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Alternative lending continuing to rise in UK

Mar 02, 2013 Sean Albert

Banks, credit unions and other financial institutions are increasingly rejecting loan requests from United Kingdom citizens, but that doesn't mean residents have gone completely underserved

The short term lending gap has paved the way for the growth of alternative credit, such as prepaid cards, which are far easier to obtain and typically include several economic advantages. 

"Having been down 2 percent through the first half of the year, customer numbers ended the year at parity thanks to improvements to the pre-paid card product, TV advertising and a number of other growth initiatives," said Peter Crook, chief executive of a U.K. alternative lending company that saw its profits jump 12 percent year-over-year in 2012. 

Short term lending declined dramatically in the U.K. for businesses and consumers alike, according to a recent study by the British Bankers Association. On the consumer side, new credit card spending saw a £100 million year-over-year decrease in January, down to £7.2 billion total, while borrowing and overdraft loans dipped another £200 million. 

To compound the issue, the Bank of England's Funding for Lending Scheme has been largely unsuccessful. 

Alternative lenders to the rescue
Most alternative lenders use Payment Reporting Builds Credit (PRBC) scoring methods, which use data like phone and utility bills to determine whether a person is a quality candidate for funding. This has made credit more readily available for at least two groups of people in the United Kingdom:

Subprime borrowers: Through PRBC measurements, many people at or right below the subprime credit level have secured finances.

Underserved consumers: Some members of this category include recent college graduates, who simply haven't had the opportunity to build credit. 

While financial services are lending less, the need for loans and credit cards hasn't disappeared - after all, people must still pay bills, buy cars and repay loans. 

"People see value in having a credit card," Crook said. "They need one to buy a ticket on a low cost airline or buy something from Amazon. ... A lot of our regular customers are savvy about managing their finances and we are seeing a subdued demand for credit."

As with Americans, the lack of lending has paved the way for alternative credit use among Britons. Prepaid cards are probably the most common form of alternative funding, as they are a relatively easy way to secure money for the short term. Meanwhile, for consumers seeking larger loans - such as people trying to buy a car or house - alternative short term lending can be extremely helpful.