The ‘high-cost’ credit sector has reduced by almost £3 billion of lending since 2019, with more than 250 firms exiting the market, according to the FCA. This exodus means there are significantly fewer options available for non-prime consumers who need to access credit. Without this, non-prime consumers are forced to turn to illegal lenders, with more than 3 million adults believed to have used an unlicensed lender or loan shark in the last three years. This is a threefold increase from the FCA’s previous estimate of 300,000 in 2020.
Research shows that currently 16 million people are financially underserved, with around £2 billion of unmet but potentially commercially viable credit need. A well-functioning subprime credit market is vital to meeting this need and presents an opportunity for firms, despite inherent challenges in the market.
Challenges faced by subprime lenders
The rise of buy now pay later (BNPL)
The rapid expansion of the BNPL market has affected demand for subprime lenders, particularly those offering short term, lower-value loans. Many consumers view BNPL as a more accessible and cost-effective alternative, avoiding traditional credit checks and interest charges. However, from July 2026, BNPL providers will be subject to regulation and will be required to carry out affordability and creditworthiness assessments. The FCA also plans to consult on introducing a mandatory requirement for BNPL providers to report to credit reference agencies. This shift is expected to improve consistency and coverage of consumer credit files, giving lenders a clearer view of a borrower’s financial position and helping reduce the risk of consumers taking out credit beyond their means.
Regulatory and compliance
Firms are navigating a complex and evolving regulatory landscape. In March 2025, operational resilience rules came into force, requiring firms to identify key business services, set impact tolerances, and test their ability to operate within those limits during disruption. Meanwhile, the implementation of the Consumer Duty in 2023 introduced a higher bar for good outcomes and fair value to consumers. This can be particularly hard to assess in the subprime market, as research has shown that consumers in this segment often value availability, timeliness and flexibility over price when making their borrowing decisions.
Technology and innovation
Many lenders continue to grapple with ageing IT systems that lack the flexibility and scalability needed to support today’s increasingly digitised lending environment. Integrating alternative data sources to improve credit decisions remains a challenge, while AI and machine learning presents an opportunity to enhance the customer journey and streamline operations. At the same time, firms must contend with the growing threat of financial crime, including increasingly sophisticated fraud and cyberattacks which are harder to detect and mitigate. Meeting these technological demands requires significant investment.
Access to capital
Economic uncertainty and a changing regulatory landscape over the past decade, including remediation exercises for historic lending practices, has deterred some long-term investors in the sector. Funders are increasingly cautious, meaning subprime lenders are often reliant on more expensive capital from hedge funds or private credit, which can put pressure on profitability. In contrast, BNPL firms have been able to attract high levels of investment due to its significant rise in popularity among consumers.
Economic pressures
While inflation remains elevated, it's expected subprime lenders will see increased demand as households look to manage rising living costs and limited access to traditional credit. However, persistent inflation may challenge borrower affordability, increasing the risk of arrears and defaulting customers, particularly among financially vulnerable consumers.
While economic pressures, shifting consumer behaviours, and a changing market landscape may present certain challenges, they also create opportunities for firms that can adapt and innovate.
Supporting financial inclusiveness
The Government is currently developing their National Financial Inclusion Strategy, including the formation of a Financial Inclusion Committee consisting of the FCA, the Money and Pensions Service (MaPS) and stakeholders from the industry. The full strategy is expected to be published by the end of 2025.
Subprime lenders have faced many headwinds over the past few years, however, they play a critical role in the market, supporting financial inclusiveness and helping consumers access the credit they need. It's essential that lenders have a viable and resilient operating model, allowing them to navigate change and fulfil their role in an inclusive, well-functioning consumer credit sector.
For more information, contact Jarred Erceg.
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