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Consumer Finance in EuropeBack to Reality

Contents

Executive Summary 3

Introduction 7

Trends in European Consumer Credit Markets 11

Implications for Consumer Credit Players 33

The Emergence of New Business Models 45

Conclusion 53

3Copyright 2008 © Oliver Wyman

Executive Summary

A more challenging environmentConsumer credit was one of the fastest-growing and most profitable sectors until 2006. Following a period of high growth from 2004 to 2006, it has witnessed a further spike, with volume CAGR topping 9% in Europe. The sector has thus attracted the attention of new entrants, whilst a frenetic activity of M&A has pushed valuation of specialised players ever higher.

Last year we observed a turning point due to both contingent and structural conditions, as some mature markets reached saturation and economic conditions worsened. The rise of interest rates – and of credit losses as families become more indebted – has eroded margins. At the same time, intensified competition has pushed prices downward, particularly in mature segments. With the new EU directive and the introduction of SEPA, regulators are impacting the industry as well. Though some initiatives may possibly widen the markets, we believe that the net effect of the new regulation will have a negative impact on the industry’s profit pool. Lastly, the sub-prime crisis has forced players to reconsider funding as a key condition for staying in the game.

As a consequence, contrary to the conventional wisdom of the past years, a decoupling between volume and profit growth is taking place. New volumes will not necessarily bring profits.

Yet, consumer credit is still an attractive area of the European financial services industry. With €1.2 TN outstandings at the end of 2007 it represents 25% of global volumes and is second only to North America as a regional market. Moreover, we believe that EU markets will keep growing, albeit at a slower pace, and that in the next five years, volumes will still increase at 5% CAGR.

Go east – Go southThis overall view hides a wealth of opportunities since the sector, in particular with respect to margin growth, is becoming increasingly polarised by countries, client segments and products. For players able to exploit these skews, consumer credit will still provide high margins and fast growth.

4 Copyright 2008 © Oliver Wyman

From a geographic standpoint, we saw the emergence of new growth engines, within and outside the EU. In a global context, we forecast that, in terms of outstandings, the US and the EU will lose at least 10% global market share in the next five years, whilst the most dynamic regions (China, Latin America, Turkey, Russia and India) will increase from 18% in 2008 to 27% in 2012. In particular, BRIC countries (Brazil, India, Russia, China) will experience annual growth between 20% and 30% and their profit pools will grow even faster. In Europe, mature markets will lose profit and volume shares to maturing countries, such as Italy and Greece, and to emerging countries, such as CEE.

Within the same markets, the profitability skew between product and client segments will widen, fuelled by competitive intensity and regulation. The following trends can already be highlighted:

Point-of-sale finance has often become a no-profit zone in mature �

markets as merchants negotiated better terms

Personal lending has witnessed strong volume growth across �

Europe, but profit grew less than proportionately since many banks have attacked the market with low-price offers

Credit cards proved the most resilient among traditional products, �

registering strong balance growth and high margins across Europe

Opportunities in non-conforming segments and in home equity �

products are currently constrained due to the sub-prime crisis, however their development has only been delayed

A new strategic agenda requiredNeeding to adapt to a tougher environment, winners will change their approach from a primary focus on business development to a more balanced and complex strategic agenda. There will be no magic recipe but we believe the winning agenda should include the following main levers.

Driving efficiency to the next level

Conducting cost reduction efforts �

Implementing Straight-Through Processing (STP) by automating and �

digitalising key processes

Achieving cross-border operating synergies through regional platforms �

and centres of excellence

Responding to worsening credit conditions

Optimizing risk organization, processes and tools along the value chain �

Enhancing collection performance through highly powered analytical tools �

Promoting growth Expanding footprint by entering high potential emerging geographies �

(BRIC, Middle East, South East Asia)

Targeting new client segments with dedicated value propositions �

(migrant populations, youngsters, retirees…)

Innovating the product offer (bundled loans and saving/investment �

products, cards with pre-approved loans that can be activated by SMS…)

Optimising distribution channels with a specific focus on the Internet �

and intermediaries (e.g. agents and brokers)


Consolidation: From big to huge

Against this background, new business models will emerge. Consolidation both at the global level and within markets will determine a dramatic increase in size of the main players. By 2015 the top 10 players will manage at least €200 BN of outstandings. To exploit economies of scope, as well as manage increasingly complex structures and diverse markets, these players will have to rethink their organisational model and develop regional platforms and centres of excellence.

Another growing phenomenon is the convergence of consumer credit and other forms of retail lending. Leading European specialists tended to focus solely on unsecured consumer lending. As illustrated by recent major initiatives, some players are now trying to sell a broader range of retail lending products, starting with mortgages. It is difficult to say at this stage whether or not retail lending convergence will generalise. We see a scenario where the convergence trend could extend to other asset classes such as SME lending. However, it is worth mentioning that some leading industry specialists still consider that consumer credit should be their sole area of focus.

Lastly, driven by technological progress and the attitude of new consumers, a new breed of entrants has the potential to change the infrastructure on which consumer credit rests, particularly for cards, and could eventually move upstream. The revolution in payment methods (e.g. PayPal) and the rise of social lending (e.g. Zopa) offer both opportunities and challenges to incumbents. Although it is not yet apparent that these innovations will radically alter the consumer credit landscape, players clearly need to understand these trends and be ready to position themselves for competitive advantage.


Purpose of the reportThis report describes and analyses recent trends in the European consumer credit markets and gives an outlook on future growth and profit sources. It echoes the previous report published by Oliver Wyman in 2005 to the extent that we aim to help financial institutions decide upon where and how to compete. In addition, we want to highlight how a different set of capabilities and business priorities is being brought to the fore, particularly given the emerging market and regulatory trends.

With that in mind, this report aims to present:

An overview of recent evolutions in the European consumer credit �

sector, contrasting sub-segments and local markets

Insights on emerging trends �

An evaluation of market opportunities in light of the current �

situation and the future outlook

An analysis of the emerging key success factors that will �

differentiate future winners

Conclusions on emerging business models and the priorities �

required to develop the right strategic agenda

ApproachAs we noticed three years ago, the European consumer credit market is still an aggregate of heterogeneous local market realities. However, we believe that stronger communalities and convergence trends are taking place. We therefore carried out an analysis of regional consumer credit environments, according to common features such as competition, regulation and demand-side factors.

We then projected these patterns into the future, in order to look at both absolute market growth and evolution of profit pools by product and consumer segment. Finally, we considered these emerging trends to understand the skills needed to meet the challenges they present, and to determine which business models are best suited in the coming environment.

Introduction


The analysis in this report are based upon a wide range of sources, including:

Published reports and articles from official national data agencies, �

national central banks, consumer credit associations and the World Bank

Direct interviews with major industry players and experts �

Oliver Wyman’s and Santander’s global expertise and thought �

leadership in consumer credit

Scope of the reportThe report primarily looks at consumer credit markets within the perimeter of EU 27 countries1. For comparison purposes, however, we also consider some non-EU 27 consumer credit markets as well as regional blocks of the world:

North America � 2

Latin America �

North Asia � 3

Middle East �

South Asia � 4

Rest of the World � 5

Rest of Europe � 6

We cover consumer credit products excluding the residential mortgage business. In particular, we focus on general-purpose loans (personal loans), revolving credit (with or without a plastic card) and loans linked to specific purchases (such as point-of-sale finance for cars and consumer durables).

Additionally, we consider products such as home equity loans (HELs) and home equity lines of credit (HELOCs). Currently a minor segment, they will become more important due to emerging trends.

1 EU 27 includes Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom

2 North America includes the United States and Canada3 North Asia includes Japan, South Korea, and China4 South Asia includes Singapore, Taiwan, Thailand, Vietnam and Indonesia5 Rest of the World includes Africa, India, Australia and New Zealand6 Rest of Europe includes Russia, Ukraine, Belarus, Moldova and Turkey


Format of the reportThis report is divided into three main sections:

Trends in European consumer credit markets over the period �

2004-2006: In this section, we compare at country level the recent evolutions in volume, growth and penetration within the consumer credit market. We then analyse profitability drivers to understand the main issues that confront credit institutions before assessing the impact of changes in regulatory environments. Lastly, we describe and explain our volume and profit growth projections per market

Implications for consumer credit players: � A summary of the conclusions that we put forth in the 2005 report are addressed in the light of recent changes in the European consumer credit market. We then describe new key success factors, proposing a winning strategic agenda for players in the consumer credit industry

The emergence of new business models: � In this last section, we present a map of emerging business models and our views on their chances of succeeding in tomorrow’s consumer credit market


IntroductionIn this section we compare the market growth, penetration and product mix of the various markets, in order to understand the maturity levels and emerging convergence trends among them. Our analysis is conducted from the perspective of non-EU markets so as to draw conclusions on the relative attractiveness of different areas. We also analyse profitability trends and their underlying cost and revenue drivers. Thus, we aim to explain the drivers that are shaping industry profit pools, detailing the emerging key changes in competition and regulation, as well as the consequences for the market.

Volume, penetration and product mix of marketsBy the end of 2006, the overall European market passed over the €1 TN mark in outstandings and was the second-largest regional market, representing about one-fourth of the world market and one-half of the US market.

Looking at the distribution of outstandings, high concentration is a characteristic of consumer credit at the international level. Overall, the two main regions represented 77% of consumer credit stock in 2006. The next largest regional block is North Asia (including China, Korea and Japan), which represents only 9% of the total. All other regional blocks each represent 2% to 3% of global shares. Even the Rest of Europe block, which includes the most dynamic countries adjacent to the EU market, represents only 2% of global outstandings.

