There's A New Subprime Crisis, But It's Not What You Think

Tyler Durden's picture

Authored by Robert Colvile via CapX.co,

  • The struggles of Provident Financial have fuelled concerns about a new sub-prime crisis
  • Buyers of Provident's car loans are up to their eyeballs in debt
  • Regulation has discouraged big banks from offering affordable credit to the poor

A decade on from the financial crisis, the reports today about the sub-prime lender Provident Financial have given us a nasty case of déjà vu.

Within the space of a year, its loan repayment rates have fallen from 90 per cent to 57 per cent – leading to profit warnings, the departure of its chief executive, and a collapse in its share price.

It feels like a frighteningly familiar story. Overstretched customers at the bottom of the economic food chain rack up unaffordable loans from greedy financiers. When the music stops, the credit failures cascade upwards, bringing down lender after lender until the whole financial edifice comes apart.

So are we facing a new sub-prime crisis? There are two conflicting narratives.

The first is that Provident’s problems are unique to Provident. The firm operates in what is euphemistically known as “the non-standard credit market” – ie providing loans to people who are woeful credit risks. It does this via Vanquis Bank, which sells credit cards; Provident, which sells domestic loans; Satsuma, which does short-term online loans a la Wonga; and Moneybarn, which provides car finance.

 

The one-line explanation for what went wrong with the business is that Provident moved from collecting what it was owed via “self-employed door-to-door agents” to full-time “customer experience managers”. In other words, rather than outsourcing the business of debt collection it would bring it in-house.

 

The move followed followed claims, for example by Citizens Advice (£), that the agents of some doorstep lenders were engaging in illegal cold-calling, irresponsible lending or naked intimidation – though Provident denied that its own agents engaged in such behaviour, and said they would be sacked immediately if they did so.

 

The problem was that, as soon as the firm told the existing collection agents that they were being fired, they walked out rather than stay through the transition. Hence the plunging rates of debt collection, which the new staff haven’t been able to get back up.

 

But there’s another narrative – which is that Provident’s entire business model is evidence of a serious and potentially systemic financial problem.

 

The alarm here is particularly focused on the sub-prime car-finance industry, in which Provident (via Moneybarn) is the biggest player. Across the sector, the credit checks are incredibly swift and (according to many reports) rather cursory. That’s led many people to worry that the market is getting out of hand – including the Financial Conduct Authority, which has launched an investigation. There’s a particular echo of the sub-prime crisis in the increasing popularity of personal contract plans (PCPs) – clever financial innovations which offer very poor people access to very nice cars, because they are effectively leasing them rather than owning them.

 

Moneybarn, to be fair, doesn’t focus on PCPs: it’s more about old-fashioned lending. But that lending is going to people who are often heavily indebted already. Back in July, Liberum Capital published a research note explaining why it had put a SELL rating on Provident. The most startling figure was an estimate that “a typical Moneybarn customer spends 66 per cent of after-tax income on rent, car loan and credit card payments”. These, in other words, are people who are already drowning in debt – and the slightest rise in interest rates, or economic slowdown, or spike in inflation, could see them go under completely.

In America, it was fears that another bubble was forming in sub-prime loans that prompted the big banks to pull back from the car market in particular. So are we in for a repeat of 2008?

Personally, I’m optimistic. We’re talking about fewer borrowers and lenders: Moneybarn, for example, has only 41,000 customers. Also, regulators are now hyper-aware of the dangers of excessive lending, and have taken a whole series of steps to make sure that the dominos cannot (or should not) topple into each other as they did back then.

In fact, the real message of the Provident story is very different – because it’s about the unintended consequence of those same regulations, and the people who have suffered because of them.

If you read Provident’s annual report, there is an awful lot in there about social responsibility – to the point where the opening dozen or so pages could essentially be boiled down to the phrase “We’re not Wonga!” in 144pt bold caps. But there’s not a lot of stuff in there about interest rates.

