Financial institutions M&A: Consumer credit | White & Case LLP International Law Firm, Global Law Practice
Financial institutions M&A: Consumer credit

Financial institutions M&A: Consumer credit

With many larger banks focusing on corporate lending, consumers are turning to alternative finance sources, potentially heralding a new era of inorganic growth for specialty finance businesses

Consumer credit markets differ substantially across Europe. This section focuses on the UK given significant levels of M&A driven by regulatory change and the resulting investor behaviour.

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Credit cards

Payday lenders

Specialty finance/marketplace lending

   

Credit cards

Current market

  • Flat

We are seeing

  • Strategic M&A deals and financial sponsor interest

Key drivers

  • Excluding megadeals, broadly, M&A levels have been adversely impacted by financial sponsor focus on more lucrative NPL investment returns
  • Credit cards have a higher risk profile under the Consumer Rights Act 2015, and banks seek to dispose of non-core high-risk profile business units and move to distribution/white- labelling models
  • Banks seeking to limit exposures to liability for mis-selling of PPI

Trends to watch

  • Interest in consumer credit portfolios from trade consolidators and private equity

Our M&A forecast

M&A activity levels to remain relatively steady

   
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Payday lenders

Current market

  • Flat

We are seeing

  • Strategic M&A deals

Key drivers

  • Reduced profitability, following the FCA's imposition of price caps on high-cost short-term credit with effect from 2 January 2016
  • Increased operation costs, following the FCA's regulation of consumer credit firms with effect from 1 April 2014
  • Increased operating/regulatory risks
  • Increased litigation risks, following on from enhanced consumer protection rights under the Consumer Rights Act 2015

Trends to watch

  • 'Thinning of the herd'

Our M&A forecast

An increase in M&A activity driven by market participants upscaling to meet increasing operating costs and lower profit margins, and diversifying their product/service offering

   
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Specialty finance / marketplace lending

Current market

  • Upward

We are seeing

  • Strategic M&A deals and financial sponsor interest

Key drivers

  • Success of marketplace lending securitisation, which has increased availability of capital and financial sponsor interest in providers
  • Material successes in recent fund raisings mean larger players have well-stocked M&A war chests
  • More partnerships, as established banks actively seek access to new customer bases. Established banks' confidence seem to have recovered, although they are now more focused on adequate diligence before entering into joint ventures

Trends to watch

  • Increased consolidation activity
  • Growth of new and established lenders driven by government support for responsible alternative finance for SMEs
  • As Brexit looms, specialty finance providers have perhaps found their niche as providers of alternative finance for SMEs and short-term finance for consumers, while High Street banks focus more on high-value commercial lending
  • M&A activity has been dampened by heightened regulatory investigation/enforcement action and consumer litigation risk. Are poor internal systems and controls systemic across internet-based consumer lending platforms?

Our M&A forecast

An increase in M&A activity from market participants which have enjoyed first-mover advantage, but that increase may take a while. Market participants are likely to focus on their own product/service offerings and distribution models, and reorient themselves to comply with expected p-2-p lending regulations, in the short term

   
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Publicly reported examples


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