Trends in European Consumer Credit Markets


Figure 1: Outstanding consumer credit in regional markets in 2006

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Source: European Credit Research Institute (ECRI) 2006 Statistical Package, Bankecon 2005-2006 Report, National Central Banks’ statistics, Oliver Wyman analysis

If we focus on the EU zone, high concentration levels clearly are typical within regional blocks as well, due to an uneven level of market maturity, country economic development and cultural attitudes towards these products.

Figure 2: Outstanding consumer credit in EU 27 markets in 2006

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Within the perimeter of the EU 27, 63% of consumer credit outstanding in 2006 is accounted for by UK, Germany and France, with UK and Germany accounting for 49% of the market.


These differences in market sizes are partly due to the demographic and economic potential, but also are compounded by radical differences in penetration levels as measured by the ratio of outstanding consumer credit over national GDP. From this perspective, we noticed that during the last three years, even though the European “high penetration” group was mainly composed of the largest markets, some smaller countries such as Greece and Ireland also joined the group. Indeed, a process of convergence in relative penetration versus the leaders is quickly taking place in the most dynamic emerging markets; as a consequence, concentration within Europe is decreasing.

Figure 3: Market penetration per consumer credit product in Europe in 2006

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Volume relative to GDP

Auto loans POS/Instalment Personal loans Credit Cards/Revolving

UK

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Source: European Credit Research Institute (ECRI) 2006 Statistical Package, Bankecon 2005-2006 Report, IMF statistics, National Central Banks’ statistics, Eurofinas statistics, Oliver Wyman analysis

Penetration varies widely across Europe. Countries with over 10% of penetration mainly are large, mature markets (e.g. UK, Germany and Austria), even though the novelty of recent years is represented by Ireland, Norway, Denmark and Greece, which, despite their young and small markets, quickly have reached the highest levels. The UK is always a separate case, with a penetration of 16%, which is about 30% more than any other EU country.

A heterogeneous group is within 5% and 10%; as for highly penetrated countries, there is a mix of fast-growing markets such as Italy and Spain, as well as slow-moving, traditional ones like France, whose relative importance is declining.


This pattern of young and fast-growing versus traditional and static countries repeats itself in the low penetration group (below 5% of volume relative to GDP). For example, Belgium always has been culturally adverse to consumer credit, whilst low volume ratios in Slovakia and Czech Republic are due to very young markets.

However, penetration is only a partial way to understand a country’s attitude and potential in consumer credit.

An analysis of the product mix in European countries shows a strong linkage between the type of products developed in the market, current penetration and future potential.

On one side, we have developed markets in which credit cards account for a high market share, with the UK and Ireland as the most prominent examples. In these countries high penetration mainly is the result of consumer credit products being heavily used as a payment method, not only as a means to borrow money. In itself, this factor significantly increases both actual penetration and latent demand.

Other mature markets are characterised by a low adoption of credit card products. Typical examples of this include Germany, Austria and to a lesser extent France, in which penetration has reached an early plateau at around 10% of GDP.

Italy and Spain both have a similar product mix, with a high share of traditional products (POS and car financing) and low credit card usage. Spain leads Italy in absolute penetration terms, but both are likely to have a similar saturation plateau conditioned by a lower propensity to revolve. Both differ from the mature continental European block in which they are still growing fast whilst starting from a smaller base. Nordic markets (Sweden, Norway, Finland and Denmark) are instead highly concentrated on personal loans as a consequence of their predominant banking distribution channel. They see little development in POS outstandings.

Lastly, we have emerging countries (CEE countries, Greece and Turkey) which are following an unusual pattern of development. These countries have seen credit cards develop early, often in innovative ways before or at the same time as more traditional sectors (POS and car financing).


Figure 4: Consumer credit product mix trend in Europe, 2003-2005

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UK andIreland

Continental andNordic Europe

Mediterraneancountries

CEE

Change in market share 2003-2005

POS and auto loans Revolving credit Personal loans

Source: European Credit Research Institute (ECRI) 2006 Statistical Package, Bankecon 2005-2006 Report, National Central Banks’ statistics, Eurofinas statistics, Oliver Wyman analysis

Note: Continental and Nordic Europe figures are calculated on the basis of figures for Belgium, France, Germany, Norway, and Sweden. Mediterranean countries’ figures are calculated on the basis of Greece, Italy, Portugal and Spain. CEE figures are calculated on the basis of Czech Republic, Hungary and Poland

Across all markets, a shift has occurred in importance from traditional sectors like POS and car financing to personal loans and credit cards. Overall, the share of POS and car financing went down from 46% to 44% of the total European market between 2003 and 2005.

We believe that this trend will continue in the next years for two main reasons. On one side, POS and car financing tend to be more mature sectors across the European Union; as a consequence, there is less unsatisfied demand and growth will be in line with that of GDP.

On the other hand, given their lower margins there is less room for growth by extending this type of credit to riskier segments in profitable ways. In the UK, for instance, where POS credit has higher margins, recent growth was fuelled by sub-prime lending. Moreover, low margins will eventually lead to a retrenchment of aggressive promotions that have been a strong driver of this sector’s growth.

In sum, low margins will offer few incentives on the supply side to expand the market with push-and-pull strategies. Given that clients’ demand will not be growing, POS and car financing will grow significantly less than credit cards and personal loans. Over the next five years, Oliver Wyman expects that POS and car financing market share will further decrease by 4%.


Moreover, we can conclude that both Anglo-Saxon and emerging countries are converging towards a product mix in which cards play a larger role. Countries in Continental Europe, however, are likely to plateau at lower penetration level, whilst stabilising around a different product mix characterised by a higher percentage of personal loans.

Lastly, given the strong growth in emerging Europe and the slower growth and sometimes stagnation in mature European countries, smaller markets will continue to represent an ever-increasing share of consumer credit outstandings.

Patterns of growth in European markets As a first step in understanding growth patterns in Europe, we compared the EU with all other regional markets.

Figure 5: Regional consumer credit market shares vs. growth, 2004-2006

NorthAmerica

EU (27)

NorthAsia

LatinAmerica

Middle East

SouthAsia

Rest ofWorld

Rest ofEurope

Market share in 2006

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Market share 2006 CAGR 2004-2006


Europe overall is an attractive market compared to the rest of the world; in 2006 the EU represented 25% of global outstandings and had a period of steady and significant growth. Yet, its market share is decreasing, whilst emerging countries with fast-growing economies and higher latent demand are growing faster.

Consumer credit historically has taken off in order to fuel the spending of the emerging middle class. Thus, those regions with a large demographic pool whose income per capita is growing fast, but is below €5,000, represent the true challenger to the EU’s market share.


The largest region of this group is the North Asian market (including China, Japan and South Korea), which in 2006 represented 9% of the global market and since 2003 recorded year-on-year growth of 11%. This growth can be largely attributed to the dynamism of the Chinese economy, which exactly fits the profile of the emerging consumer credit market.

Within the same group are all other areas of the developing world that are in a current phase of strong and relatively stable growth, including Latin America, Rest of Europe (particularly Russia and Turkey), Rest of the World (in particular India) and overall, despite political hot spots, the Middle East. This group represents 9% of the global market with a pace of growth since 2003 that has more than doubled Europe’s.

On the other side, the most interesting international example is from the US, the most advanced and largest world market. In the period from 2003 to 2005, despite the world’s highest penetration, the US experienced a spurt of growth with CAGR of 4%. This growth has been driven by the success of HEL and HELOC, which cannibalised the conforming credit card market, and by the growth of high-risk credit card and unsecured loans. The latter is now collapsing due to the sub-prime crisis. Moreover, in 2006 higher interest rates and a shrinking home equity market contributed to reversing the pre-existing buoyant economic condition, and growth eventually stalled.

The lessons learned from the US are that, on the one hand, European consumer credit has a lot of potential headroom both in new segments and in new products; yet, there clearly is an upper limit to the level of indebtedness, even in highly sophisticated markets. This level depends on interest rates, and now is being reached in the US. Although Europe as a whole is far from this level, individual countries such as the UK have achieved a level of saturation that makes growth heavily dependent upon macro-economic conditions.

As a consequence, we forecast that, in terms of outstandings, the US and Europe will lose at least 10% global market share in the next five years, whilst the most dynamic regions (China, Latin America, Turkey, Russia and India) will increase from 18% in 2008 to 27% in 2012. In particular, BRIC countries will experience annual growth between 20% and 30% over the next five years.


Within Europe, when jointly analysing growth and penetration in individual markets, current penetration appears to be only one of the many different growth drivers. Current penetration alone is not a good indicator of a market’s potential attractiveness, in terms of unsatisfied credit demand.

Figure 6: Consumer credit market penetration vs. growth in Europe, 2003-2006CAGR outstandings 2003-2006

Outstanding/GDP 2006

AustriaBelgium

Czech Republic

DenmarkFinland

France Germany

Greece

Hungary

IrelandItaly

Luxembourg Norway

Poland

Portugal

Russia

SlovakiaSpain

Sweden

Turkey

UK0%

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20%10%

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100%110%120%130%140%150%

2% 4% 6% 8% 10% 12% 14% 16% 18%

Source: European Credit Research Institute (ECRI) 2006 Statistical Package, Bankecon 2005-2006 Report, National Central Banks’ statistics, IMF statistics, Oliver Wyman analysis

Volume growth was strong across the whole of Europe until 2005, driven not only by the impetus of emerging countries, but also by the largest ones, barring Germany.

