Plenty of mortgage brokers are talking about it. But what is really involved with white labelling? And what about mortgage management - is it really a viable, long-term option for brokers to aspire to? Examine the pros and cons of both
White labelling is something of a buzz word in the mortgage industry at the moment.
White labelling, which allows a mortgage broker to sell a loan that is branded with his or her company name, has it benefits. But do mortgage brokers really appreciate what white labelling involves? Even as its simplest level, where a lender will continue to handle most parts of the loan application and fulfilment process, brokers need to be aware of certain challenges and responsibilities that come with having their brand on a loan.
Some brokers see white labelling as their first stop towards becoming a fully-fledged mortgage manager, part of an attempt to garner more customer control and higher commissions. But if white labelling can be challenging, what's in store for the broker who tackles mortgage management?
This article aims to uncover the realities inherent in white labelling and mortgage management. It looks at the challenges that confront the mortgage broker eager to pursue these strategies, and outlines ways in which the broker can better prepare for the shift.
One thing that quickly became apparent during the research for this article was the lack of clear definitions around some key industry terms, namely mortgage originator and mortgage manager. While opinions varied to some degree, a consensus around what each of these terms actually means could be summed up as follows.
Considered to be someone who originates mortgages under their own label, although tasks are limited to pre-settlement activities including obtaining valuation and instructing solicitor. Generally seen as the sales and packaging component of the loan process, which is then sent to lender/mortgage manager for approval.
Can handle the pre-settlement tasks, but main skill is the post-settlement work. The manager can have either a delegated lending authority (DLA) and approve the loan directly (what one source says is a 'pure' mortgage manager), or send it to the lender for approval. Also handles collections, customer enquiries and arrears.
So, what are the key factors mortgage brokers need to consider before taking on a white label product? Here are a number of areas MPA has identified.
One reason brokers are eyeing off their own brand name product stems from a more aggressive banking sector. Many of the brokers interviewed for this story said they had anecdotal evidence that an increasing number of their broker-introduced loans were being pilfered by the banks that were supplying the funds. Not content with simply cross-selling products to broker-introduced customers, the banks are seemingly more intent on snaffling them altogether by offering them a cheaper mortgage deal.
"I'm getting more feedback all the time that the banks are now starting to do their customer care program, and ring the people we introduce," said Steve Marshall of Adelaide-based The Loan Arranger. "I've had three or four of late where branch staff at banks have said [to the customer], 'why did you use a broker, why didn't you come direct?'. It seems very evident that the banks are starting to be far more aggressive."
Banks are under pressure to maintain mortgage lending growth. This is evident in the most recent Reserve Bank of Australia (RBA) Financial Stability Review, which showed new borrowers are receiving an average 60 basis points discount off their mortgages. Banks are also spending big on sprucing up their branch networks, keen to bolster direct business opportunities as this avoids paying commissions to brokers.
Some are adamant that banks now offer lower prices to customers that do business direct. "The banks are beginning, and will continue more and more, to differentially price," says Steve Weston, head of distribution at Challenger Mortgage Management. "Of course, their rationale is they're not paying a broker commission, as their staff and their own structure is a fixed cost."
This practice, which is widespread in New Zealand, will encourage more borrowers to skip brokers and head straight to the nearest bank branch. It may also encourage existing broker customers to refinance with banks at rates brokers cannot match.
For the broker, not using the banks must seem like an increasingly appealing option. Why give them hard-won customers they'll end up taking? This is where white labelling can help, as Gino Marra, chief executive officer at mortgage manager Carrington National, points out. "With white labelling, you actually own the client." Marra, whose firm has just released a white label product aimed at mortgage brokers, emphasises how having this control can help quarantine clients from the banks.
This is a common mantra of the non-bank and mortgage manager space. That most are business-to-business operations that rely on brokers for their product distribution gives their claims added weight.
