Commission hikes show banks more reliant on brokers, analyst says

by Julia Corderoy05 Sep 2014
With the low cash rate easing the cost of funds for banks, coupled with the intense competition in the mortgage market, lenders are passing on their “tailwind” savings to brokers by increasing commission incentives.

The latest J.P. Morgan Australian Mortgage Industry Report points out that the banks are increasingly looking to increase upfront and trail commissions to attract greater market share. 

Martin North, principal of Digital Finance Analytics – who collaborated with J.P. Morgan to produce the report – told Australian Broker that lenders were choosing to pass more of their “tailwind” onto brokers rather than to consumers with out-of-cycle rate cuts.

“The banks have become more reliant on brokers as an essential pipeline for new business. The banks are very keen to grow their lending book, and credit growth is growing much more slowly than house price growth which is fostering a very competitive environment. 

“The banks believe that the using the mortgage broker channel is a critical element within their strategic approach to growing their market share. This is driven by the fact that consumers value the advice of brokers. 

“In consumer surveys conducted by DFA, it shows that brokers are much more regarded by consumers than banks.  Consumers value the broader canvas that a broker can tap into. They value the more independent view of the brokers, as opposed than going directly through a branch. There is also high level of confidence that brokers will give reliable advice and negotiate a better deal.”

Even though cost plays big part for a consumer looking for a home loan, it isn’t the only thing they care about. This has also contributed to the banks passing more of their cost of fund savings onto brokers, according to North.

“For many consumers, it is not purely price. It is price, plus convenience, plus choice. It is also about getting the right deal, not just the cheapest deal.”

North also pointed out that from an economic perspective it makes sense for banks to want to invest in their third party channel.

“It is often cheaper for banks to write a loan via a broker, compared with the internal first party channel of the branch. 

“The branch network has a lot of overhead costs that flow into the branch. With the current costs bases banks have versus the commissions that are being paid, it is slightly more cost effective for a bank to write a third party loan,” he said.

 

COMMENTS

  • by hellsbells 5/09/2014 9:14:29 AM

    and dont forget that the huge savings the banks are making as our grandfathered books dwindle away. Remember the dire straits the banks were in during the GFC and the justification for why they had to drop the commission rates....

    now if that wasn't collusion I don't know what is.... where was the ACCC on this point

  • by Ed Ridge 5/09/2014 9:16:18 AM

    Now if we can just get our aggregators and industry bodies to realise the tide has turned and NOW is the time to address clawbacks, conflict with branches etc. Why do you think the MFAA is now letting brokers onto the board, because the current directors are not up to the next step in our evolution, lets see if any brokers are to the challenge.

  • by Clarke Kent 5/09/2014 9:16:48 AM

    No salaries, no bonus, no sick leave, no super, no holidays, no leave loading.

    Why wouldn't Banks' want to pay more, we are cheap labour and only get paid on successful outcomes!