After 2005, changes in fundamentals heavily impacted the three main European markets. On the demand side, in particular, rising interest rates have impacted consumer credit appetite. On the supply side, worsening credit quality and the recent liquidity/sub-prime crisis have reduced the aggressiveness of some players, particularly in the UK.

Within this worsened macro- and micro-economic context, Germany and France had less room for growth due to their product mix structure. In fact, Germany’s growth was almost flat between 2005 and 2006; the effect of product innovation thus far has not been strong enough to break through market inertia. In France, personal loans and low APRs have driven volume growth. In both countries growth perspectives are being stifled by regulation that eventually limits access within conforming perimeters.

Italy and Spain have grown significantly, albeit from different penetration bases. On the supply side, a more active banking approach, the opening of new segments (non-conforming) and the


broadening of existing channels (such as the Internet and agents) have led to an 18% year-on-year growth between 2003 and 2006 in both countries. On the demand side, consumers increasingly are willing to raise their indebtedness to support their living standards. Italy and Spain are proving that overall a convergence towards penetration plateaus differs from country to country, but is at a minimum above 10% of GDP.

Lastly, CEE countries and other emerging markets are displaying very high growth rates. Between 2003 and 2006, the fastest-growing countries have been Russia, Hungary, Czech Republic, Slovakia, Greece, Poland, Turkey and Estonia. Russia and Turkey, in particular, have proven to be the most dynamic markets, nearly doubling their penetration over the last two years. In these countries, strong economic growth is insulating consumers from feeling the effects of rising interest rates, whilst competition is expanding accessible markets buoyed by light regulation and high margins. Moreover, although the countries in this group are highly differentiated in terms of penetration – ranging from high penetration levels (Greece with 12% in 2006) to relatively low penetration levels (Czech Republic with 4% in 2006) – they all share fast growth trajectory, full-range product development and high saturation levels, thereby ensuring a strong growth potential. If we then consider their recent take-off, we realise that the current gaps in penetration are only due to their different stages within a broader, faster convergence process.

Profitability of consumer credit

Profit landscapeUntil the end of 2004, consumer credit was seen as both a revenue and a profit growth engine. Based on this assumption, banks have increased their investments in consumer credit, and new players have entered the arena. Yet, over the last three years we witnessed an increasing decoupling of volume and profit growth.

Overall profit margins have decreased and become more variable by country and product segment. Moreover, the skews in profitability have widened dramatically between the best players – those who are capable of adapting quickly to new challenges – and the laggards. “Free lunch” is no longer available in consumer credit, and volume growth is not sufficient to be profitable for players with capabilities’ gaps.

Profit pools overall have increased since 2004, but at a slower pace than volumes and with stark and growing differences between segments and countries.


In POS and car financing segments, profit pools have been shrinking, although this data is heavily dependent on how price transfers for new client acquisition are computed.

Personal loan profit pools have grown strongly due to booming volumes offsetting decreased margins, whilst credit card profit pools have grown at the same pace as volumes.

Figure 7: Global evolution of profit pools by product segment in Europe, 2004-2006

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Source: Oliver Wyman analysis

From a geographic perspective, mature non-Anglo-Saxon markets within the EU have been hit hardest by shrinking margins; the worst evolution of the profit pool was registered in Germany with an overall reduction of economic profit.

In the UK, profit pools increased in line with volumes due to a product mix skewed towards high profit products, the shift from focusing on Net Interest Margins (NIM) to higher fees and commissions (particularly late fees and commissions on CPI) and high profitability in new risky segments. On the other hand, the UK also is the most competitive market, and the skew between best practices and laggards is the highest.

In maturing countries, strong volume growth and a shift in the product mix are offsetting lower margins, producing a healthy 9% growth p.a. in economic profit.


Lastly, in emerging countries booming volumes have driven an explosive growth in economic profit, but starting from a small base and consequently still accounting for a minor share of the European pool. As seen in Figure 8, though the most mature markets have lost ground in relative terms, they still remain the main profit pools.

Figure 8: Evolution of profit pools in Europe between 2004 and 2006Profit pools (€BN)

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100%

Profit pool 2004 Profit pool 2006

Cumulative profit pool 2004 Cumulative profit pool 2006

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Source: ECRI, Bankecon, National Central Banks’ statistics, Oliver Wyman analysis

If we broaden our view to other regional markets, we can see that the US and the EU are still the dominant economic profit pools. However, emerging regions are growing faster, and some regions, such as the BRIC countries, already represent significant opportunities.

Figure 9: Evolution of regional profit pools in the world between 2004 and 2006

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Profit pool 2004 Profit pool 2006

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Source: Oliver Wyman analysis


By analysing the trends of profitability drivers, we can better understand the reasons behind this fundamental change. Thus, we will look at the evolution of:

Pricing and margins �

Funding costs and availability �

Risk �

Pricing and marginsGross margins have been shrinking in the EU by approximately 12% since 2004, particularly in mature and maturing countries, and for most products barring credit cards.

Margin evolution mainly has been driven by three factors: price levels compressed by competition, funding costs determined by interest rates and additional fees and commissions. These factors have had diverging evolutions, causing a highly differentiated situation across countries and product segments.

Pricing pressure has increased on average in Europe, driven by strong competition from banks and new entrants. Despite strong differences in absolute terms across countries, we notice an overall convergence at lower levels. At the EU level, the weighted average APR decreased by 5% between 2004 and 2006, and funding rates, weighted by national outstanding amounts of consumer credit, increased overall by 9% between 2004 and 2006.

On the one side, we have emerging countries with much higher but rapidly deflating prices. Typically, players in new markets tend to have higher gross margins to protect themselves from unknown credit quality and to exploit fast growth in red-hot economies without recurring to price competition.

Maturing markets already are at US price levels and are converging towards lower ones; yet, at the bottom, mature markets have slim margins that can hardly be further compressed.

The main difference between maturing and mature markets is that in the latter, price competition has already been exploited as a growth lever in the last four years and that the intensity of margin compression, due to obvious economic limits, is tapering off. In maturing markets such as Italy and Spain, players more recently have started to recur to this type of competition, particularly as the Internet – a low-price/high-transparency channel – has become an important conduit of volumes; thus, further compression is easy to forecast.


Figure 10: Net interest margins in European markets vs. growth of outstandings

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Consumer credit outstandingsCAGR 2004-2006

NIM for personalloans in 2004

NIM for personalloans in 2007

Credit outstandingsCAGR 2004-2006

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rway

Source: ECRI, Bankecon, National Central Banks’ statistics, DataStream, Reuters, Oliver Wyman analysis

Notes: NIM for Eurozone countries is calculated as the difference between APR for Personal Loans of one to five years’ maturity and straight average of ECB base repo rate. For all other countries, NIM is calculated as the difference between the straight average of APR on loans to households for consumption and the straight average of overnight repo rates. NIM for Norway includes overdrafts. NIM for Sweden is based on available data

Specialists have been able to recoup some of the margin compression with higher commissions and fees from insurance products such as CPI and PPI. Instead, banks thus far have been less able to cross-sell these products, with penetration oscillating between 10% and 30%. The profit share of these highly profitable products is increasing steadily and can represent over 30% of total economic profits for specialists.

However, this aggregated view hides profound differences across sectors and segments.

POS and car financing already were characterised by slim margins in 2004, and the increased competition from inexperienced players looking for quick volume growth has driven down prices, significantly increasing the negotiating power of retailers and merchants. Thus, frequent promotions aiming to facilitate retailers’ sales have significantly lowered average prices. As a consequence, car financing and POS, with the exception of the UK and emerging high margin markets, has become a no-profit zone for players without the right partnership and cross-selling capabilities.

Personal loans were most affected by the renewed competition from banks; in fact, this product is the easiest to sell for non-specialists, and branch networks are powerful platforms for gaining volumes.


Moreover, many large banks tend to approach personal lending with a low-price customer-friendly positioning to avoid any potential reputation hazards, thus further pushing down prices.

As a result, personal loans for conforming segments have become significantly cheaper. This trend is stronger in mature markets where banks have been more proactive in entering the sector. Even in this case, however, different segments (such as non-conforming) have bucked the trend.

Figure 11: Net interest margins on personal loans between 2003 and 2007

0%

2%

4%

6%

8%

10%

12%

Net interest margin on personal loans

2003 200620052004 2007

Eurozone US

Source: The US NIM is calculated as the annual difference between the 24-month average interest rate on personal loans and the US Federal Funds target rate, both communicated by the Fed. The Eurozone NIM is calculated as the annual difference between APRC rates on loans to households for consumption and Euro short-term repo rates, both communicated by the ECB

Credit cards have best resisted price compression, though that sort of competition is present in the most advanced markets. The main difference being that in such markets, more players are capable of exploiting demand elasticity and risk-based pricing to optimise penetration and defend prices at the same time. Moreover, in Anglo-Saxon countries players have turned towards higher fees, especially late fees, as an important source of profits.


Funding costs and availabilitySince 2005, the second trend compressing margins has been a steady increase of interest rates and therefore of the funding costs. Over the past two years, short-term ECB repurchase agreement rates have doubled, starting from a historically low level of 2%.

Figure 12: Eurozone funding rates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2003 2004 2005 2006 2007

Euro Short Term Repo (ECB) – Middle Rate

Credit Yield to Maturity for AAA Financial Institutions

Source: Monthly interest rates provided by DataStream

Worsening this situation, the recent sub-prime crisis has dried liquidity from the Interbank and ABS markets, pushing spreads higher. Since the beginning of 2007, access to liquidity and cost of funding have become essential factors for business sustainability, particularly for those companies lacking banking support.

