Future of financial advice mortgage brokers

The primary value proposition of brokers has traditionally been their ability to offer customers a tailored end-to-end experience, typically at no extra cost. Brokers have extensive knowledge of different lenders’ products and can match customers with specific products that are right for them, increasing customers’ likelihood of being approved. More specifically, brokers are attractive to customers because of certain qualities, including the following:

• Independent guidance on the choice of bank. Brokers can offer independent guidance on a wide range of product choices across different lenders that can be tailored to a customer’s specific needs.
• Prescreening. Brokers can discuss the technicalities and likelihood of acceptance of an application, at times working directly with lenders on prescreening.
• Speed and visibility. Brokers can significantly speed up the process by knowing which banks to approach based on a customer’s situation, how to negotiate with banks, what documents are required, and how to get the fastest service.
• Human interaction and convenience. Brokers offer a high-touch, one-to-one service model that banks can’t often match. This personal touch can be especially important during what can be a stressful time for customers.
• Simplicity. Brokers can simplify the lending process for customers by serving as a buffer between the bank and the customer during the bank’s often-complicated application process.
• Follow-up advice. Brokers can offer postloan settlement follow-up advice to ensure that mortgage configurations continue to meet the customer’s needs.

One of the winners in the turbulent mortgage climate has been the mortgage broker. A broker is a financial intermediary that connects borrowers seeking a mortgage with potential lenders. They help customers find the most suitable mortgage and guide borrowers through the complexities of the application process. Some of the biggest mortgage brokers include London & Country and Mortgage Advice Bureau in the United Kingdom, Aussie and Mortgage Choice in Australia, and De Hypotheker and Hypotheek Visie in the Netherlands (see sidebar, “A mortgage broker’s value proposition”).

In many major markets, mortgage brokers originate a surprising portion of home loans: in the Netherlands, for example, brokers originate around 60 percent of all home loans; in Australia, that proportion hovers around 70 percent; and in the United Kingdom, it climbs as high as 75 percent. (Online aggregators, another kind of intermediary, are also playing an increasing role in loan origination by bringing customers transparency and comparison support.)

Incumbent banks are losing ground against these new market forces and face increased risk of their mortgage product becoming commoditised. In response, they’re getting creative with solutions—some cooperative, some competitive. Some have lowered prices to maintain mortgage application volumes, close to the cost of capital in some cases. Still others are offering significant incentives to customers and intermediaries to win business. And some are taking on brokers directly by launching new digital attackers that market directly to customers and bypass the broker market.

What some incumbent banks have missed is the opportunity to partner with mortgage brokers. In contrast, a few banks have created a win–win situation with brokers by improving brokers’ experiences (for example, through cloud-based customer relationship management (CRM) tools), by helping them reduce their costs (for example, by helping them manage parts of their back office) and by using this fast-growing channel to grow faster than the market.

In this article, we’ll look at recent changes in the mortgage markets, the ways that the broker business model has benefited from these changes, and a playbook that banks can adopt to better compete and collaborate with brokers for mutual benefit.

A decade of structural changes

For the past several years, as housing markets boomed, some banks became complacent about their mortgage business. As a result, today their business is shrinking, they’re on the defensive against brokers and others, and as they seek to catch up, they’re not sure which issues matter most. That’s because mortgage origination, in large part, has undergone a significant transformation over the past ten years. Four broad structural trends have had the most impact:

• Digitisation of banking. The digital revolution continues to reshape how banks function. Customer demand for digital origination of mortgages is sometimes twice as high as the supply of digital mortgages. Seventy-two percent of customers now start their loan journey online. Digital mortgage offerings are gaining share in most advanced markets. These changes will continue to erode the competitive advantage of the branch network and lower the barriers to entry for new digital attackers.
• Significant shifts in economics. These new digital attackers typically have access to a wider range of capital sources than banks—namely, venture capital funding—which has allowed them to quickly enter the mortgage market. New entrants also usually have different economics than incumbent banks. Notably, their cost to serve through a fully digital operation can be 80 percent lower than that of traditional banks, which allows them to offer more competitive prices. Additionally, increasingly stringent regulations continue to drive up costs for banks, further compounding the problem.
• Rise of multibank customers. As institutional loyalty fades, customers are increasingly willing to use multiple providers to fulfill their needs. Banks and fintechs have unique selling points; customers are now happy to take the best of what each can do, rather than use just one bank to fulfill all their needs. Customers are also showing a greater propensity to switch between institutions, which has been further enabled in some markets by open banking.
• Change in customer expectations. As experiences improved in other industries, customer expectations of their banks rose significantly as well. In mortgages, customer satisfaction scores are usually considerably lower than for other banking products, mainly because the process takes so long (40 to 60 days in most cases). It’s worth noting that out of the seven reasons customers offer for choosing a mortgage bank, only two are related to price; the rest are related to experience. Finally, customer stickiness is highly correlated with this trend; satisfied customers are about 35 percent more likely to refinance their mortgage with the same bank than dissatisfied customers.

Channel evolution in response to structural changes

These structural changes have opened the door for some big shifts in origination channels. The emergence of digital technology has paved the way for a new breed of lenders that are entering the mortgage market via innovative digital platforms and gaining share from slow-moving incumbents. While big banks are making progress on the digital front, most are still a long way from a fully digital, straight-through mortgage origination. As both start-ups and incumbents race to build digital offerings, mortgage sales through the branch network continue to decline.

Meanwhile, in many markets, these structural changes have helped enable a steady rise in the number of new mortgages facilitated by mortgage brokers (exhibit).