Today, The Financial Inclusion Centre publishes a new report into the Rent to Own (RTO) sector. Over 400,000 households, almost exclusively on low incomes and reliant to some degree on benefits, take out expensive credit to spread the cost of purchasing consumer goods from furniture and large household items such as cookers and washing machines to electrical items such as TVs and computers.
The report describes the detriment faced by vulnerable consumers using the sector and makes a number of recommendations to encourage the development of a socially responsible alternative RTO sector.
The sector has proven to be recession proof, more than doubling in size over the last five years since the onset of the economic crisis and is dominated by just three providers – BrightHouse, by far the most well recognised and largest firm, PerfectHome, and non-store based provider Buy As You View. Over the last five years, annual gross profit within the sector has grown by 139% from £127 million to £303 million.
RTO providers can be found on the high streets of our more deprived communities. There are now 373 RTO stores, spread across the country – a figure that has grown by 140% from 155 stores in 2008. According to BrightHouse there is a potential market for 650 stores across the UK.
The typical RTO customer profile is a young female lone parent, living in rented accommodation and almost exclusively from low income households that are wholly or partly reliant on welfare benefits. There are a range of detrimental practices found within the RTO industry, including:
- RTO agreements are expensive and price transparency is poor – with interest rates reaching 99.9% APR and charges for additional cover, the cost of goods can almost triple.
- Customer experience high levels of financial difficulties – with roughly half having some degree of late payment and failing repay.
- High numbers of customers have their goods taken back – with over 10% of customers having their goods repossessed.
- Poor value and often unnecessary bolt-on service cover, warranties and insurances – with at least 85% of BrightHouse customers estimated to purchase such services.
- The market structures make customers exposed to over-charging and poor practices – with few choices consumers are therefore more vulnerable to over-charging and unfair activities.
- RTO is inappropriate for a proportion of customers – with firms found not to be considering user’s financial circumstances.
Such issues have placed the industry firmly under the spotlight of policy makers and the regulator, with the Financial Conduct Authority (FCA) set to outline new rules in 2016 giving greater protection for vulnerable consumers as well as creating a more level playing field for better value alternatives.
In response, over the last few years a number of social businesses have responded by developing alternatives to compete with the RTO retailers. These combine some of the more ‘positive’ characteristics of the RTO model that appeal to consumers but delivered in a way that designs out some of the more harmful aspects. By doing so, these alternatives are able to generate significant cost savings for low income customers and thus help avoid paying a poverty premium for their essential goods.
The report contains a number of case studies of RTO alternatives run locally and nationally that offer differing delivery models.
Delivery model options:
The five case studies demonstrate just how different the delivery models can be and highlight the particular challenges which need to be addressed if the alternative sector is grow. The key issues are:
Credit provision – who will deliver the lending facility.
In-house loan delivery directly by the social RTO firm – This requires the creation of new lending vehicles with effort and time to obtain regulatory permissions and raising of capital finances.
Outsource credit delivery to an existing social lender – Partnering with an existing affordable credit provider (typically a credit union or CDFI) can benefit from its ability to raise capital, its existing lending track record/infrastructure and user’s access to other financial services. Yet, it can be more restrictive, being tied to certain lending criteria, approaches or risk appetites.
No matter who provides the borrowing, three important lessons have emerged:
- The consumer’s selection of the goods and their credit application/decision needs to be seamless, even if it is actually operated by two different entities.
- The loan process needs to be straightforward and decisioning making needs to be made almost immediately through the social lender’s own systems.
- Some degree of automation and access to credit scoring/reference data is important and therefore the selected credit provider will require appropriately developed IT technology.
Lending capital – who provides the capital for lending and who shoulders the lending risk.
If the credit provision is undertaken in-house or via a franchise model, significant capital will need to be secured. Equally, an outsourced credit partner could still require external capital to be raised depending on their available funds and willingness to lend for this type of purpose/product.
Moreover, lending risk could be shared by establishing either ‘ring-fenced’ lending capital or an underwriting agreement to cover potential defaults. This gives greater flexibility to lend to ‘those in the grey area’ who might ordinarily be too risky for the social lender’s traditional credit assessment.
Delivery outlet – how will household goods and lending be promoted and accessed by customers.
Retail shop – for some, creating a high street retail outlet that mimics the look of BrightHouse is seen as essential. The main consideration is the huge start-up and ongoing operational costs and whether it can be financially viable from the income generated primarily from product mark-up.
Online provision – websites enabling product selection and ordering combined with loan application and assessment should be an essential aspect of any RTO alternative. Whether this is the sole route to market or one of many channels is the key consideration with the choice set in the context of the target customer and their ability to access a purely online facility.
Catalogue delivery – a complementary brochure is also very important, particularly with a restricted access model focused on social housing residents. Consideration also needs to be given to a telephone-based facility that enables customers to both apply for credit and place orders.
Product operations – who manages the stock, order delivery and customer relationship.
Developing in-house product operations – this option is particularly challenging as it needs extensive scale and volumes to make it financially viable and significant upfront / ongoing costs.
Outsourcing by partnering with an existing RTO provider – the far easier option would be to piggy backing on an existing RTO alternative and utilising their supply chains – either by working with a formal franchise (e.g. Smarterbuys or Coop Electical) or a particular scheme (e.g. Fair For You). However, this may limit the scope for product tailoring and reduce income generation.
Creating direct arrangements with individual suppliers – either local/regional businesses (e.g. Furniture 4U) or national firms/manufactures (e.g. Fair For You). This enables the selection of certain product lines based on quality and income generation potential and could also be attractive from a local economic development and employment perspective.
Customer base – should it provide open access to all or be restricted to certain users.
Open access – with the need for scale and volume an open access model would appear to provide the greatest scope for financial sustainability.
Restricted access – this model is often found amongst social housing providers delivering a RTO alternative specifically for their residents and is confined primarily from a wish to focus resources only at their own users. Alternatively, this could still be achieved through an open access model but with the ring-fencing of funds for specific groups of users.
By exploring the current crop of social providers offering RTO alternatives, it is clear that there is no single approach that offers the perfect delivery solution. Instead, there are a number of delivery considerations that can developed to best match the specific local circumstances and aspirations. One common feature of all the featured case studies is the need to involve a range of stakeholders. Partnerships are needed to bring together local authorities, social housing providers and other third-sector organisations looking to address this issue.
Ultimately, it is hoped that the research stimulates debate, providing further focus on the rationale for intervention in this market and providing a starting point for anyone considering the various options for which type of RTO alternative offers the most appropriate solution.
Summary Report can be accessed here – Better and Brighter – Responsible RTO Alternatives (Summary 150316)
Full Report can be accessed here – Better and Brighter – Responsible RTO Alternatives (Full Report 150316)