Gaining access to wholesale funds at near wholesale interest rates is another much touted attraction sprouted by mortgage managers and non-banks. White label products often come with pricing flexibility; the broker can choose how much commission he or she is paid, giving the freedom to either offer a low rate to price sensitive customers, or a higher rate to those less inclined to focus on price.
One Sydney-based broker, who was considering whether to take up a white label product, says being able to offer a heavily discounted rate to some customers who might leave him for a cheaper rate elsewhere was one key attraction. But this would be restricted to just those clients he believes would eventually bring him in more business down the track.
This view is consistent with that of Mary Shalala, of Sydney-based Action Home Loans. She says her white label product, which she sources from GE Third Party Solutions, enables her to cut her commission payment altogether so she can give select customers rates that are well below market value.
"The thing I like about this is that, if you've got family or friends, and you want to make a loan where you make no profit or margin, you can do it," the MPA Top 100 broker says. "You can do that because you're able to play with the rates... That's the only reason I did it. I just did a loan for my sister, and she got a rate that she couldn't get anywhere else."
This view is at odds with Darren McLeod, sales leader at wholesale lender Firstmac. He says while there were some pretty aggressive wholesalers out there offering low interest rates, it's the less price-sensitive customers that brokers should be targeting with their white label products.
He says a key rationale behind going the white label route is to make more money - why else would brokers bother - hence why it makes more sense to target customers that are not as price sensitive as others. This is where McLeod believes strong branding comes into play, along with the right target market.
Marra agrees. He uses the example of a broker who specialises in servicing doctors' mortgage needs; the perceived added value this broker may provide to this market could allow him or her to bolster the interest rate charged. Or, if the loans are more complex and time consuming to process, customers may be more willing to accept a higher rate, he says.
McLeod says Firstmac does not target the broker who might still be with an aggregator and doing around 10 to 15 loans per month. They neither have large enough volumes, nor can they get their head around branding and pricing, he says.
Another attraction to white labelling is the ability to build up a brand name. And when you talk brand names in the mortgage industry, most are quick to associate success stories like Aussie and Wizard with their own dreams.
"The benefit for them in white labelling is... they can build a strong brand awareness. That's how Wizard started, that's Aussie Home Loans, that's what they were doing," says Fred Alam, director at wholesale lender Resimac.
Building a branding does not just happen, though; as Marra points out. A brand needs to be associated with a point of difference. "You've got to ask yourself the question, what are you and what do you sell about yourself that is different?"
Drew Innes, managing director at Mortgage Origination Group Australia (MOGA), says many people fail to appreciate the energy and work that goes into growing a brand.
"I think a lot of people underestimate the fulfilment required to actually establish a brand," he says at his Sydney office. "It doesn't happen overnight, it happens over time... through some pretty smart marketing, positioning, lobbying and probably a bit of luck. You're selling something to the end consumer, that the end consumer is expecting you to fulfil on ... has the customer got any use value out of the brand that you've sold. Is there a real benefit there?"
Having started his own broking business two and a half years ago, Paul Collis, managing director of Blue Coast Finance, agrees that building a brand is expensive. Collis is in the process of building his business up from five loan writers to 30 in the next 12 months, and is opening new offices in the region between NSW's Hunter Valley and Queensland's Sunshine Coast. A key ingredient in building his business has been his comprehensive approach to branding the business. "We engaged a professional advertising company to develop all our brand, and make sure there was a synergy between our website and business cards and the whole [company]," he says. "The big mistake I think people can do is short cut on their brand development."
And, as McLeod points out, branding also comes with responsibility. The mortgage broker needs to be confident that the funder behind the loan can provide the service they need. "If you're saying this isn't a [bank] loan, this is a Darren McLeod loan, and the funder behind you is stuffing around on service, that will probably reflect worse on you than it would the [bank] who you can always throw it back on."
Weston cautions about the ego that can sometimes encourage a broker to introduce a white label product. The allure of having the company name up in lights can be a flawed premise, he says.
