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Meet the sub-prime lender that has just cracked the FTSE 100

Provident Financial (Other OTC: FPLPFnews) has built a £5bn business on lending where the banks won’t

When Provident Financial vaulted into the FTSE 100 earlier this month it
joined the ranks of Britain’s biggest public companies at the same time that
Wm Morrison, one of its closest neighbours, was demoted.

Provident and Morrisons, the ailing supermarket whose headquarters are within
walking distance of Provident’s offices in Bradford, share plenty of
history. The firms were founded within 19 years of each other and built
their business around the household finances of Victorian Yorkshire, with
one selling eggs and the other offering doorstep loans.

But where Morrisons has been slow to react to the exodus of consumers to the
internet, losing
the retailer valuable market share , Provident has flourished with an
array of online loans and credit cards.

For Peter Crook, chief executive of Provident since 2007, overtaking Morrisons
is less of a triumph, more an unwelcome decline for one of Yorkshire’s
biggest employers.

“Sadly for Bradford it’s one up one down in this reset. The city’s struggling
to try and improve its position,” said Crook, who sits on a regeneration
board in the city. “But it’s tough; Bradford hasn’t had the investment that
some of the northern cities like Leeds and Manchester have had. It’d be nice
to see it revitalised in due course.”

Crook, a burly Lancastrian who lives in rural Northamptonshire, has found
himself spending increasing amounts of time in London. He has a corner
office in the upper floors of the new Walkie Talkie skyscraper, where
Provident’s biggest business, the Vanquis credit card, is based.

Crook has a small telescope set up on his desk to enjoy the office’s
near-panoramic views of London. It (Other OTC: ITGLnews) ‘s positioned to read the messages on the
BT Tower three miles to the west, although on a clear day he can see as far
as the Heathrow runways.

More importantly, the base in the City grants him easy access to financial
regulators, shareholders and potential business partners.

“Unlike many [consumer] businesses, the vast majority of our stakeholders
other than customers have never used our services. So you do need to invest
some time in making sure that stakeholders understand some of the issues,
what customers want and how you serve them responsibly.

“I’ve come across one or two that have [used our loans],” he added. “Not going
to name any names.”

The
Bank of England has flagged that household borrowing is rising at its
fastest pace in almost a decade, leaving some families vulnerable to the
anticipated rise in interest rates. Provident, whose loan book grew 16pc to
£1.8bn in the year to June, sees plenty of room to grow further among
customers who would struggle to access credit from the high street banks.

Crook has a clear picture of what economic shifts will be felt in the pockets
of his customers. He’s not nervous about the Bank raising interest rates,
for example, because almost none of his borrowers have mortgages.

“With (Other OTC: WWTHnews) the credit card you’re getting daily feedback from the customers, you
see whether they’re spending more or less and the types of things they’re
spending on, whether it’s on or offline,” he said.

“They are feeling reasonably good. They’re not seeing pressure on day to day
living costs, and the living wage when that lands will help some of our
customers, albeit most of our customers are on average incomes rather than
low incomes.”

As Provident’s customers start to see an improvement in their finances, the
firm is also creating more full-time posts, at the expense of its army of
part-time and casual team of household lenders, who carry out home visits
and decide who in their neighbourhood can afford a loan.

With increasing scrutiny from the Financial Conduct Authority (FCA) about
staff training, and a rush towards online and credit card debt instead of
doorstep loans, “we concluded that it’s more effective to have a smaller
number of people working for us for most of the week or all of the week”,
said Crook.

“I think there is a good ongoing business there but it’s a stable business
rather than one with a lot of growth… Go back ten years and you’d see people
with steadier jobs borrowing money from Provident, teachers, nurses, local
government workers.

“It’s really the growth in the internet, the all pervasive access to the
internet that’s opened up for some customers other options.”

The company has customer satisfaction scores “that most banks would die for”,
in spite of 30pc of customer accounts running in arrears. Provident was the
subject of 114 new cases with the Financial Ombudsman in the first six
months of the year while Vanquis received 344. This compares to 361
complaints levelled at Wonga, the online payday lender that last year was
lending about as much as Provident.

“Generally when a customer does get into arrears with us it’s because a
life-changing event has happened: they’ve lost their job or they’ve been ill
and unable to work, or maybe got divorced,” said Crook. “We work with our
customers to try and get over those. The FCA expects all lenders to show
forbearance and I think we have particular expertise in trying to get
customers back on track.