You can get an idea of just how profitable Provident is, however, by looking at its component businesses. Last year Vanquis made £204.5 million from its 1.5 million credit card customers. Provident and Satsuma, which are part of the same unit, made £115.2 million from approximately 850,000 customers. And Moneybarn made £31.1 million from those 41,000 customers.

In other words, each customer for Provident’s credit cards, and home or online loans delivered approximately £135 in profit. For Moneybarn, it was a staggering £758.

So where are these profits coming from? Not, as you might think, from those at the very bottom of society. The average customer for Vanquis is 35-45, living in rented accommodation but with a full-time job paying £20k to £35k. Because of their “thin or impaired credit history”, the maximum line of credit is no more than £4,000, with a representative APR of 39.9 per cent. The statistics for Moneybarn are similar: £20k to £30k in income, with an APR of 33 per cent.

For Provident and Satsuma, the income is lower and the interest is higher – a lot higher. These are people on £10k-£15k, paying interest rates of 535.3% for Provident and an eye-watering 991% for Satsuma, although the loans are usually smaller and shorter-term.

How, given these statistics, can I argue that the regulations are a problem? Don’t we really need more regulations to protect people from these greedy, unscrupulous loan sharks?

The problem here is actually pretty simple.

Before the financial crisis, the big banks lent to all sorts of people they really shouldn’t have. In order to prevent the same thing happening again, the rules were tightened up – now you could only get a loan for a house, or a car, or pretty much anything, if you had the sort of credit rating that would make your bank manager (if they still existed) beam with approval.

Yet this process had a very important consequence: the mass withdrawal of blue-chip financial institutions from the lower end of the market. Barclays, for example, used to be well known as a place that bankrupts could go to for a second chance. Now, such customers often find themselves locked out of the credit market.

Britain, as the official Financial Inclusion Commission points out, has a pretty comprehensive banking system: only 1.5 million people are officially “unbanked” (although a great deal more are not all that happy with the service they’re getting…).

But even those with bank accounts often struggle to get access to credit. According to Provident, there are between 41 and 43 million Britons in the “standard” credit market, and between 10 and 12 million who are locked out of it – plus approximately two million who flow between the two depending on the health of their finances.

Thanks in large part to the banks’ and regulators’ flight from risk post-2008, those 10 to 12 million – and their counterparts in foreign countries – have been left to the likes of lenders like Provident. Or to those who are far less scrupulous: since the crash, payday lending has grown massively, but so has the number of illegal moneylenders and pawnbrokers.

As Provident’s profit figures suggest, this is an incredibly profitable niche. Last year, Provident’s return on equity (ROE) across the group was 45 per cent – in other words, every £1 in assets delivered a 45p return in profit.  By comparison, Metro Bank – a challenger bank serving a more conventional market – is aiming for an ROE of 18 per cent in 2020. At the height of the boom years, Barclays’s ROE only reached 20 per cent – in these staider times, it is now barely 3 per cent.

What’s happening, in other words, is that the poorest in society are paying more – much more – than they should for credit and lending, or even for access to the banking system. Syed Kamall MEP has written powerfully on CapX about the damage this causes.

Access to credit is one of the things that lets people climb the economic ladder, in the developed and the developing world. But access to too much credit – or to credit on the terms that are generally now on offer – keeps them trapped in debt.

No one wants to open the floodgates in terms of lending – lord knows we’re all indebted enough already as it is. But encouraging the banks to expand their services, or coming up with new ways to help the unbanked and deliver low-cost, low-risk credit, would directly benefit the poorest in society. Such people will never be able to borrow on the same terms as those with unblemished credit records. But the more players there are in the market, the lower the premium they will be charged.

As it is, in attempting to protect the financial system from another crash, we’ve left millions of people with no option but to turn to the likes of Provident – which may often end up being a very improvident move indeed.

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LawsofPhysics's picture

Define "money"...

"Full Faith and Credit"

tick tock motherfuckers...

Looney's picture

 

Same as DITECH.COM

These cunts are back, too.

Looney

Kafir Goyim's picture

The article states that 

Access to credit is one of the things that lets people climb the economic ladder, in the developed and the developing world.

