Looking Across The Globe

by External10 Jun 2014
Lisa ClaesTo look into the future of the Australian mortgage market, ING Direct’s Lisa Claes says we should look to innovation in other countries

The Australian mortgage market has undergone massive change in the past decade. Some of it has been driven by circumstances. The GFC altered the lending landscape and rationalised the number of players in the field. Some of it has been driven by regulation. Broker licensing saw the third-party channel shrink in number, while the NCCP has changed way banks and brokers must do business.

But ING Direct’s Lisa Claes says the next wave of market change will be driven by consumers.

“Regulation has driven a lot of consumer trend epochs, but the balance of power is now consumer led. Vertical integration was a regulation-led epoch, but digital is a consumer-led epoch, and hang on for the ride!” she says.

The trend toward digital interaction, Claes says, fulfils consumers’ “insatiable appetite” to use technology, and their desire to be self-directed.

“One of the themes we see is digital and the customer’s insatiable appetite to use it and interact digitally, and related to that is their desire to be – to some extent – self-directed.

“Digital is a wonderful tool that equips the customer to be self-directed. For banks and intermediaries, it’s around using data in a relevant and meaningful way for customers to either embed the relationship further or extend the value chain,” she says.

Banks and brokers have always had access to a wealth of consumer data. But the digital revolution means this data can now be used in meaningful and intelligent ways, Claes says. It’s not just an opportunity for lenders and brokers; it’s what customers expect.

“The good news is customers expect that and reward businesses for using data intelligently. There’s no longer any shyness or reluctance for service providers to use what the customer has given them in a meaningful way to either embed the relationship or extend the value chain,” Claes says.

For a look at how Australian lenders and brokers can harness customer data and the appetite for digital interaction, Claes points to the experience ING Direct has had in other countries.

Claes points to the Spanish lending market as a good example of banks using data wisely. She said banks in that country have harnessed customer data to give borrowers the hands-on experience they crave.

“If you look at what they do in Spain: in Spain they use data they get from the loan – and that’s data as simple as the tenure of the loan, the amount borrowed, the type of loan and repayment rate – and they give customers a personal financial management tool online. They allow them to play with that tool with their own mortgage and see what it would look like if they, say, doubled repayments, or went from fixed to interest only or a bit of both, or if they wanted to pay it off in five years. It’s a very simple thing, but it really endears and cements the relationship,” she says.

But banks can also use customer data to interact in other ways, Claes says. Banks in Spain use customer data to keep track of mortgage milestones.

“They’re also going a bit further and using LVR data to notify the customer of milestones they reach. That creates a digital dialogue. It can be a binary conversation, or just the bank notifying the customer when they reach milestones. Those can be milestones that common sense says would be of interest to the customer, or they can be ones the customer has decided on. These are very simple initiatives but they have had a very significant impact on relationships,” Claes says.
Banking focuses on:
PERSONAL – By providing access to the customer’s history and surfacing it in a way that adds value to the customer, they are solving the customer’s need to feel informed and in control of their mortgage.
TRANSPARENCY – The customer can clearly see their history. They can see where they have made extra repayments and what impact that has had on the final payment date.
EXTENDING THE VALUE CHAIN – They are looking before and after the typical value chain in mortgages to understand and improve the experience for the customer and the impact for the business.

ING Direct’s home country has seen regulatory hurdles for brokers far beyond those brought to bear in Australia. With broker share of the market upwards of 65%, the third-party channel has historically been viewed very favourably in the Netherlands, Claes indicates. But this has not saved the broker channel from regulatory impost.

“What we saw in the Netherlands was triggered by the government trying to hose down the housing market. What they did – and this is a rather blunt instrument – is they legislated to go from a commission-based broker model to fee for service. They didn’t do it because of any distrust or dislike of brokers. They saw it as another lever to slow down appetite for residential property,” Claes says.

But this did not serve as a death knell for brokers. It merely changed the way brokers, banks and borrowers interacted as part of the supply chain, Claes says.

“The commission that was paid by banks is now paid by the customer. That created pricing modularity whereby the customer is still happy to go to brokers and the broker’s market share is still strong, but there’s more allocation of effort in getting a mortgage. They’re divvying up the effort between the bank, the broker and the customer,” she says. Shifting the fee brokers make from the bank onto the customer also means that customers in the Netherlands can now scale the services they expect from a broker.

“What we’re seeing is customers getting a range of services, from execution only – where a customer pays a fee on the low end of the spectrum – to a full range of services like we see in Australia,” Claes says.

And banks that want to support the historically robust broker channel have also shifted their strategy, Claes says.

“What ING did to preserve the origination channels is it charges a fee on its direct channels because it knows the broker has to charge a fee.”

Claes says ING isn’t the only lender that has changed its offering to support the broker channel.

“We’re seeing banks that want to preserve and nurture the broker channel helping the brokers build self-service platforms for the customer. Customers are more likely to go to a broker if they can do some of the process themselves and save some of the fee. By helping brokers build self-service platforms it’s making the work in onboarding customers very modular,” she says.

