High street lenders are only likely to be successful in the sub-prime market if they enter via acquisition rather than organic growth, according to Pricewaterhouse Coopers (PwC).
The accountancy firm has outlined some of the cultural and systematic risks faced by mainstream lenders entering the sub-prime market in its report, Mortgage Lending Update.
PwC welcomes mainstream lenders entering the market, as well-established credit procedures and considerable marketing and advertising spend could improve customer confidence in the sector. However, it said the way forward is through acquisition rather than organic growth. The report said: ‘Without the right approach from the outset mainstream lenders will find it difficult not to decline too many borrowers and thereby stifle the introducer channel.’
Graeme Johnston, a partner in the financial institutions group of PwC and the report’s author, said: ‘If high street lenders try to enter the sub-prime market by growing organically I think they will fail. Their lending would be more restrictive and they will not have the courage necessary to take this market head on. Those who buy by acquisition will have an existing team with a critical mass to trade and systems that work.’
The report said the key to sub-prime lending is the ability to control arrears and prime lenders may baulk at the seemingly tough measures necessary and worry about lending under their own brand, through fear it may damage their reputation.
As a result, most sub-prime lenders still operate under their own brands post-acquisition. But according to PwC, this benefits both parties.
Johnston said: ‘As far as the acquired company is concerned amalgamation would spoil what makes them special, and as far as the acquirer is concerned there are image issues about being too closely connected in people’s minds with regards to early, sharp and persistent arrears chasing.’
But while more prime players look to enter the sub-prime market, Johnston said sub-prime lenders are unlikely to move towards prime markets.
‘Sub-prime lenders will not enter the mainstream market, but will continue to target niches where their greater flexibility and customised underwriting allow them to take on prime opportunities which prime lenders would have turned down.’