Mark Vilo: how mortgage brokers have shifted the goal posts

Suncorp’s head of bank intermediaries on the rise of the third party channel and what comes next

We live in a dynamic and competitive financial environment. Housing prices, while more subdued in recent months, continue to climb, particularly in Sydney and Melbourne and buyers are still happy to compete in this incredibly vibrant market. Even with the recent rate rises targeting investors, the price of mortgage finance remains very low.

So why are the ‘big four’ banks losing market share?1 Could it be that bigger doesn’t always mean better?

The fact is that more and more Australians are turning to the smaller, non-major banks for mortgage finance through their brokers. Data from the biggest players in the business, Australian Finance Group (AFG), demonstrates a continuing shift away from the big banks towards smaller lenders as customers continue to look for the best deal. And the best deal isn’t always about chasing rates.

Right now, non-major banks account for more than 30% of all loans across the industry. This is the third consecutive year in which non-major banks and other lenders have taken market share from the big four.
So why is this happening?

A number of market forces are driving this phenomenon.  First, the customer is now well and truly ‘in the driver’s seat’. We have all heard the statement that customers are now better informed and savvy when it comes to purchasing. It has almost become a cliché because it’s so true.

Customers are increasingly following the new methodology of researching online and working with their social networks to gain further input into their decision-making. In fact, a recent survey by KPMG showed that 77% of consumers go online to research a home loan, however, only one-third will apply online. As we know, the decision to buy a home or refinance requires a fair bit of work, so while customers may research online, they are turning to an expert to help guide them to the final purchase decision. 

Secondly, inflation is now at the lowest level since 1999 and with wage growth stagnating, consumers are aggressively looking for better deals. They are doing this more frequently and seeking advice on how to structure their home loan to best manage their cash flow. 

Thirdly, over the last ten years, mortgage brokers have played a pivotal role in expanding the options in the lending market and offering choices to every day Australians. The recent ASIC Review of Mortgage Broker Remuneration showed brokers arranged 54.3% of loans in 2015 –  up by more than 10% compared to 2012 – further illustrating the important service they provide. 

Is mortgage broking the first wave of disruption?

The advent of the mortgage broker has not only helped give the customer greater choice, but has opened the market for the non-major banks and other lenders. This was previously nearly impossible to penetrate due to the power of the big 4 banks. In fact, the mortgage broker and aggregator cohort could be thought of as the first wave of disruption in the lending industry.

Mortgage brokers have changed the game for customers and helped the non-majors gain traction on the big 4 banks’ traditional position of strength. Of course, rate always plays its part but it cannot stand alone. Management of the lender/broker relationship, streamlined processes, credit appetite, customer service and product flexibility are all required for a compelling proposition. Performance in these key areas by the non-majors can provide an edge over their big bank bedfellows and help brokers help their customers make the best choices. 

Some analysts also comment that the playing field is going some way to being levelled. The recent levy on big banks has helped this, however within weeks, Standard & Poor’s downgrade of 25 small and mid-tier lenders due to household debt, and fears of a housing price correction, seemed to counteract this. Fortunately, Suncorp Bank’s rating remained unchanged, but such dynamic change should act as a warning on sustainability for the industry as a whole. 

What the non-majors aim to do is change the conversation. As APRA applies regulatory changes for investor lending, the boom in refinancing continues with ever-increasing competition in the sector. This is playing into the hands of the smaller banks who are seemingly more agile in adapting their policies and measures. In turn, it is creating an interesting narrative on the challenge around churn – but perhaps I’ll save that conversation for another time.

Staying ahead of the game is an ongoing challenge and non-majors will need to keep offering a real and meaningful competitive edge. We can’t take it for granted that the smaller guys will continue to beat the odds and succeed in the most competitive of environments – even against the biggest players in town.

And while the game today is evolving, the next frontier is on our doorstep. 

Innovation is coming to the lending industry. The next wave may soon be here with a recent APRA discussion paper proposing the introduction of new restricted authorised deposit taking institutions (ADIs) with a minimum of just $3million start-up capital. We’ve already seen new entrants including Moula, Lendi and LoanDolphin and this second wave of disruption could open up a whole new world.

Those brokers who embrace the technology wave and look for ways to integrate it into their own businesses will be capable of succeeding in the robust industry of the future.

1We acknowledge that the current AFG Competition Index shows a marginal decline in the non-major lender market share of all mortgages for September 2016. However, analysis of AFG figures over the previous 12 months reflect a fluctuating trend of steady growth in non-majors’ share. 

Mark Vilo is head of bank intermediaries at Suncorp. Previously he managed wealth and life intermediaries at the bank and has a background at Asteron Life, ING DIRECT, MLC, Colonial First State and FAI Insurance. You can read MPA's full interview with Vilo here