The future of mortgage broking – an insider’s perspective
photo credit: bb_mattToday’s guest post comes from an anonymous senior industry executive (so anonymous, not even we know the true identity!). Due to the controversial views expressed in this guest post, we will be heavily moderating comments, so please do remember our comment rules! Enjoy.
Brokers are threatened by big bank dominance, however should they band together they’ll be in a stronger position to secure the longevity of the industry, writes a senior industry commentator.
With the market in such a state of flux it’s tough to call what next month will bring, let alone six to twelve months in to the future. Nevertheless I think you can draw some pretty firm conclusions on the future shape of our industry based on well founded assumptions about past behaviors.
Let me put my comments into context. I have worked for major banks, non-bank lenders and mortgage managers over many years and I am still heavily involved in the mortgage and mortgage broking industry.
I’ve been on the asset and liability committees of major lenders where they debate mortgage pricing, margins and profitability.
I’ve led the mortgage business for lenders where I have been responsible for the market and financial performance of that product range. I’ve also set the strategy and established the mortgage broker channel for a major non-bank lender.
Although I’ve never actually been a mortgage broker, as you can assume from the above, I’ve got solid industry pedigree. This experience has given me tremendous insights into the workings of our major lenders.
Looking into the future, I feel the following is going to play out and I’d be keen to see whether you have a similar take.
Firstly, I’ve made the very reasonable assumption that the primary goal of all truly commercial organisations is to make as much money as possible in the short-, medium- and longer-term.
For large public companies, like our banks, the share price is the boss - period. Therefore maximising return equity, sustainable profitability and total shareholder return is of paramount importance.
I’m a big admirer of our banks, they are fantastic money making machines, and I’m a shareholder, but let’s not pretend they work for popularity points… it’s basis points they really care about.
I once asked David Murray, at the time the chief executive of the Commonwealth Bank, whether customers, staff or shareholders were the key stakeholders in his business. Of course he give the standard answer about it being a balance between the three, customer and staff satisfaction were critical and this would lead to greater shareholder return etc….blah blah blah!
I didn’t believe him for one minute.
A senior executive at one bank once commented that the ‘perfect’ model for running a bank was to “piss your customers and staff off to the extent they don’t quite leave”.
If you give customers poorer service he reasoned, charge them higher rates and fees, give staff worse working conditions - with lower pay etc - then this would make your profits grow, as long as they don’t leave.
Make no mistake about it; banks are there to ruthlessly make money… and lots of it.
The conclusion: everything banks do can be traced back to making more money in some form (or self aggrandisement) - regardless of whatever PR spin they may apply.
The second major assumption is that the major banks have an oligopoly. This means a great deal of market power concentrated in a few hands.
The Australian banks have this market power, with enormous combined market share in retail lending, deposits, insurance and wealth management, for example.
In the mortgage market in particular, this market power has increased dramatically in recent times. So what will the future hold?
Will banks kill the mortgage broker channel?
Let me say straight out that I believe that the major banks would rather the broker channel did not exist.
Banks have vast fortunes tied up in branch infrastructure and mobile lending teams, as well as other mortgage distribution channels - and they want to maximise the return on this investment.
What is the logic in banks supporting other channels that compete with their own? In the ‘golden days’, you went to the bank to get a loan, and that’s just the way they’d like it to be again.
Whether banks will continue to support the third-party channel depends on three related factors. The first is economic, the second is risk, and the third is customer power.
Brokers offer an easy proposition for banks. They don’t have to employ you, don’t have to train you and don’t have to manage or support you very much. You are a marginal cost: banks largely pay for you only when they use you - i.e. you settle a loan and they pay you a commission.
Under their fixed cost model, banks have to pay for their branches and staff and mobile lenders regardless of business volumes.
It’s a simple economic equation. If, all things being equal, banks can write a loan through mortgage brokers at the same or lower cost than through a branch or mobile lender, then that’s what they’ll do. However if mortgage brokers are more expensive for banks compared to other distribution channels, they won’t use you. Remember, banks just want to make as much money as possible.
But of course, all things aren’t equal.
When it comes to risk, banks are very wary of brokers as they feel they have less control. When I set up the broker channel for a lender, the board was quite paranoid about ‘getting into bed’ with this dodgy mortgage broker crowd. Banks will demand a higher profit from the broker channel to compensate for this perceived higher risk.
Aside from the economic and risk factors, the other major factor determining the banks’ support of the broker channel is customer power. And for the past decade, the customer has had the upper hand.
With a multitude of mortgage products available from international banks, Australian major and regional banks, non-bank lenders, securitised lenders, mortgage managers, sub-prime lenders etc., competition has never been higher and customers have had excellent choice. Brokers offered customers a great value proposition and they needed you to help them though this maze of lenders and products.
With many customers turning to brokers, and many other products available, banks risked missing out on significant market share unless they provided their loans through brokers.
