised the price of apps in their app store.
What does the future hold?
The key concern is whether Inflation will rise faster than wages. So far wage increases are running around 2.8% whilst CPI is as reported 1.6%. The worry is that wage inflation will not be able to match the price of CPI throughout 2017. The National Institute of Economic and Social Research (NIESR) have predicted inflation may rise to 4% this year.
This will mean consumers will have less money in their pocket which exacerbates the problems outlines above of less money in the economy. Retail Sales in December were much lower indicating the higher prices in the shops are starting to bite. Many business importing raw materials and products from outside of the UK will have hedged on their currency some 12-18 months ago. They will therefore have not yet been forced to raise prices as they are not buying at the new lower exchange rate. With the Pound having dropped some 10-15% since the Referendum eventually the UK as a net importer will have to pay more for the goods and services it is buying from overseas. 2017 will be the year this starts to become much more apparent.
One tool to combat Inflation is to raise interest rates but this can have its own implications. For example as interest rates rise it will help savers but put up repayments for borrowers. Credit card debt has been rising to almost pre-crisis levels prompting the Bank of England to warn it is closely monitoring this situation. If Inflation rises dramatically an interest rate hike is very likely but whilst this will help cool the inflation rise (and help Sterling strengthen) the potential negative factors on borrowers is probably not worth the benefit to savers.
All in all, some Inflation is good and welcome in an economy, but if it starts to bite too much into people’s back pockets and in turn hurts business and the wider economy this is not good. Rising Inflation can increase Unemployment, lower GDP and dent both business and consumer confidence. With the weak Pound being a key contributor to rising Inflation and the Pound likely to remain low in 2017 and beyond, rising Inflation is an issue that is going to continue to affect the public until it is understand what Brexit actually entails.
At the end of Q2 2016, the Insolvency Service estimated that 3,617 corporate and SME companies entered insolvency, a number that is 2.7 % lower than the same period in 2015. For personal bankruptcies, the estimate is that 3,537 bankruptcy orders were granted which is 11.2 % lower than the same period in 2015 and the lowest since Q3 1990.
However, unlike the corporate and SME sectors, total personal insolvency, including bankruptcy filings, Debt Relief Orders (DRO) and Individual Voluntary Arrangements (IVA), was up 22.4 % from Q2 2015. The lower personal bankruptcy filings were offset by higher DROs, which were 15.6 % higher in Q2 2016 versus Q2 2015, and IVAs which were 42.7 % higher in Q2 2016 than in Q2 2015.
To tell us more about trends within consumer and SME insolvencies in the UK and the implications for credit grantors, Finance Monthly interviewed Andrew Berardi – PRA Group Europe’s Managing Director for UK Insolvency Investment Services.
Why have corporate and SME insolvencies fallen?
One needs to dig deeper into the corporate insolvency figures to find possible clues. For instance, one statistic shows that Compulsory Liquidations, where a credit grantor pushes the company into a bankruptcy or winding up order, decreased by 14 % between Q2 2015 and Q2 2016. Also, total company liquidations stand at the lowest since comparable records began in 1984. It is clear from the figures that credit grantors are giving their corporate and SME clients “breathing space” and in some instances, providing a life line by re-writing loans, finding additional financing, and even forgiving some loan principal.
The resurgence of Private Equity after the financial crisis has also provided a lifeline to struggling entities through funds designed specifically to invest in turnaround situations. The Insolvency Service website in the UK also publishes interesting statistics regarding insolvency by specific industry types; construction and retail/wholesale trade seem to have the highest incidents of insolvency proceedings.
A final statistic, and one not included in the official corporate insolvency statistics, is that companies entering liquidation after administration have risen by 33 % from Q2 2015 to Q2 2016. As trading conditions get tougher, this could be a harbinger for a rise in future corporate and SME insolvency proceedings.
What is driving the changes in personal insolvency filings in the UK?
Despite the fall in personal bankruptcy filings, overall consumer insolvency filings are on the rise. The statistics show that the fall in bankruptcy filings is confluent with the rise in DRO filings. In October 2015, the DRO protocol was relaxed so that consumers with £20k in debt (£15k in the previous DRO protocol) and £1k in asset (£300 in the previous DRO protocol) could access the DRO protocol. The relaxing of these guidelines has resulted in greater access to the DRO protocol for a population of consumers who may have otherwise had to petition for a bankruptcy as their only viable debt forgiveness option.