Introducing your own brand also means a broker loses the ability to leverage off some of the most powerful brand names in Australia. While the banks are not necessarily the most popular institutions in the country, when it comes to making what is often the most important purchase in their life many
Australians feel more comfortable dealing with a lender they know.
"Many, particularly longer term brokers, start to believe their own publicity but quickly realise that while their clients value their service, they do prefer to borrow from larger, reputable lenders who they have a higher trust level with," says Foley. "The fact that the major lenders have the greater slice of brokers' business levels confirms this position."
A BROKER'S VIEW
Les Harris from Adelaide-based Mortgage 123 says he was recently approached by a wholesale lender about taking on a white label product. And while the mortgage broker says he has yet to sit down and fully weigh up the benefits and disadvantages of white labelling, he wonders whether these products can compete on price and delivery with what the banks already offer.
"Are they [white labelled products] really cheaper?" he queries.
If they were not cheaper and more efficient than bank products, he sees no need to take on the possible additional workload that often comes with managing a white label product. Moreover, he believes brokers could have a harder time selling a self-branded loan when compared to a more popular and recognisable bank product. Only recently he had a customer almost refuse to continue with a CBA loan application when she saw Colonial mentioned in documentation he showed her. While he says she was fine once he explained that Colonial was part of CBA, he believes it shows how borrowers often like to know the lender they are dealing with.
Fears brokers could be seen by borrowers as favouring their own branded product over other lenders' offerings was another concern Harris raises.
He acknowledges banks are becoming more aggressive in luring customers away from brokers, and he says this could conceivably motivate him to further consider white label products.
What Marra does not suggest is taking on a white label offering while retaining a panel of other lender products. "If you sell yourself that you're an independent like most brokers are, I would not recommend white labelling," he says. It would be difficult for a broker to maintain a veneer of independence in this instance. "It doesn't work," he adds. "Clients see through that."
Gerald Foley, director at National Mortgage Brokers (NMB), believes brokers should not underestimate the power of being viewed as independent. It is often what attracts consumers to using a broker in the first place. "Brokers should stick to their consumer proposition to assist clients to find the most appropriate loan from a wide range of lenders and products based on an impartial platform of customer needs first; identify suitable product second."
Barry Elmslie, director at Perth-based Able Finance Broking Services, says proposed Western Australian legislation will demand that brokers outline the reasons why a certain loan was recommended to a client. Even with this requirement though - which is something Able Finance already provides to its customers - Elmslie worries that having a white label product on the books could undermine his independence.
"I would be concerned, especially with higher commissions, that you might have someone make a claim against you down the track...to me, it's very hard to be both [a broker and originator]."
Foley also questions the wisdom of aggregators who introduce their own white label products. Many aggregators see a way forward in growing their revenues, and to protect themselves against lenders restructuring (and possibly reducing) commissions, is to offer their own badged product through their broker network.
"This strategy has some risks associated as often the products are less than competitive over the medium to longer term and the brokers may push back on something they feel jeopardises their impartiality position with their clients," he says. "I believe aggregators should stick to providing their broker networks with an impartial range of lenders and products, services and support that will enable them to better manage and grow their businesses. Let the lenders play the lenders game."
Yet Marshall says the need to protect customers from channel conflict justifies moves by aggregators like AFG and PLAN to set up their own mortgage management arms. He believes while companies his size would not have the volume to justify a similar initiative, this was not the case for the larger aggregators.
Angelo Malizis, chief executive officer at Mbius Financial Services, a wholesale lender owned by Allco Finance, says when he was chief executive officer at Wizard he had no problem pushing the non-bank's own products as they effectively met the needs of most customers. "You can only do that as a mortgage manager if you feel confident that you have a stable of products to satisfy 85% of customers that walk through the front door."
Problems would surface, though, for a mortgage broker trying to sell both a self-branded loan and a range of other lender products. "Taking an each way bet by still keeping their broker roots... they'd almost need to have two separate companies," he says. "It's very difficult for them to achieve."