“With customer satisfaction levels, it starts with the fact that we’re there
for them when they’ve been excluded by everyone else. It’s hard to live a
modern life without a credit card, it’s hard to travel, it’s certainly hard
to lead a digital life.

“We are manufacturing something that people really really want and everybody
else won’t give it to them, because they’re not set up to underwrite and
manage and ultimately collect back on these sorts of customers.”

He believes the banks will continue to shy away from lending to customers with
impaired or thin credit histories, saying that based on his time at
Barclaycard, the high street lenders simply do not have the right technology
or risk appetite to provide these loans.

“The other thing is the banks have brand and reputational issues with charging
the rates they needed to price the risk properly. We’re a specialist lender
and think we’re paying a fair price for the risks we take but if you’re
running a large high street bank franchise you have all those other
considerations.”

Nor does Crook see a big threat coming from the remaining payday lenders that
make it through the FCA’s arduous authorisation process, seeing instead “an
opportunity for other online businesses with perhaps more customer friendly
propositions like Satsuma”.

Provident has been investing in its new online loan that is repaid in
segments, which it hopes will avoid the problems with affordability that
come with asking customers to repay the whole loan on payday. The site had
£11m-worth of loans by June, thanks in part to a TV campaign featuring a
crooning orange.

“We’ve not tried to make any landgrab here; there’s no prizes for getting it
wrong,” said Crook.

Competition closer to home is coming from Non-Standard Finance,
a new venture floated this year with John van Kuffeler, former Provident
chairman, at the helm.

“John’s got a lot of experience around the space and it’s interesting that
he’s got backing from some of Provident’s largest shareholders who obviously
recognise the opportunity in the non-standard arena,” said Crook, referring
to the two firms’ shared investor in Neil Woodford, the former Invesco (NYSE: IVZnews) fund
manager.

But isn’t he concerned that his former colleague might eat Provident’s lunch?
“Look, we’re a FTSE 100 company with a market cap of £5.3bn so, you know.
John’s raised £100m so far and he’s got a bit more in the pipeline, but I
think we’re in slightly different space.”

Besides, Provident has got its own expansion to worry about. The firm acquired
the car financing business Moneybarn a year ago , returning to a form of
secured lending that Provident exited in 2005 when it shuttered Yes Car
Credit. Ideas on the table include loans for those looking to buy a car to
join the taxi business Uber.

“If you look more broadly, it’s fair to say there’s still a large undersupply
of credit to the non-standard consumer in terms of being able to borrow
thousands of pounds, spreading the cost of that loan over several years. If
you went back to pre-crisis there were probably £10bn to £12bn of annual
lending being done to this audience; today there’s very little.”

There are also plans to leverage Provident’s close ties to its customers in
the case of home lending the firm is right there in the living room, while
Vanquis is building loyalty fast such as by cross-selling insurance.

Crook also thought about starting a simplified bank account for those who
wanted extra help to manage their money, but has pulled back after realising
that the Competition & Markets Authority’s recent report on bank accounts
was unlikely to bust apart the high street firms’ dominant position.

Provident is also having to grin and bear George Osborne’s new
bank surcharge , which from January will tax profits above £25m generated
by firms holding a banking licence including Vanquis.

“All I can say is that I’m not sure that this tax will be there forever, it’s
perhaps a feature of where we are now. If we get to the end of this
parliament and the deficit’s been paid down then the Chancellor’s got some
room to manoeuvre then there may be something that gets changed,” said Crook.

“There are a lot of advantages in being a bank, like deposit funding, but we
don’t need to be a bank. So if the world became too difficult to banks, then
we could run a different business format.”

Before then, Crook has no intention of slowing down growth in Vanquis, which
had its busiest ever day on Black Friday as shoppers used its cards online.

Meanwhile, he’s busy darting between Provident’s various UK offices and trying
to catch up on his reading ahead of the Bradford literature festival, where
he’s on a judging panel.

Crook will also be back on the investor circuit soon to explain the company to
blue-chip institutions who until the firm’s entry to the FTSE 100 had never
even heard of doorstep lending.

“Some of them think it’s something to do with mortgages,” he said. “But we
plan to see some fresh faces on our next trip. It’ll be interesting to see
what the interest’s like.”

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