However, the causes for the rise in IVA filings are less certain. Evidence suggests that the IVA protocol has been marketed to a broader range of consumers who are now aware of the many benefits of an IVA as compared to other forms of debt forgiveness arrangements. Additionally, changes in the regulatory landscape may mean consumers are being directed away from unregulated Debt Management Plans (not considered insolvency) and increasingly advised to consider a regulated debt forgiveness scheme such as IVAs. Regardless, the increase in IVAs cannot be ignored.
What should credit grantors do to maximize recoveries on credit products defaulted due to insolvency?
Recoveries on insolvency proceedings can be lengthy and unpredictable, and in the case of DROs, credit grantors should not expect any recovery. Whether your customer is an SME or consumer, it is important for credit grantors to engage in the process by:
- Engaging with the insolvency practitioner, bankruptcy trustee, or administrator appointed to the case.
- Processing and responding to the paperwork in a timely and accurate manner.
- Lodging your proof of debt along with supporting documentation such as statements, invoices, etc. where and when requested.
There are specialist service providers who can assist your department with these tasks for a fee. Another way to maximize recoveries may be to sell the insolvencies to an FCA regulated specialist debt purchaser such as PRA Group.
How can PRA Group assist UK credit grantors to maximise their recoveries from SME and Consumer insolvencies?
As a highly respected and recognised global leader in the purchase of nonperforming personal and SME credit products, PRA is also one of the industry leaders in purchasing many types of consumer and SME insolvencies including IVAs; CVAs – an IVA for SMEs; Trust Deeds – the Scottish equivalent to an IVA; and bankruptcies.
With insolvency purchasing capabilities in the UK, Germany, U.S., and Canada, there is a good chance your organization can benefit from PRA’s insolvent debt purchasing expertise. Our insolvency team consists of industry veterans who are highly regarded for their ability to structure debt purchase solutions that are customised, compliant, and transparent.
What are the key considerations to make when managing acquisition of bankrupt and insolvent consumer debt? What are the most common challenges that you are faced with?
Sellers of insolvent consumer debt should be clear on the internal strategic purpose for selling insolvent debt. As indicated above, insolvency proceedings can be administratively burdensome for an internal recovery operation and therefore many sellers like the idea of a “forward flow” whereby the buyer assumes the administrative responsibility of managing the insolvency. Some sellers simply prefer to enter into periodic “spot sales” to fill a recovery gap or accelerate the recovery from the insolvency. In being clear on the strategic purpose, PRA can then structure a purchase solution right for the Seller. Another common challenge we have as a buyer of insolvent debt is the quality of the data. Certain insolvency-specific data (such and insolvency start date and insolvency type) is important to ensure the best price. Given PRA’s extensive experience with these debt types, we are often able to supplement seller data through our data warehouses, which ensures the best possible price for the seller.
As a thought leader in this segment, how are you developing new strategies and ways to help your clients?
We are very much an active participant within the insolvency industry, which, in my opinion, assists everyone in the insolvency chain. Throughout the regions we operate, PRA maintains strong working relationships with Trustees, Practitioners, regulators, creditor liaisons, and consumer advocacy groups. In the UK, PRA maintains representation on the standing IVA working committee. In the US, we have implemented a hybrid “service to buy” solution, which gives sellers the best of both solutions.
Career Highlights
- In 1993, Andrew joined Bear Stearns Companies Inc. to help establish and grow a first ever debt purchasing platform for consumer insolvencies in the United States.
- In 2003, while still with Bear Stearns, Andrew moved from New York to London to build and grow a first ever debt purchasing platform for consumer insolvencies in the United Kingdom.
- In 2014, Andrew joined the PRA Group after a 5 year period working with a boutique investment advisor where he established the first ever Private Equity style fund dedicated exclusively to the purchase of consumer insolvencies in the UK.
Food for Thought
What would be your top 3 tips for going the extra mile?
- Be as clear as possible regarding objectives and the desired outcomes
- Surround yourself with talented people and give them guidance and autonomy
- Endeavour to be two steps ahead of the competition
What does a typical day in the office look like for you?
At some point, one’s career evolves to where there is no typical day in the office. However, every good day involves some combination of strategic dialogue, data analysis, and client centric activity … all in the same day.
What inspires you to press further into your work?
Mentoring younger people who are passionate about building the business and building their career within PRA Group. I very much enjoy meeting our clients and ensuring the business is doing everything it can to meet their needs. Last, but not least, I enjoy one on one meetings with Insolvency and Turnaround professionals who are passionate about rescuing small business, and, for those practicing on the personal insolvency side, passionate about helping consumers to resolve their debt problems and move forward with their lives.
Email: Andrew.berardi@pragroup.co.uk
Andrew always has plenty of time to speak to those who have a shared interest in trends within the insolvency market or wish to better understand PRA’s debt purchase capabilities.