In a first phase, mortgage lenders and insurers have been hit by rising sub-prime defaults, whilst risks on RMBS and CMBS increased. This first wave started with a series of shocking news: HSBC issued a profit warning of over US$10.6 BN of charges on bad US mortgages, and was followed by New Century’s bankruptcy and Bear Stearns having to inject US$3.2 BN into a hedge fund over-exposed to sub-prime.

During summer 2007, we assisted with the inevitable downgrading of a number of RMBS, and with further news regarding risky exposures of hedge funds. Although national central banks started injecting liquidity into the repo market last August, the situation has not yet stabilised. Rather, the US housing bubble is being pricked, lowering home equity and increasing the likelihood of further credit losses for sub-prime mortgages.


Moreover, whilst the main direct actors of the crisis operated in the mortgage US sub-prime sector, the financial contagion – through the investors buying RMBS and particularly highly leveraged hedge funds – has spread globally and impacted the ability to access credit, both in the wholesale and in the ABS space.

This downturn in credit accessibility has been particularly damaging since it followed a period of abundant and cheap liquidity during which many players, particularly those not backed by a deposit base, started to rely on and take for granted those credit sources. Thus, a whole segment of the industry depends on the resolution of this crisis, with respect not only to their margin, but also to their long-term viability.

RiskThe period from 2003 to 2005 has presented a historically low level of risk for all retail activities. From this low base, Oliver Wyman has registered an increase of nearly 30% in credit losses since 2004.

This is due to two main factors: a deteriorating credit cycle and the increasing importance of riskier segments and channels. Additionally, non-conforming segments present a double danger, as on average they are riskier and much more volatile across the credit cycle. Although prime customers’ risk increments from the through to the peak of the cycle tend to be around 100%, near prime and sub-prime customers tend to be much more volatile, with the riskiest segment being subject to spikes of more than 500%. Thus, conservative players have suffered much less from the cost of risk increases, and the average hides a highly differentiated risk map.

Figure 13: Evolution of expected losses on outstanding consumer credit in Europe

90

100

110

120

130

2004 2005 2006

Source: Index calculated as the straight average of expected losses across POS, auto finance, personal loans and credit cards according to Oliver Wyman’s proprietary data. Rebased on 2004 data


Going forward, we believe that the most likely scenario is a generalized worsening risk outlook, with profound differences by country. The European credit environment as a whole will worsen significantly but there will be no generalized collapse. Some countries, such as UK, Ireland and Spain, present a high likelihood of a more severe and rapid deterioration of credit quality, while others such as Germany, Austria and Poland should enjoy a stable situation.

Evolutions in the regulatory environmentDuring 2008, the regulatory environment for consumer credit will change significantly. The European Union will issue its new directive in mid-2008; consequently, individual states already have started to strengthen local regulations consistent with the content of the draft directive, which is focused on enhanced consumer protection via greater transparency and lender responsibility. The sales of ancillary insurance products, such as CPI, are under increasing regulatory scrutiny due to consumer association pressure. Lastly, SEPA will progressively come into force, unifying the European card payment system.

Consumer credit directive and local regulationsThe regulatory framework for consumer credit in Europe has been subject to numerous changes that aim to enhance consumer rights and promote a harmonised European consumer credit market.

The 1987 European consumer credit directive set the first regulatory framework for consumer credit, defining the content and the form of credit agreements. However, it left considerable discretion to each Member State in setting up appropriate measures to ensure sufficient consumer protection. Following several amendments, a new proposal was published in 2002. The adopted approach included the creation of an “optimal harmonisation level,” leaving each Member State in control of some aspects of the credit process. The latest proposal for a new directive on consumer credit was adopted in January 2008; as such, each Member State now has two years to implement the directive into national law.

The objective of the new directive is to enhance consumer protection on a fully harmonised European level, by allowing consumers to make informed choices when buying credit. This objective is achieved by ensuring that lenders provide adequate information prior to, during and after the stipulation of the agreement. From the lenders’ perspective, the EU Directive regulates the whole customer-facing credit process: advertising, some phases of risk assessment, credit agreement and servicing.


In particular, the EU Directive sets a clear definition of the standard information which must be included in any advertisement: the borrowing rate, total amount of credit, APR, duration, total amount payable by customer, instalments and the obligation to acquire ancillary services (e.g. insurance).

The directive also sets the obligations of the lender in terms of the consumer creditworthiness assessment, which must be based on all reliable information available within the EU (both internal and external), and which must be revised consistently with the new conditions if the total amount of credit is changed after the conclusion of the credit agreement.

During the entire agreement phase, a high level of transparency is required: lenders must provide adequate information to the consumer (i.e. a detailed explanation of product characteristics and its potential effects, including consequences of default in payment), in order to enable the consumer to assess whether the proposed credit agreement is adapted to the consumer’s needs, and whether it fits with the consumer’s financial situation. In addition to any information needed to compare different offers, lenders also must provide a full pre-agreement form replicating the official agreement contract.

Finally, the consumer’s information rights also have been widely extended during servicing. The consumer must be informed of any substantial contractual changes (e.g. changes in borrowing rate) before they are enforced. Consumers are granted new rights relative to early repayment and withdrawal from the agreement, and are allowed to withdraw from the agreement freely in the case of open-ended credit agreements or within the first 14 calendar days from the signing date. Further protection is provided in case of linked credit agreements7: if the goods/services covered by a linked credit agreement are not fully supplied as stated on the contract, the consumer can pursue remedies against the creditor if the consumer has already pursued all remedies against the supplier but has failed to obtain satisfaction. In terms of early repayment, the consumer is entitled at any time to discharge fully or partially his or her obligations, by paying only the interest (relative to the repaid part of the loan) accrued to that date.

7 Art. 15 of the latest European Directive on consumer credit states that “Where the goods or services covered by a linked credit agreement are not supplied, or are supplied only in part, or are not in conformity with the contract for the supply thereof, the consumer shall have the right to pursue remedies against the creditor if the consumer has pursued his remedies against the supplier but has failed to obtain satisfaction to which he is entitled according to the law or the contract for the supply of goods or services”


Whilst waiting for approval of the new directive, the national regulatory bodies of many European countries have increasingly focused on this sector and have tightened their consumer protection framework.

Continental European countries are on track with the latest directive, and some have anticipated it. In July 2007, for instance, Italy issued a new consumer credit law, anticipating most of the contents recently discussed by the EU Directive. France is another country with an advanced and restrictive consumer credit regulation: six new laws aiming to enhance consumer protection were issued in the last five years. Nordic countries also have advanced regulation in terms of customer protection. Finland, Denmark and Sweden have already issued regulations compliant with the new European Directive, and Norway is working on its new consumer credit law.

Following this trend – and as a consequence of the increasing pressures from consumer groups and public opinion – Anglo-Saxon countries, traditionally characterised by a less restrictive framework, recently have amended old regulations, aiming to establish a more transparent and more competitive market.

Lastly, European emerging countries are still working on new regulations compliant with the EU directive, and their legislation often has considerable grey areas to be completed. For instance, Turkish regulation provides lenders with a detailed list of information to be included in the contract as well as a comprehensive explanation of consumers’ early repayment rights. The law, on the other hand, does not set any specific requirements on minimum advertisement information or on consumers’ withdrawal rights.

In sum, the trend clearly is toward an overall EU convergence into a more regulated market in which increased transparency will be granted.

Business implications of the new directiveEuropean lenders involved in the consumer credit market are concerned that the new EU directive will over-regulate the market, causing a margin squeeze due to shrinking revenues and rising costs. By focusing only on transparency the directive will be an obstacle to lender’s efficiency, thus limiting potential decrease in prices for customers.


The new directive will have two main effects on revenues. First, lenders will be asked to apply more stringent consumer creditworthiness assessments, potentially leading to a decrease in volumes. Secondly, new transparency requirements likely will enhance competition driven by price.

Lenders also have concerns regarding the increase of administrative costs, since a compliant credit process will require providing the consumer with a growing amount of information, thereby increasing processing needs. To that extent the new directive could result in limiting price decrease for customers given its negative impact on lenders efficiency.

Finally, new operational risks for lenders also will come from the enhanced level of protection guaranteed to the consumer. For example, in the case of linked credit agreements, when the goods or services subject to the agreement are not fully supplied (or are not in conformity with the agreement), the consumer could pursue remedies against the lender if he or she failed to obtain satisfaction from the supplier. This will also impact lenders’ efficiency as these operational risks will impact their economics.

Regulatory scrutiny effects on CPI salesInsurance products often are attached to consumer credit products and sold as a package. The objective is to cover the consumer from adverse events that could prejudice the consumer’s ability to repay the credit (Creditor Protection Insurance – CPI). CPI is a key product for the consumer credit industry given its obvious benefits for customers and positive impact on lenders’ profitability.

Increasing consumer association and regulatory pressure on CPI sales is expected to squeeze lenders’ margins on these products. On the revenue side, the combined effect of negative publicity and the forced use of less proactive sales practices could decrease volumes. Instituting greater transparency in pricing across comparable offers and ensuring that consumers clearly understand the costs versus benefits of CPI also are expected to drive down prices and revenues. On the cost side, lenders will need to increase spending on the governance of the sales process to ensure compliance. This will include rolling out:

Training programmes aimed at developing compliant yet effective �

sales approaches

Incentive systems with concrete goals including satisfaction of �

compliance requirements

Control systems ensuring that the POS sales approach is fair �

towards the consumer


SEPA’s impact on card paymentsUntil the end of 2007, retail payments throughout Europe were processed via different systems, multiplying the number of payment instruments, standards and processing infrastructures required. The local fragmentation of issuing lenders, acquirers, processors and card schemes has increased the costs of paying via card, ultimately hampering the diffusion of card-based products.