Is this really true for most people?  For most people, access to credit is a way to survive, and it's damned handy, I admit, when the money runs out before the month does.  But is that really "climbing the economic ladder"?

I would say for most people, access to credit allows them to survive miscalculations that are inevitible when you are living exactly at your means.  Living exactly at your means is not a recipe for "climbing the economic ladder".

Unless you're using that credit to invest in productive assets, there is no economic climbing occuring.  Are we really pretending that people are doing that?

 

auricle's picture

In the context of a revenue generating business credit works great. In the context of your personal fixed income where you don't make enough to cover your monthly nut, not so much. 

DWD-MOVIE's picture

I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do… http://disq.us/url?url=http%3A%2F%2Fwww.jobproplan.com%3A68UoF1LgzM-Yo3S...

BandGap's picture

Wanna bet that somewhere, somehow, this shit is backed by the US of A? What a great way to keep the magic going!

any_mouse's picture

The (((City of London))) and the (((Bank of England))) predate the twinkle in the eye of the Founding Fathers of the US of A.

The central planners's picture

The only company i make bussiness with  called provident sells pms and not credit.

ThirdWorldNut's picture

I hope 2 years from now we say this is the day it all started. The longer it continues the worst it will explode.

Falling Down's picture

This is the sort of shit that should have been wrung out the last time.

Pernicious Gold Phallusy's picture

I climbed from poverty to security by avoiding debt, and not buying things I couldn't pay for with cash. Pretty sure my method still works.

LawsofPhysics's picture

It depends on whether or not you actually have to pay it back OR can access billions for ZERO percent interest.

Fuck, if the interest rate is negative you are actually stupid if you don't spend more... 

See the problem yet?

 

chunga's picture

This is the moneychangers' answer to stealing money from people who don't have and that's to just give it to them. This money is looking for people. It's not new it's just way more prevalent.

It's so bad now that Sinclair's potted hams in "The Jungle" are now people. I hope all companies engaging in this business model get punished real bad some day.

markitect's picture

Part of the problem is generational as well, in the 1970s you could work a labor job or at a grocery store and still afford rent, gas and a car.  Today, if you could even find a labor job, it most likely wont even cover rent - in my area all the trades jobs are 50+ guys, theres just no need for more bodies.  And grocery stores, forget it, thats min. wage and you'll be in Mom's basement.  The only option left is credit.  It's a fucking treadmill to nowhere and inherently evil, I mean which is worse, stealing money outright or slowly choking people to death by stealing their time and labor until they wake up destitute and realize they wasted their life's labor?  That's the core of the issue.

CRM114's picture

Well, no. With bottom jobs, you couldn't afford a car - to be even more accurate you could afford a car AND NOTHING ELSE. No smartphone contracts, for example.

I have helped a number of millenials with their financial matters, and every one of them is unable to save because they are spending vast amounts on their social life (which is what the phone is for). 

It's very simple advice every time. Prioritize.

And the vast majority would be done  a favor if expensive credit were outlawed; and the cops stopped box ticking and attending diversity courses, got off their increasingly fat @sses, and went and arrested a few loan sharks.

Archibald Buttle's picture

funny you mention the generational aspect. the way i see it, they are systematically stealing the "generational wealth" of the poor and middle classes. think about, say, a house. somebody worked for 30 years to pay off that mortgage, and when they die their kids inherit the house. they can sell it and split the proceeds or one can buy out the others and continue to live in it. and pass it on to their kids. in the last (current) crisis, the houses got repossessed by the banks that printed money out of thin air to allow the purchase in the first place. so the unlucky mortgagee loses a big chunk, if not all, of their life savings. and what do the kids inherit now? funeral expenses.

between this provident fiasco, and munchkin's wife's marie antoinette episode, we just may look back at this being the starting point. however, rather than the first domino falling, i think this time it will be more like the game of spoons played in the novel Aurora.

HRH Feant2's picture

535% and 991% interest -- fuck no wonder these people are broke! And this is legal for what reason?