Though the regulatory burden placed on brokers may have been harsh, Claes says the market has adapted to survive in a new environment.

“Anecdotally, what we’ve heard is that the good have gotten greater and those who were part-time or piecemeal have left the industry.”
Twelve months ago, legislation was passed to move from a commission model for brokers to a fee-for-service structure. 

This caused the broker population to fall from 14,000 to 4,000.

The average commission is 2000 Euros so customers looked for ways to reduce the fee burden by participating more fully in the process.

Brokers continue to diversify their services to compensate for the impact of a reduced revenue stream.

Banks/brokers are working together more closely to accommodate the increasingly omni-channel consumer who transgresses digital/direct/ intermediary channels in one transaction.

Mortgages are very complicated, requiring three full business days of work for any loan from a broker, just for the loan work.

In Germany, Claes says brokers provide a valuable service in an extremely cluttered and complex market. Lenders abound in Germany, with 2,000 banks vying for customer business. But cutting through the clutter is a unique online portal known as DiBa.

“There are 2,000 banks in Germany, and 300-plus are registered on the portal,” Claes says.

This broker portal gives the third party access to aspects of the mortgage process that are often closed to them in Australia.

“Germany remains unique in the market. What it does is it’s almost like it transfers the mechanic shop in the bank onto the portal. It takes part of the internal process within the bank and externalises it onto a platform that is accessible to all brokers,” Claes says.

She says DiBa also allows brokers to tailor-make lending solutions to fit their customers’ needs.

“It has a couple of really snazzy features. You can go in based purely on customer need and put in a tailored solution for a client, and ask for the best deal not only for price but for the best features. You can get it on an anonymous basis so you’re not biased by brand, but you can do it on a brand basis as well,” she says.

Tailoring a solution for clients can even extend to price, Claes indicates. “It allows brokers to modify the customer’s rate by using commission as a lever.”

And because the portal uses customer data, Claes says it shaves time off the process.

“Before the lender makes an offer, the process has facilitated you uploading a lot of detail up front about the customer. They’re almost loan ready, because the bank has everything they need to make a solid credit decision,” she says.

Having access to this customer data has a positive impact on both credit decisions and conversion rates, Claes says.

“The credit decisioning has a 95% accuracy rate, and that has a very positive halo effect on the conversion rate, which is 85%-plus.”

The data being provided by brokers can also smooth the process for any future transactions, Claes says.

“All that information stays there for future use, and you can repackage the customer’s needs to another lender at another stage. It’s that one and done digital concentration of information and pricing modularity,” she says.

“I know they’ve got plans to scale it to other types of products,” Claes says. “The mind boggles at the opportunities.”

Germany has 2,000 banks.

The market is cluttered and complex – brokers provide a valued service.

Service is commission-based.

Prohyp, owned by DiBa, is an electronic broker portal with 300 bank products on the portal. Brokers access electronically uploaded customer requirements and credit profiles.

Broker can request a specific or best offer on an identified or anonymous basis.

The system is intuitive and accuracy is required in order to progress.

Once customer details are uploaded they are stored for all time (whether the application is approved, rejected or aborted).

The customer rate can be customised using commissions as a lever, and this is, for example, 12.5 bps = 1.5% commissions and 32 bps = 2.5% commissions – maximum 3%.

Conversion 95%.

Sophisticated electronic data tracking.

All these markets point to a learning opportunity and a bright future for the Australian mortgage market, Claes suggests. Even with encroaching regulation and changing consumer trends, brokers have adapted and survived in markets around the globe.

“These are very dynamic markets. They’ve had very severe value chain interventions and we’re watching this innovation because brokers have had to survive, and banks have had to help them survive because they rely on them,” Claes says.

Digital trends will ultimately be an incredibly important part of the way banks and brokers do business in the future, Claes says. The access to information allowed by technology means consumers are becoming savvier and expecting more.

“What digital does is it heightens or enables transparency. We’ve seen the popularity of comparison sites and the lengths to which customers will go to do research on any consumable, whether it be financial services or not. Customers now know a lot more about what to expect, and they know a lot more about the correlation between value and effort,” Claes says.

But an informed and knowledgeable consumer is a positive development, Claes says. Any trend that increases consumer knowledge and empowers consumers should be championed, she suggests. Banks and brokers will have to prepare accordingly, as customers will increasingly expect more bang for their buck.

“With an informed customer that has knowledge in this respect, the customer will question or expect a lot more for not only what they’re paying, but for what someone else is paying.”

Claes believes the bank of the future is being shaped by a variety of forces:

• Digitally enabled customer with multiple powerful devices
• High expectations of seamless quality experiences

• Customer needs, not bank products

• Attitude to change is shifting
• Prepared for innovation
• Only 10% of CEOs see their companies as innovation leaders
• 97% of CEOs see innovation as a key priority for growth
• 64% of CEOs see neither innovation nor operational effectiveness as dominant – they are looking to succeed at both!

• Remain fiercely independent
• Full ongoing service offering
• Provide multi-channel service offerings