That’s now changed - big time. Banks continue to merge and buy competitors (the new Westpac/RAMS, CBA/BankWest groupings, for example) thereby reducing choice.
Securitised lenders, mortgage managers and sub-prime lenders have all but disappeared and non-bank lenders, foreign banks and regional banks have generally scaled back their lending.
The result: go to a broker these days and sure they’ll still give you a loan. You can have one from CBA, ANZ, NAB or Westpac!
And at the moment customers are pretty happy with that. In uncertain times customers want a quality brand they trust (but still may not like). Why risk ending up with an expensive GE Money loan? As a mortgage customer, if I know there are only four credible suppliers and all their products are basically the same, why do I need a broker?
As a result, customer power (and therefore broker power) has greatly diminished. Today, it’s almost as if you get a loan from a major bank or you just don’t get a loan.
So what does the future hold considering the dominance of the big banks?
It used to be generally acknowledged that there was a significant first mover disadvantage among lenders in reducing broker commissions or exiting that channel altogether. The case is now not so clear. Brokers made a terrific fuss when Westpac first cut their broker commissions but most of you still give them plenty of business today.
So here are my predictions:
I would not be surprised to see one, or all of the major banks, cease using the broker channel altogether, at least in the short- to medium-term. Remember, they have already started this - unless you aggregate through certain groups or submit loans electronically, for example, some major lenders exclude you today.
I would not be surprised to see further broker commission cuts. Why wouldn’t they? They’ll make more money and customers can’t really easily go elsewhere for a loan in the current market.
Commission cuts may not come in the dramatic ‘slash and burn’ fashion of 2008 but if I were a bank I’d first of all muddy the water by making my commission arrangements more complex and less transparent and then gradually dial them down. Sound familiar?
I would not be surprised to see banks starting to offer differential pricing or better value products through their own channels, rather than mortgage brokers. Why not?
I would not be surprised to see banks having less restrictive credit criteria through their own channels, rather than mortgage brokers. Why not?
I would not be surprised to see higher LVRs available through their own channels, rather than mortgage brokers. Again, why not?
Will one bank go it alone down these paths? That’s highly unlikely. But when one moves it highly likely that the others will quickly follow, as they did when they cut broker commissions, moved interest rates or introduced new fees.
What can brokers do?
I honestly believe the power has shifted to the banks and today brokers are largely at their mercy.
But there are a number of things the industry and individual brokers can do.
As a broker, get serious about your business or get out of the industry - it’s as simple as that. If you want to be a successful mortgage broker, be more professional, work harder at getting new business, service your customers better and work your back books harder.
Support other quality lenders and providers at every opportunity. Every loan or other product you submit to a major lender strengthens their hand and weakens yours. So do your utmost to support quality lenders outside the major banks.
Grow your mortgage offering and income with existing customers. If you are not at least offering to protect the mortgage with life insurance, for example, then the bank probably will.
If you are not offering home and contents insurance, the bank probably will. Build your mortgage customer’s loyalty to you, not to the bank you send them to. More products from you will strengthen client loyalty.
Also consider diversification. Some brokers are moving from being mortgage brokers to finance brokers, offering personal loans, commercial loans, leasing, car finance etc.
While a more difficult proposition than adding mortgage add on products such as insurance, it is achievable and can generate good revenue as a result.
There is an argument that mortgage brokers should become financial planners. Personally I don’t buy into that: it’s like dentists wanting to becoming doctors.
Mortgage brokers offer a strong service proposition to consumers; so do financial planners. It’s simply a different service.
For some brokers, consolidation may also be a sound strategy - there is strength in numbers. If you are an independent sole-trader mortgage broker with a small aggregator or franchise group, you are probably in a weaker position than being part of a larger group with a larger aggregator or franchise group.
Lastly, as an industry we need to continue to embrace further regulation and education. It increases your credibility and helps weed out rogue elements.
As I sit here at my keyboard today, I don’t honestly know how the industry will look come six to twelve months time. However I know the banks pretty well, I observe what’s going on in the market today and I fear the future will be as I’ve suggested above - but it does not need to be the reality.
Make no bones about it; it’s going to get tougher being a mortgage broker. But it’s survivable.
There is nothing more that the banks want to see than the borrower paying for the broker to do what they currently do for the bank and the borrower as this would mean that the banks get what they want without paying for it - the introduction of customers and the completed outsourced lending tasks handed to them on a fee free platter - this is another good strategy to reduce costs and boost profits - and there will be no need for clawback as they will not be paying anything to the broker in the first place.
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Michael July 2, 2009
I share most of your forecasts but have little fear of the future. Smaller banks like ING offer better service and better rates than the big four, so I never use the big four unless I have to. With ING i never have to worry about channel conflict, them stealing loans or refinance. Their retention team is second to none and are protecting my ongoing commissions, no wonder they have a loan life double the big 4’s.
I have been saying ad nausium for years, if you are a broker and dealing exclusively withy the big four - get out of the industry, you are doing us all a diservice.