The summer beckons as I leave Experian after six great years. But before heading to the beach, I’m reflecting on what I have learned about the mortgage industry. Mortgage distribution is being buffeted by powerful forces with a big prize for the businesses which can ride the waves of disruption. Many of these trends have been playing out for decades, so as with surfing ocean waves, patience and timing are critical.
Wave 1: Consumer convenience – the digital hybrid model
Customers are used to the convenience of digital tools in all areas of their lives. This extends to mortgage advice. However, consumers continue to want the reassurance and human touch of expert advice from real people but preferences vary by demographic and personal choice. The modern advisory business needs to make all the tools available to customers and be able to meet their needs.
Wave 2: Evolving channels to market
Traditionally, customers access advice through estate agents or housebuilders, and these remain important channels. However, customers are now used to gathering information through price comparison sites, and they may have existing relationships with a financial adviser or with their bank. The estate agency business itself is facing disruption from fee-free online agents such as Strike, while Rightmove and Zoopla are reviewing their relationships with traditional agents. Paying for digital leads is a zero-sum game, which has seen digital brokers go to the wall. The winning advice business needs to specialise in serving particular channels or develop a flexible operating model to service and nurture leads from all channels, including managing a growing existing customer base.
Wave 3: Broker market consolidation
Mortgage advisers are typically small firms or self-employed individuals operating through networks, which are in constant competition to offer the best tools and best value to individual brokers. A small number of larger directly authorised firms exist, together with new digital entrants. However, the digital players have struggled to generate leads at an economic cost, and are therefore sub-scale and unprofitable, whereas the larger players have struggled to maintain growth and profitability by offering a fee-free model. A shake-out is underway, with individual advisers moving to find the best place, small firms being snapped up and technology innovators being acquired by traditional players.
Wave 4: Technology and data
The vision of a data-enabled “five-minute mortgage” has been around for decades. The technology to enable this now exists in the form of slick digital consumer journeys, shareable data and application programming interfaces for data transfer. However, lenders are not consistent in their adoption of these technologies, and brokers are still mostly under-invested in technology. The industry hubs – Mortgage Brain, Smartr365, 27Tech and Iress – are positioning themselves to bridge the gaps but some face technology challenges of their own. Industry players need to place some smart bets on which technologies to adopt to avoid falling behind, but also not over-invest in technology which consumers and lenders fail to adopt.
Wave 5: Big bank inertia versus product innovation
The UK mortgage market is dominated by six banks, whose balance sheets give them an advantage in pricing and whose brands and customer bases give them advantages in customer acquisition and retention. However, the brutal truth is that the big guys have an interest in maintaining the status quo, have a low-risk appetite and are organisationally cumbersome. So product innovation is left to smaller fintech businesses, which lack the scale and distribution of the big banks. Companies such as LendInvest, Landbay, Habito, MPowered and Molo are innovating the origination as well as product design, with buy-to-let, lifetime, eco-mortgages and HELOCs at the forefront. But without the brand heft of the big banks, will they cut through to the mainstream consumer?
Wave 6: Government policy and regulation
Government housing policy is stuck in a perennial rut. A real focus on carbon-efficient lending might make a difference. Meanwhile, with the introduction of the new Consumer Duty, the Finance Conduct Authority is looking to increase the focus on consumer outcomes but is also keen to enable innovation to meet digital consumer trends. This drives a degree of regulatory schizophrenia, pushed by the contrary drives towards conservative risk-aversion and a desire to promote innovation. Regulated firms need to skilfully navigate the regulatory environment, demonstrating robust processes, controls and governance while taking advantage of the room to manoeuvre with innovation and managing their relationship with the regulator.
Wave 7: Stagflation
After a record-breaking 15 years of stability (Covid aside) and ultra-low interest rates, the economy now faces a dramatic spike in inflation, coupled with low or no growth. This unpleasant economic predicament will affect all the macro drivers of the market: everything from interest rates to affordability, to property prices, transaction volumes and rental yields. How long it lasts and where the market finds a new level is hard to call. This is too important not to mention, but so far out of the control of individual businesses that navigating the other trends is probably more significant for long-term success than trying to second guess the economy.
There is a great opportunity to ride these waves to create a winning mortgage distribution business. And there’s nothing wrong with focusing on just one wave, but if you don’t keep an eye out for all seven, you might get knocked off your board. Happy surfing.
Phil Rance, former mortgage director at Experian