The SEPA (Single Euro Payment Area) project aims to unify the many fragmented national payment systems for the three SEPA payment instruments (credit transfers, direct debits and cards) to a common, interoperable system. SEPA countries include the EU member states plus Iceland, Norway, Liechtenstein and Switzerland. Card issuers, acquirers, processors and card schemes will have to adapt to the SEPA principles starting from January 2008. SEPA will coexist with national payment systems until 2010, when the migration will be completed in full.

As a result of SEPA, consumers will be able to use the same card for all payments throughout Europe. Thus, the use of cards versus cash as a preferred payment means is expected to grow considerably. Moreover, a decrement of processing costs is expected due to the fact that acquirers will be able to process all card transactions within a single system, facilitating cross-border competition. The Eurosystem Payments Council, SEPA’s governing body, has already stated that a key SEPA objective is to harmonise card payment costs without penalising those countries with lower rates than others. Merchants consequently are expected to increase acceptance of card payments, as the decrement of processing costs should have a positive impact on merchant passive fees.

Lenders, too, may benefit from SEPA, although the new environment would have contrasting effects on their profits.

In terms of revenues, SEPA’s objective to enhance the diffusion of cards as a means of payment clearly benefits lenders. Furthermore, the unification of the European market from a processing standpoint provides an easier opportunity for lenders to expand their footprint at the pan-European level. Increased competition in formerly protected local markets, however, may offset extra revenues opportunities via downward pricing pressure.

Infrastructure costs for lenders may decrease, as they may be able to negotiate more favourable conditions with service providers. What remains to be seen is how these savings will be distributed among the various players in the card payment value chain – lenders, acquirers, processors, card schemes, merchants and consumers.


IntroductionAs exposed in the previous section, the current environment is significantly more difficult than it was in 2005. European markets will still be experiencing growth, but at a slower pace and in a more skewed way. The combination of price pressure, rising risk and higher cost of funds has resulted in decreasing margins. Moreover, the sub-prime crisis has radically changed the availability of funds, which had always been taken for granted, particularly for players such as mono-liners who had no direct access to a deposit base. Finally, regulatory pressure is resulting in pressure on revenue and margins, as well as increased operating cost.

In our 2005 European Consumer Credit report, we identified key capabilities for each segment of the industry, with particular attention to the marketing/business development side. Though these key capabilities apply today, considering the more challenging environment, there will be a shift from a primary focus on business development to a more balanced and complex strategic agenda that integrates risk management, operational efficiency and innovation around products, channels and target segments.

In this section, we first will review the key capabilities required to succeed in the consumer credit industry, and then will propose a winning strategic agenda for both today and tomorrow.

Key capabilities in consumer creditConsumer credit is a highly contested space, with strong differences among its sub-segments: vehicle financing, point-of-sale financing, direct financing and distribution through banking channels. Each requires specific know-how and capabilities. These are summarised in Figure 14 below, together with cross-segment business foundation capabilities.

Implications for Consumer Credit Players


Figure 14: Key capabilities in consumer credit

Direct financing key capabilities

Decision analytics including optimisation of offers, communication �

and marketing frequency; integrated risk and value decisioning; and decision analytics linked to customer-facing activities

Cross-selling of additional products to tap new sources of profits �

Customer relationship management focused particularly on the �

efficiency of contact management

Vehicle and point-of-sale financing key capabilities

Dealer or merchant acquisition with tailored offerings building on �

innovative business-to-business (B2B) marketing techniques

Dealer or merchant management and support with integrated IT �

systems, permanent training of the dealers’ sales forces or financing of the dealers’ short-term financial needs

Transformation of customers acquired through dealers and merchants �

into direct customers, by leveraging sophisticated customer intelligence techniques and tools

Branch distribution key capabilities

Synergies with a dedicated centre of excellence for consumer credit, �

adequately integrated with the bank’s distribution channels to leverage the best attributes of both worlds

Sales force effectiveness to increase the bank’s ability to sell consumer �

credit products through its own distribution channels

Cross-segment business foundation capabilities

Risk management: underwriting automation, scoring and eligibility �

filters, limit setting, fraud management, collection and recoveries

IT/Operations: process efficiency, IT infrastructure, monitoring and �

reporting tools, flexibility and scalability

Funding: sustainable access to funding; diversification of funding �

sources

Customer analytics, applied to both risk and marketing, continue to be a top priority. The most successful players make extensive use of in-market testing in which each cycle of result analysis provides information about the next innovation cycle. The innovations extend to all aspects of product range and include features such as life cycle, flexibility and limits that can be tracked with sophisticated data-mining tools. In this way, product offerings and communication (messages, channels and frequency) are continuously optimised.

Still, efforts to maximise marketing approaches often adhere to a limited campaign-by-campaign perspective. As a result, the “best” clients receive a disproportionate amount of attention, despite decreasing return yields. Contrary to that, best players have a dynamic view of customers across all campaigns. Over time they optimise marginal returns from each contact across channels and products. These approaches can lead to a significant increase in terms of marketing efficiency.

Against the backdrop of decreasing margins, many successful players have intensified their cross-selling efforts. Players push insurance products that are bundled with their credit products (e.g. purchase protection for credit cards or vehicle insurance combined with financing). However, the most advanced specialists also are quite active on other insurance products. Simple health and provident products often are a significant part of their insurance business since they are easy to sell for a sales force with limited expertise.


In the area of Customer Relationship Management, best-in-class players use customer information to build relationship marketing programmes and event-driven communication. Moreover, these systems also are used to deploy “tiered” service levels, ranging from automated call centres to expert responses, to better serve high-value requests and clients. Thus, resources can be liberated for more effective sales and service activities, thereby increasing productivity.

In vehicle and point-of-sale financing, best players have professionalised their approach to acquiring and retaining merchants. Leading players have established B2B marketing intelligence groups that support the efforts of the sales teams by designing value propositions to each specific merchant segment. High service levels and a tailored approach are provided for key merchants, whilst less strategic partners are served with a standardised approach.

In this sub-sector, it is also essential to offer a seamless IT platform that allows merchants to process a credit request and obtain approval or refusal within minutes. In grey-zone cases, an immediate connection is made to the credit company’s hotline. Accompanying measures include the training of merchant sales forces to explain how the products are sold and processed.

Finally, the ability to transform customers acquired through merchants into direct customers is a key driver of profitability. In a number of European markets, merchants are in a position to impose very tight financial conditions to their consumer credit provider. It is therefore essential for credit players to maximise the return on their partnership investment by optimising the revenues generated by each customer. Best players follow a very systematic and sophisticated approach to target, segment and market their customers acquired via merchants or dealers.

In branch distribution, the most advanced banks establish a centre of excellence to inject consumer credit know-how into their system in the form of decision analytics, product design expertise, high levels of automated underwriting and collection capabilities. Acknowledging the importance of this know-how, many banks have established partnerships with specialists when their size or capabilities did not allow internal development. Specialists on their side have gained an alternative source of revenue and, in the case of Joint Ventures, a powerful channel.

On the front end, the key challenge is to improve branch distribution sales effectiveness. Unlike specialists, banks need to sell a very complex set of products and must serve their clients more


extensively. To improve sales performance, and in particular the ability to cross-sell CPI, best practices are introducing performance incentive schemes and training programmes (often with the help of specialists) to boost their productivity.

Beyond segment-specific key success factors, players need to master three foundation capabilities: risk management, IT/operations and funding. The former two items will be developed in the following section of this report, as they should be at the top of all players’ strategic agenda, particularly given the current environment.

Funding is a pre-requisite, albeit an oft-forgotten one. Until the sub-prime crisis, the rise of securitisation and of ABS products had apparently made funding a non-issue. As the current crisis evolves, access to liquidity has become a crucial factor for business survival. A number of players have faced serious difficulties in recent times because of funding shortages. Likewise, several recent decisions to exit some European consumer credit markets have been made in part due to the need to reallocate scarce capital resources. As illustrated by these recent developments, funding requirements are a necessary condition for the survival and expansion of consumer credit players.

Building a winning strategic agenda

IntroductionAs leading players have already understood, the current environment requires new business initiatives that combine optimisation of foundation requirements and tailored business development capabilities. We have summarised these in three main challenges:

Driving efficiency to the next level �

Responding to worsening credit conditions �

Promoting growth �

Driving efficiency to the next levelIn recent years, the strategic priority clearly was around business development and expansion into new markets and new segments. Though increasing revenue is still on the agenda, efficiency will become the name of the game for a number of players, especially in mature markets.

Efficiency is sought through different levers. At its most basic level, efficiency is achieved by cost reduction efforts that focus on the main operating and marketing expense items. As a starting point,


this entails renewed cost awareness; investments and operating expenses are coming under scrutiny and cost reduction programmes are being launched.

New IT development, above-the-line expenses and new hiring typically are the first items to be cut. The risk in these cost-cutting programmes is rushing into measures that have short-term effectiveness, but negative long-term impact.

To achieve further and more sustainable efficiency gains, best practice players are investing in automating and digitalising their key processes. Organisations adhere to a Straight-Through Processing (STP) model across all channels and groups of clients (i.e. obtaining all applications or information requests in electronic format). In general, customers’ applications should be processed on a non-paper basis with manual intervention levels remaining very low (below 5%).

