Speaking at the British Specialist Lending Senate, Damian Thompson, group managing director for retail finance at Aldermore, said that whilst high street banks had been “skeptical” of the market at first, they now saw opportunities and strong returns.
“They are coming. They will be on our doorsteps I suspect by the end of the year and that will be a challenge for us because you will see the occurrence of current account funding in our industry,” he said.
According to collated figures from specialist lenders and high street banks, between 2015 and 2021 the compound annual growth rate for specialist lenders was 13 per cent, compared to 1.5 per cent for high street banks.
Thompson said specialist lenders have better returns on equity than high street lenders and have been “key players” following the 2008 financial crisis.
He said during the crisis, specialist lenders were able to create “really strong savings products” which helped fuel growth.
He added that reasons for specialist lenders’ success included high level of insight, no legacy system and demand for specialist expertise.
“We were really focused as an industry and as a group of lenders. The high street suffered from an identity crisis, they wanted to do everything. We were very clear and very focused on what we wanted to do,” Thompson said.
He said specialist lending market had “proven that we are not a short-term fix” and indicated there was “longevity” in the market.
“We don’t lend money. We create dreams and realities for families that don’t believe it’s possible for them and unlocking that opportunity is really important,” he said.
Key challenges are consumer duty, customer retention and changing work habits
The FCA is currently consulting on consumer duty with the aim to set clearer and higher expectations for firms’ standards of care towards consumers.
Thompson said this would be the “paradigm shift” in his lifetime, adding that brokers and lenders would have to rethink how they sell and create products.
Thompson added that one of the “biggest challenges” for specialist lenders was customer retention, adding that previous models around this had to change.
“Our customers come to us, and they get clean very quickly. They start making the payments, they start understanding what they have to do,” he said.
He continued that it was vital to listen to the customer, brokers and colleagues which serve them.
“If the industry continues to do that, and works with brokers, it’s going to make a real big difference, particularly in this economic environment.”
Thompson pointed to inflation, ongoing fallout from the Ukraine crisis and rising energy costs as causes for concern and said if it was a harsh winter these problems could be amplified.
He added that changing work habits with the “great resignation” and remote working also raised questions for lenders.
Thompson explained that a lot of people had decided to retire or resign from their roles post-pandemic.
He said some of those people may come back but they would “need specialist lending services” as their new role may not be aligned to their original career.
Thompson added: “Don’t underestimate this [remote working] as lenders, how our affordability models are going to work for customers who are working two days a week, three days a week from home what are we going to do own utility bills, what are your affordability changes is going to mean for them.”