Autralian Broker TV sits down with industry heavyweight JOHN FLAVELL of NAB to hear what he has to say on banks and their evolving relationship with brokers.
Q: You say banks aren’t trying to squeeze brokers out. Why are brokers important to banks?
John Flavell, NAB
John Flavell: At the end of the day, if you look at the preferences that consumers have in terms of how and where they access financial services. It’s irrefutable that the broking channel has just continued to grow and grow. Now there is conjecture whether it represents 42% of the market at the moment or 45 I am not sure. But our expectation is that it will only continue to grow. So any lender that cut themselves off from or didn’t engage fully with such a vital part of the market would just be, as I said they would just be isolating themselves from such a large customer base.
Q: Brokers’ business with banks is increasing. Will that trend continue?
John Flavell: If a broker can have had a relationship with a customer over an extended period of time and they can consistently review that customer’s requirements and then deliver a range of financial services to them at any given point in time, based on their changing needs, then why would there be any reason for a consumer to break that relationship and go anywhere else. And that’s something that we are very definite about and that’s why we continue to invest in the channels we have.
Q: Let’s talk about the quality of broker business. What are you seeing?
John Flavell: The quality of the applications that are being submitted there is no difference between the proprietary channel and the broker channel. And I think that that’s a real feather in the cap for brokers, because they have got numerous lenders policies and processes to understand whereas bank lenders have only got the one, so that’s the first indicator. The other thing is the actual arrears performance, so the data that they provide you there is an industry set of data and the difference between 1665 basis points 90 days past due for proprietary and 65 to 70 for brokers, once again the difference is miniscule.
Q: What about the profitability of the broker channel? Is return on equity solid?
John Flavell: From a lending institution’s perspective, their now focus is on the return that we can provide, you know the equity that we allocate to a business and it’s a numerator and a denominator discussion. So as far as the denominator is concerned the equity base, the quality of the business that we are generating through the broker channel, means that the amount of equity that we have to hold consistently comes down, which is a positive story in terms of return on equity. Now there is the numerator piece which is actually managing the margins and actually managing the expenses as well.
Q: How will commissions be impacted?
John Flavell: There is no doubt about it, the greatest expense associated with putting a loan on the book is the upfront commission, the origination fees. And you are right those are over a 5 year period of time. So as we extend the loan terms, then we have got more margins left to make available to brokers, which means we can increase our trail and that means that we are not actually just increasing the profitability of a broker’s business as time progresses, we are actually increasing the worth of the asset as well because in part brokers businesses are measured in multiples of those recurring income streams, so it makes a very positive contribution to the worth of the asset as well.
Q: How can brokers expand to different products? What is NAB doing to encourage diversification?
John Flavell: The mortgage in isolation is fine, but a mortgage when you have got it linked to maybe credit cards, transaction accounts, general insurance, debt protection insurance, those sorts of things, moves from just being a product to actually a set of financial solutions. So working with brokers to bundle up solutions that make sure that we’ve got market leading transaction accounts, market leading credit cards and then enabling brokers to have discussions with their customers about accessing a broader range of those financial services is where we are focused.
Q: The online market seems to be growing. Do you think that will threaten brokers’ business?
John Flavell: I think that realistically if you look at the mortgages by their very nature are complex transactions. They are, there is a lot of variables associated with them. If you are looking at online mortgages, then typically what you are doing is, you are asking customers to fulfil some of the tasks associated with the origination process and if you are asking a customer to do that, then if you are prepared to give away some of your margin in terms of a discount on the interest rate then you get some flow. So the question that I would have is how many customers or how many potential consumers are there out there that have got the ability, the skills, the time and even the expertise to do that fulfilment piece themselves. That is a part of the market and as a major lender we would be crazy to not have a presence in that space, but I think from a broker perspective, sure there will be new competitors and there will be new channels that open up all the while. The brokers are in a unique position where they can sit down, they can understand a consumer’s needs and they can basically guide them through that whole fulfilment process and so there will be new channels, there will be new competition, but brokers are well positioned to go out and compete.