The front-end data-capturing process is the main focus of this endeavour. Capturing all data directly at the front line – ideally the key is to retrieve the existing customer data automatically from current accounts or other products. Front-end data-capturing models are superior to models that include the transport of paper forms to central processing units. On one side, they are significantly more cost-effective. We observed that the application of STP models generated improvements in cost/income in the order of 10% to 15%. On the other side, STP allows faster servicing, particularly in the underwriting process.

Automation in this sense not only applies to web-based customer application, but also to every transaction through any channel. Examples include:

Direct finance: capture of all web-based information �

Branch distribution: capture of all customer information on �

dedicated terminals with guidance of support staff

Point of sale: capture through web-based applications for strategic �

merchants, whilst providing simple terminals for non-strategic merchants

Best practices go beyond STP and now focus their efforts on creating cross-border operating synergies. Although a number of players have been operating in several European markets for a long time, they once ran each market as an independent unit. The differences in local regulations and cultural attitudes were often invoked as a reason


for maintaining a multi-local model. With the progressive regulatory convergence and worsening market conditions, this philosophy is now increasingly challenged.

The first step in creating cross-border synergies entails implementing effective knowledge-sharing processes between geographies. The usual way of achieving this is to create centralised corporate functions structured around key capabilities (e.g. marketing, risk management, collection). These functions have the role of exchanging best practices, setting policies and supporting geographies in implementing them. Within this function typically reside experts who are in charge of supporting knowledge sharing and suggesting standard approaches to be used as blueprints in local markets.

A more advanced approach involves having these corporate functions in charge of developing tools and processes with a view to implementing them in several markets. This is the concept of centres of excellence, which typically focus on risk and propensity scorecards, monitoring systems, underwriting or recovery processes. Reporting templates for each process are then supported with little variations across most countries to allow for better centralised visibility and control. Key Performance Indicators (KPIs) and Service Level Agreements (SLAs) are common across the whole organisation.

However, building regional platforms is the most effective way to achieve economies of scope and scale in a pan-European environment. A platform is a generic concept and can include a number of different realities; it can refer to an IT system being used across geographies or to an operating unit servicing customers in different markets.

Deciding the level of centralisation of different functions (i.e. global, regional, national) is crucial, as each company might have a different set of core expertise that is relevant to different countries. Moreover, different markets have varying degrees of diversity, thus the geographical footprint is determinant in deciding how to allocate functions. For instance, Nordic markets are quite homogeneous in terms of the availability of high-quality public data; thus a regional platform of risk and marketing functions is an interesting option that is applicable even to small players.

In general, IT systems, risk management, financial management, decisioning analytics and HR policies are candidates for centralisation, whilst sales and marketing tend to stay at a local level.


Responding to worsening credit conditionsIn times of worsening credit conditions, it is essential to ensure optimal effectiveness of risk management. This is generally achieved by working on risk organisation, processes and tools.

Having effective risk organisations is no longer a “nice to have” – it’s a “must have” to ensure the performance of the entire institution. Many consumer credit players have integrated risk into their marketing and commercial operations and are now using this as a core source of competitive advantage. New regulatory requirements, from Basel II in particular, as well as best practices, stipulate a clear separation between risk and front office, right up to senior management. As a consequence, the key organisational imperative is ensuring appropriate independence on the core credit side, whilst allowing sufficient integration in the commercial organisation to deliver the value-adding agenda. Overall, this is an issue where the detailed combination of organisational structure, resources and individuals define what is realistic.

Since consumer credit processes are typically complex (see chart below), there are often gaps in the process that allow bad loans or credit to get through. Good lenders have an effective lending process that trades complexity against controllability, and that is able to adapt as the credit environment deteriorates. This allows the lender to be fast to manage early signs of account deterioration and to move arrears balances quickly into recovery. It also allows the lender to apply more sophisticated approaches in areas such as reactive limit setting and card authorisations.


Figure 15: Example of loan origination process

Failseligibilitycriteria

formonthlyscoring

Newcustomers

Monthlyscoringprocess

Outcomeparameters

Customersystem

Policy rulesset 1

Policy rulesset 2

Policy rulesset 2

Policy rulesset 1

Policy rules1 and

eligibilityrules

Shortsanction

withlimits

Shortsanction

withsuppressed

limits

Shortapplicationfor specific

product

Limitcalculation

for allproducts

Fullsanction

% factorsExposure

caps

Repaymentcapacity

Classification into

segments

Riskscorecards

Policyrules

scorecards

Outcomedriven

adjustments

Calculationof customeraffordability

Credit bases(Cred T/O,

Repayments,Deposits)

Riskscore

Segmentationrules

Scorecardweightings

Data feeds(internalbureau, credit risk

datawarehouse)

Outcomes

2

Decisiontrees

1

Allocationto

scorecards

Output to affordability calculation

Upload customer affordability on customer system for approval/limit setting

Newcustomerscoring

Newcustomerscoring

Existingcustomers

1. Risk scoring/segmentation 2. Affordability calculation 3. Approval/limit setting

App

Acc Ref Dec Acc Ref Dec

App

Calibratetrees

Any policies and procedures will need credit tools for scoring, calculating debt capacity/limit setting and infrastructure to deliver them to the relevant decision point. In best practice organisations, the following observations can be made:

Tools are highly decision supporting, in that they can discriminate �

between “good” and “bad” customers. Performance is monitored regularly, and updates are frequent as the market changes. They also are designed around specific decisions (e.g. new to credit origination, existing customers’ line extensions, collections, bankruptcy etc.)

All information available on the client is used to assess �

creditworthiness, especially across products whenever possible

Tools are easy to use and avoid multiple data entry �

The end-to-end workflow is automated, and decisions are taken �

within minutes


As the credit situation worsens best practices are the first to spot changing conditions through standardised delinquency reports and to react by optimising their underwriting criteria and focusing on collection. In credit downturns, being the first to collect, particularly among over-indebted segments, often makes the difference between being and not being paid. In the current environment, collection is a function that requires special attention.

To this extent the difference between the most experienced players and others can be profound. Rather than consider investment in collection from a simple efficiency/cost perspective, best practices apply a value approach and favour effectiveness over pure efficiency. We typically observed that investment in collection has extremely low cost/benefit ratios ranging from 1/5 to 1/30.

Collection is not considered a simple “practitioner’s game.” Highly powered analytical tools, such as behavioural scores, are integrated to achieve the highest level of performance. The extended usage of statistical analysis drives continuous test-and-learn cycles and produces innovation at all levels, from processes to organisation to performance system. This model of continuous improvement is the distinctive characteristic of the best collection groups, and is the key to reducing credit losses, particularly when vintages have already turned bad.

Promoting growthGrowth is still an imperative for consumer credit. Leading players continue to promote growth because, in a less dynamic market with increased competition, staying still is equal to losing share and profits.

Cognisant of the tougher environment, best practices have adjusted their growth strategies in two ways. Firstly, they have tightened their investment discipline and are evaluating opportunities based on risk-adjusted metrics. Secondly, initiatives with a short payback are prioritised. This will entail a radical change, particularly for new entrants hoping to reap benefits in the long term.

With this framework in mind, growth will be achieved primarily by:

Entering high potential geographies �

Targeting new client segments �

Innovating the product offering �

Optimising distribution channels �


Entering high potential geographiesAs noted previously, emerging markets (such as CEE, Turkey, BRIC countries and the Middle East) are growing rapidly. Showing high margins, they represent an attractive opportunity.

Leading players have long understood this and are now aggressively developing their franchise in “next generation” countries, be it in the Balkans, Asia or Latin America. They pursue this strategy through a mix of acquisitions, partnerships and Greenfield initiatives. As examples of such footprint expansion, we cite the following 2007 initiatives:

Santander Consumer Finance teamed up with SKBergé to form a �

new car finance company in Chile

Cetelem (now BNP Paribas Personal Finance) expanded its �

positioning in Brazil through the acquisition of Banco BGN, the same year they acquired Jet Finance in Bulgaria

Société Générale Consumer Finance launched a Greenfield �

operation in Vietnam under the name Viet Finance

Oliver Wyman believes that these expansion initiatives are bound to multiply in the coming years, as leading players will increasingly try to rebalance their footprint towards high-growth regions. It is worth mentioning that some less internationally developed consumer credit players will pursue the same path since they now consider their chances of leading the game in mature markets to be limited. As an example, Deutsche Bank has been actively developing a credit card business in India for the last few years.

Targeting new client segmentsPlayers should explore underserved but potentially profitable niches, by optimising the ability to segment their customer base and by creating tailored value propositions.

Immigrants represent one of these emerging opportunities. Deutsche Bank, for example, after having analysed the high potential of the Turkish community in Germany, decided to target this specific segment through the launch of Bankamiz in 2007. The new constituted entity employs client advisors with Turkish descent, giving bi-lingual information and communication, and offering a specific product range (e.g. BankamizKonto). BBVA in Spain and HSBC in the UK have been implementing similar strategies for several years, focusing on different immigrant communities.


Together with immigrants, micro- and socio-demographic groups, such as new mothers and newly divorced couples, could represent a client segment characterised by specific needs seldom served by the market. In this field, Rabobank launched its “divorce package” targeting recently divorced couples; the special product offering has been set to avoid customers’ short-term financial shortages. Another example would be BBVA’s €3,000 interest-free cash credit to bridge financial shortages after childbirth.

