Making a Market: The UK Retail Financial Services Industry and the Rise of the Complex Sub-Prime Credit Market

Abstract

Except as a technical topic within finance or economics, credit is a much-neglected topic in the social sciences. This paper is concerned with a particular growth and development in the field of credit that appears to have intensified over the last couple of decades. Since the introduction of credit scoring, large sections of the population have been deprived of borrowing money from the mainstream institutions and this has led to the growth and differentiation of the sub-prime market. One part of this market concentrates on consumers with comparatively low incomes and offers loans of limited denominations and collects the repayments door-to-door on a weekly basis. This is called the traditional sub-prime market for credit. Here, interest rates are much higher than in the mainstream market, largely to cover the costs of household collections but also to insure against default. A second part of the market is what is termed the complex subprime market, where customers are categorized as ‘non-standard’ because of their financial history, which may or may not include earning very low incomes. The distinction between these two markets coincides with that between the ‘old’ and the ‘new’ economy. The complex sub-prime market largely distributes its service electronically through the Internet and telephone call centres, whereas the traditional sub-prime market is dependent upon a face-to-face delivery system. In place of a standard pricing system, the complex sub-prime companies operate a risk pricing strategy related to the customer's repayment history. The paper examines these two sub-prime markets from the point of view of their evolution, their importance to customers, and issues of education and regulation.