Archibald Buttle's picture

in a sane world, compounding interest would be a staple in schoolrooms until the students understood, from an early age, how pernicious it can be when you're on the wrong end. with currnet interest rates, there is no longer a right end. unless you are the lender, that is.

Umh's picture

During the tech boom in the late 90s I knew people that used pay day loans. When your credit sucks it sucks. That being said pay day loans are cheaper than bouncing checks sometimes.

assistedliving's picture

you mean

Vanquis Bank aka VANQUISH BANK

 Satsuma aka SoSueme

Wonga aka Tonga

Moneybarn aka MoneyBurn

heck the must be greaatttt investments...all of em

pynky01's picture

IF THESE MF ARE BAILED OUT AGAIN ... YOU WILL KNOW FOR SURE, as if those with two brain cells they can rub together don't know already, WHO ARE THE MASTERS AND WHO ARE THE SLAVES... REMOVE THE JEW REMOVE THE ISSUE... I read that somewhere... NO MORE PISS ASS "wars" with gd fiat FUKIN MONEY... FIAT = WAR AND SLAVERY.... FOR GREATER ISRAEL....if it is war then fuk em up or leave them alone and come home... RULE OF ENGAGEMENT number one  IS DESTRUCTION OF THE ENEMY...nukes if necessary..kill them til they run into the hills... like Mr. T said ...we ain't here to buiild gd nations but to destroy terrorists...hurah  WHAT THE HELL IS WRONG WITH THE AMERICAN PEOPLE... I mean really our average IQ has only dropped 14 points in the last hundred years... that we are divided like the world has never seen...that we are paying someone over 1 billion dollars a day on the debt of trillions that the fukin FED has to print and loan that billion to us to pay the interest... which means more interest which means more money to print and loan to the goy...which means more interest.... what is the point anymore of pounding out these benign and meek words... we might as well give in to the marxist jinos... but hey why not try communism for a while...afterall they only starved/murdered 30 million Orthodox Christian Russians ... so we should be ok  we ain't no Orthodoxs ...right..  they would take over without firing a shot and all we would have to do is line up and give up our guns and get some knee pads cause you know how living on your knees can be painful ..so there's that....and they would take care of the black problem and the hunger problem and the conservative problem and the Christian problem so we would all be equal... but wait FREEDOM IS NOT FREE...FREE MEN ARE NOT EQUAL AND EQUAL MEN ARE NOT FREE... never mind ...which way to the gulag of your choice of course.. 

Mr 9x19's picture

1st, do not yell.

2nd, of course they will be bailed out.... they rely on our reel money, not their fake loans...

3rd, system is not allowed to crash.

4th, those not having stated it are idiots.

5th, those knowing it make massive amount of money because of the 100% win chance...

6th, only rich people cam acces this stuff to become even more rich.

7th, i am waiting the purge day.

 

CHoward's picture

And to think years ago members of the Mafia who loaned money for FAR LESS interest rates were actually arrested and had to serve time.  Pathetic.

Teletubby's picture

The name of the game is predatory capitalism kids. I stopped feeling sorry for the dregs after Perot was laughed off the political stage. The plebs don't give a f@ck why should I. That said. Anyone still playing by the "rules" is not only a moron, but a poor one at that..

Soph's picture

NA subrime auto market crisis? Hah! Whole lotta hoopla, not much to worry about.

Now, when the subprime debt market (housing et al) in China starts to tip over, THAT will be rather exciting to watch!

tlnzz's picture

Not to worry. It's all confined. "It's different this time". Everyone can go back to sleep now.

monero's picture

Do people really need credit?  Most people think they need credit, but in reality they need to not buy stupid shit they don't actually need (brand new cars included).

disagreeableness's picture

When I was still figuring out how to walk, my dad worked moving furniture. One of his coworkers was an Asian fella. One day said fella shows up driving a new Cadillac. My father asks him (this was 1970) how the hell can you afford that,  did you "buy it on time". Guy says "no, I knew I wanted a Cadillac, so I put the payment away each month until I had enough to buy one". 

Graph's picture

'(this was 1970)'.

The key phrase.