Innovating the product offeringProduct innovation currently is following two main trends. Players are introducing new bundled products to increase profitability, whilst technological innovations are creating room for new integrated payment solutions.

To boost profitability of traditional consumer credit products, these players are introducing bundled products such as multi-functional cards. Examples include charge (or debit) cards with a pre-approved revolving line, and charge (or debit) cards with a small instalment loan that can be quickly approved via SMS. These products familiarise customers with revolving spending, thus increasing its usage; on the other hand, the opportunity to use instantly pre-approved credit allows capturing of “impulse buying”.

Some players have pushed the concept of bundling even further. Banco Espirito Santo, for instance, developed a structure with a mix of savings and lending solutions, permitting customers to leverage a small initial investment via a personal loan, and start investing through savings accounts and investment funds. With a minimum initial investment by the customer and a single transaction, the bank was able to generate interest margins from both lending and saving.

On the technology side, interest has been polarised by the challenges of new payment systems, such as mobile and touchless, and by the possibility of providing integrated solutions for different functionalities in traditional plastic supports. Exploiting the “OnePulse” technology, for example, Barclays today offers the so-called Oyster Card, integrating London’s famous transportation badge in a classic charge card.

Optimising distribution channelsConsumers are now ready to utilise multiple, and in particular remote, channels. At the same time, players are looking to extend their reach at low cost on the supply side. The challenge is to exploit these trends in a profitable way, optimising emerging distribution channels such as the Internet and intermediaries (e.g. agents and brokers).


Consumers are using the Internet, attracted by its convenience and its price transparency. The challenge is that convenience and price transparency lead to limited margins and higher risks (anonymity could lead towards adverse selection of the clientele). On the other hand, the Internet clearly has grown in importance during the last years. For instance, among the best practices, Sofinco’s website had 7.2 MM visitors in 2007, accounting for 39% of overall direct sales in France, with a 26% year-on-year growth rate in terms of newly generated business.

Since offers through the Internet tend to be plain-vanilla products distributed with low prices and margins, the winners will be those who are able to minimise the disadvantages peculiar to this channel, whilst exploiting its potential upsides through:

Cross-selling new clients acquired through the Internet with �

targeted marketing campaigns, thus obtaining repeat business

Developing tailored and more profitable high-margin products �

Intermediaries traditionally represented a way to increase consumers’ reach, minimising fixed costs and time to market. On the other hand, intermediaries are an expensive distribution channel, due to the high level of commissions and fees, and so present intrinsic disadvantages:

In order to increase their remuneration, intermediaries could be �

tempted to underwrite large volumes, thus lowering credit quality

The reputation of the product provider could be threatened in case �

of scarce professionalism in the sales force

High-profile intermediaries could develop strong control of their �

client portfolio with a consequent dramatic increase in their negotiating power

Winners will need to be able to exploit the intermediaries’ channel, whilst managing its intrinsic risk by:

Selecting the right professionals (many specialists, for instance, hire �

former employees as intermediaries)

Offering training programmes to increase intermediaries’ �

professionalism

Developing incentive systems that strictly align interests of �

intermediaries with those of the credit institution

Monitoring continuously intermediaries’ portfolios in order to �

minimise operational risk and to control credit quality


IntroductionAs discussed in the previous section of this report, the current environment requires a different set of business initiatives from consumer credit players. In parallel, it is fostering the emergence of new business models in the industry.

From big to hugeIn terms of market structures, the European market is highly fragmented. This is true both at the European level and for most countries at the local level. For instance, the top five consumer credit players in the European Union account for 23% of total outstandings, whilst the largest owns only 6% of market share.

At a country level, in all the main markets except for the UK, the top five incumbents account for less than 40% of the total. The UK, given its banking concentration, has a slightly higher percentage of around 52%, which still indicates a fairly fragmented market. The few concentrated markets that do exist are relatively small ones in which the main incumbents are local banks that dominate both retail banking distribution and consumer credit. In this group we have, for example, Ireland, Nordic countries and some CEE countries where early entrants are dominant.

Figure 16: Market share of the top five players in European markets

0%

20%

40%

60%

80%

100%

Cze

ch R

ep.

Fin

lan

d

Den

mar

k

Net

her

lan

ds

UK

Pola

nd

Hu

ng

ary

Swed

en

Spai

n

Fran

ce

Ital

y

EU (

27)

Ger

man

y

% of outstanding volumes

Source: At country-level, 2004 ECB data. The ECB defines the CR5 as the percentage shares of the five largest credit institutions for personal lending, ranked according to assets, in the sum of the assets of all the credit institutions in that particular country. For Europe, the market share is calculated as of 2005 based on major consumer credit companies according to Bankecon data

The Emergence of New Business Models


These figures show a significant potential for consolidation, which leading pan-European players have been trying to exploit since the beginning of the decade by expanding into new geographies and/or trying to reach scale locally.

As a result, in the last five years we have witnessed a strong M&A activity in the European consumer credit industry with close to 100 deals. A majority of the acquisitions have been achieved by a limited number of “serial buyers” with around 10 acquisitions each: Santander Consumer Finance, Crédit Agricole (Sofinco or Finaref), BNP Paribas (Cetelem or Laser) and Société Générale Consumer Finance.

Figure 17: Number of consumer credit M&A deals in Europe since 2001

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006

Number of deals

Source: Oliver Wyman proprietary data

Even though most of these deals were rather small in individual size, their accumulation – combined with successful organic initiatives – has enabled some players to triple their size in five years. We believe that the consolidation trend will accelerate in the coming few years, but will occur through a more limited number of much larger transactions.

On the one hand, fewer and fewer independent local targets are available, and this scarcity is driving valuation multiples to historical highs. On the other hand, the tougher competitive environment will eventually push some significant players out of the market. It was striking to see some European leaders go from the “buy side” to the “sell side” in recent months.


The players who are best positioned to take advantage of these new acquisition opportunities are the other European leaders whose size could grow even faster going forward. To this respect, the recent acquisition by Santander Consumer Finance of the consumer credit activities of RBS in continental Europe (Germany, Netherlands, Belgium and Austria), as well as GE Money’s units in Germany, Finland and Austria, was a case in point.

The combination of market growth and consolidation will result in a dramatic increase in the size of global leaders. We estimate that by 2015 the top 10 global consumer credit players will total more than €3 TN in outstandings. In terms of individual size, they will range from €200 BN to €600 BN.

Managing these vast corporate structures and avoiding falling into diseconomies of scale absolutely will require mastering the capabilities to develop regional platforms and centres of excellence.

From consumer credit to retail lendingLeading European specialists tended to focus solely on unsecured retail lending. This focus gave them unique expertise, capabilities and agility along the consumer credit value chain. As illustrated by recent initiatives, some players now are trying to sell a broader range of retail lending products, starting with mortgages.

At the same time, an important reorganisation is also taking place within major banks.

After a first phase in which they centralised their consumer credit activities by creating captive specialists, some pan-European players have combined their consumer credit units with their mortgage factories.

GE Money has been following this strategy for more than 10 years by acquiring local players with diversified credit portfolios and often maintaining their business mix. For players such as BNP Paribas and Unicredit Group, it is the result of a recent decision to put together their consumer credit and mortgage specialised entities.


Figure 18: Illustration of retail lending convergence

BNP Paribas Personal Finance GE Money Bank

Unicredit Household Finance

Description BNP Paribas Personal �

Finance, set up in May 2007 from the merger combining Cetelem and UCB, is Europe’s leading personal finance operator with presence in more than 30 nations

Stated ambition is �

to compete with GE model

Worldwide provider of �

credit solutions present in 20 European countries (accounting for approximately half of its managed assets)

Serving clients in an �

integrated way

Client view across all –

products

“Partnership attitude” –

in serving broad client needs

Unicredit Group in �

October 2007 merged its consumer finance unit (Unicredit Consumer Finance) with its mortgage factory (Banca per la Casa) in a new “Household Finance” entity

Covering 16 countries in �

Europe

Aiming to become a Tier �

1 player in this space

Strategic rationale

“Credit �

convergence” – exploiting overlap between consumer lending and mortgage offers and expanding personal banking client base

Synergies: 80% �

revenues, 20% costs

Enlarge client base �

through the product offering enrichment and exploitation of the “credit convergence”

Product offering �

including auto, leasing, personal loans, salary loans, debt consolidation, mortgages and a wide range of insurance products

Exploit overlap between �

consumer finance and mortgages

Household Finance �

to become centre of excellence for the whole Group to achieve revenue synergies

The reasons for this convergence of retail lending activities differ by type of player. In most cases, however, the ability to achieve revenue synergies by launching debt consolidation and home equity products is stated as a key factor.

Managing both mortgages and consumer credit clearly allows for greater agility in attacking a segment that lies at the intersection of the two. By the same token, the current situation in Europe is, in the short term, contrary to the conditions that favoured the boom of these products in the US, namely a booming housing market and client sophistication/propensity to revolving.

These products are certainly convenient to launch for new entrants who could quickly gain share and for banks focused on mortgages, for which they constitute higher margin sales. For incumbent specialists, though, they would cannibalise high-margin revolving cards and replace them with lower margin volumes. In sum, home equity and debt consolidation constitute a high potential opportunity that can be more easily addressed through a household finance model. Yet, its success will likely be delayed by current housing and economic conditions.

At this stage, it is difficult to say whether or not retail lending convergence will generalise. We see a scenario where the convergence trend could extend to other asset classes such as SME lending. In the US, Wells Fargo has been very successful attacking the SME segment with a value proposition and business model that leverage typical


capabilities of consumer credit: direct marketing, a streamlined application process and an assessment of creditworthiness via a scoring of the business owner. Some players are already considering testing the potential of such a model in Europe. Yet, some leading industry specialists still consider that consumer credit, excluding residential mortgage, should be their sole area of focus.

Partnership and servicing between banks and specialistsIn describing the consumer credit industry, we often contrast specialists and banks; as noted in our previous report, however, these two types of players have a more complex dynamic than pure competition. Aside from the fact that most specialists have been launched and are owned by banks, many other reasons justify a more complex set of dynamics. As in other sectors, the concept of separating factory and distribution has also proved alluring in consumer credit.

Factories can provide product design and specialised know-how, particularly in risk management, whilst the distribution side can leverage vast customer bases, powerful brands and local reach. If synergies have been initially exploited within the same financial group, the scale of the benefits that this cooperation can bring has favoured the emergence of such models between banks and non-captive specialists.

This model is a win-win proposition for both specialists and banks. Specialists gain a new and diversified revenue stream and can leverage economies of scale, and at the same time banks can ramp up quickly on the learning curve and leverage the expertise of practitioners.

Typically, small and medium banks are more likely to adhere to this model, since their size makes it difficult to develop the necessary expertise in-house. Recently though, we observed banks of larger size deciding to partner with a specialised player. In Germany Dresdner Bank is leveraging the capabilities of Cetelem (now BNP Personal Finance); in the Nordic region Swedbank recently partnered in a JV with Barclaycard to form Entercard; finally, in France La Banque Postale is running a competitive bid to select their future consumer credit partner.

Although the success and the appeal of this model are now evident, it is important to understand who will eventually profit the most. As competition among factories intensified in other industries, the distribution tended to conquer the lion’s share of the profit. We believe that these forms of cooperation constitute a growing channel for specialists, but it is unlikely that they will completely replace current business models.


What’s next?Changes in customers’ culture and attitudes, together with technological improvements, are shaping new frontiers in consumer credit. As Internet-based technologies enable the low-cost development of new payment systems, consumers are becoming more self-reliant and open to new forms of banking, causing the rise of social lending communities. These two phenomena are mutually reinforcing.

Comprising the cornerstone of these new payment systems are the so-called Automated Clearing Houses (ACHs). Originally, the purpose of ACHs was to facilitate recurring payments between well-known parties. During the last 10 years, transactions conducted through ACHs grew at a pace of CAGR ~11%, with the entrance of some of the most relevant new players in the world of payments, such as PayPal. This market penetration was boosted by their intrinsic advantages of reliability and cost, combined with the explosion of peer-to-peer transaction communities such as eBay.

Among these new system operators we found merchants (such as Safeway, Nordstrom, Starbucks), issuers (such as Capital One) and start-ups (such as Revolution Money). Revolution Money, for instance, developed a new proprietary payment system exploiting the clearing house concept. Becoming at the same time card issuer, acquirer and system operator, Revolution Money made it possible to charge extremely competitive merchant fees and to eliminate interchange fees. Although players such as Revolution Money do not constitute an immediate menace to consumer credit incumbents, they could affect the volume of transactions passing through traditional card schemes, thus decreasing the average balance and frequency of product usage. Moreover, such players could (as Revolution Money is already doing) start adding revolving credit lines to their charge cards, and thus become proper competitors for consumer credit players.

On the other hand, the emergence of new payment systems could represent an opportunity to expand revenue pools by accessing a new channel. Although incumbents most likely will not find it convenient to play the role of incubator for new payment schemes, they should closely monitor their evolution. That way, they will be ready to leverage these payment schemes, for instance developing dedicated products in case they succeed.

Issuers recently have started to develop mobile services that can be integrated in both traditional and alternative payment systems. Mobile financial services encompass distinct, but related activities such as mobile banking, in-store mobile payment and peer-to-peer mobile payment.


Mobile banking has been a reality for some time, offering a new interface to provide account information and simple transaction services to bank customers through SMS, WAP and Java technologies for applications.

In-store mobile contactless payment is quite developed in some Asian countries, but still relatively new in the US and Europe. Phones with an embedded Near Field Communication (NFC) chip communicate with a contactless reader to enable payment. In 2006, NTT DoCoMo launched over 10 M phones equipped with NFC chips, and in 2007 around 70,000 POS terminals accepted the DoCoMo system. These services could either exploit an existing payment network (such as MasterCard PayPass) or an ACH-based proprietary system (such as Mocapay, DoCoMo and Mobilpay).

Mobile payment also could be a solution for peer-to-peer purchases. Remittance services mobile payment providers (such as PayPal, LUUP and Smart) are participating in a market of over €150 BN worldwide, with an average fee of 8%. In these systems, a person authorises through his or her mobile a payment to another person which, after authentication, is settled by the ACH; on the other side, a confirmation will be sent to the receiver’s mobile. Fees vary according to the service providers.

In the new paradigm set by mobile payment, telecommunication companies will play a pivotal role, controlling devices, the network of communication and, most importantly, information flows. In a market where information about consumers’ attitudes is key, this would constitute a competitive opportunity that these companies could potentially leverage in the future.

As anticipated, the other important emerging trend is retail disintermediation. Whilst banks are still considered great at keeping money safe and managing payments, consumers dispute their lack of transparency with respect to prices and conditions. The first step of this disintermediation process has been the rise of “information aggregators” such as Moneysupermarket and uSwitch. These companies enabled consumers to quickly compare available information on banking offers, thus inducing a contraction in prices and margins.

Zopa, a social lending community, can be considered as the second and more radical step of this disintermediation process. Not only does Zopa classify people looking to borrow money into risk classes, it also gathers offers at different rates from lenders according to the risk level they are willing to take. Borrowers then pick the most convenient ones. In order to reduce credit risk, Zopa diversifies lending across a


large number of borrowers and, at the end, charges fixed transaction fees to borrowers and annual servicing fees to lenders. Zopa’s low-cost operational model provides the simultaneous offering of competitive returns for lenders and low rates for borrowers.

As of now, it is not clear whether social lending will become a major force in consumer credit; by the same token, over 20 different companies around the world have been launching business models similar to Zopa’s, and have gained good media coverage. Incumbents therefore need to understand these trends and be prepared to position themselves competitively for the future.


Consumer credit is still an attractive area of the European financial services industry, but growth overall is slowing as conditions worsen. Contrary to the conventional wisdom of past years, a decoupling between volume and profit growth is taking place – and new volumes will not necessarily bring profits. Yet, the sector provides a wealth of opportunities as it becomes increasingly polarised by countries, client segments and products. For players able to exploit these skews, consumer credit will still provide high margins and fast growth.

As profit pools continue to “migrate”, Europe will inevitably reduce its global weight in favour of BRIC countries, the Middle East, South East Asia or Turkey. At the same time, European mature markets are losing profit shares to maturing countries (such as Italy and Greece) and emerging ones (such as CEE). Within the same markets, the skew in profitability between products and client segments will widen, fuelled by competitive intensity and regulation.

Winners will have to change their approach from a primary focus on growth to integrating risk management and operational efficiency. Solid funding sources will be a fundamental constraint that influences the ability of players to stay in the game. A renewed focus on optimising underwriting and on collection activities will be necessary elements of the new strategic agenda. On the business development side, the ability to serve new niches, propose innovative products and exploit new distribution channels will be the main driver for success.

Against this background, new business models will emerge. Consolidation will determine a dramatic increase in size of the main players. To exploit economies of scope and to manage increasingly complex structures and diverse markets, these players will need to rethink their organisational model and develop regional platforms and centres of excellence.

Lastly, driven by technological progress and new consumers’ awareness, a new breed of entrants has the potential to change the landscape of consumer credit. The revolution in payment methods and the rise of social lending offer both opportunities and challenges to incumbents, who will need to understand these trends and be ready to position themselves for success.

Conclusion

Authors: Jean Coumaros, Oliver Wyman, [email protected] Luca Zuccoli, Oliver Wyman, [email protected]

Oliver Wyman is the leading management consulting firm, combining deep industry knowledge with specialised expertise in strategy, operations, risk management, organisational transformation, and leadership development. As part of Marsh & McLennan Companies (MMC), Oliver Wyman is also able to draw on experts from our sister companies in the areas of brand and identity management, microeconomics, human capital strategies, insurance, and security.

Santander Consumer Finance is the division of Banco Santander that specializes in consumer finance, with agreements at over 100,000 points of sale, serving over 9.9 million customers in 20 developed and developing markets around the world.

The European financial management and marketing association (Efma) is the leading association of banks, insurance companies and financial institutions throughout Europe. On a non-for-profit basis, Efma promotes innovation and best practices in retail finance by fostering debate and discussion among peers supported by a robust array of information services and numerous opportunities for direct encounters. Efma was formed in 1971 and gathers today more than 2,450 different brands in financial services worldwide, including 80% of the largest European banking groups. www.efma.com

Copyright © 2008 Oliver Wyman Ltd and Santander Consumer Finance and The European Financial Management and Marketing Association (Efma) All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman, Santander Consumer Finance, Efma and Oliver Wyman, Santander Consumer Finance, Efma accepts no liability whatsoever for the actions of third parties in this respect.

The information and opinions in this report were prepared by Oliver Wyman, Santander Consumer Finance, Efma.

This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. Oliver Wyman, Santander Consumer Finance, Efma has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman, Santander Consumer Finance, Efma disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman, Santander Consumer Finance, Efma accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages.

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