Competition in UK lending markets has been intensifying in recent years. Across the board, pressure has increased to drive volumes, and margins have tightened. So what can lenders do to overcome the consequences of inevitable margin compression and drive their mortgage businesses forward?
Challenging market conditions
The last five years have seen increased competition with higher lending volume targets from many established lenders. Halifax, Barclays, Santander, NatWest and HSBC have all been impacted by retail bank separation. Their new, ring-fenced retail arms are significantly dependent on revenue from mortgages.
In an attempt to gain market share, the big lenders are driving down prices around core and vanilla loan products. The true rates on two and five-year fixed-rate mortgages being offered by the top ten lenders in the UK have fallen by as much as 0.14% in the last six months.
In 2019, Tesco Bank went as far as to withdraw its mortgage range, citing « limited profitable growth opportunities ».
Factor the Covid-19 pandemic into the picture, and things don’t get any better. Mortgage lenders have been working tirelessly to help homeowners during this challenging period, but in doing so, their margins have taken a further hit. Over 1.2 million UK mortgage holders have taken advantage of payment holidays offered by lenders.
There are other factors driving lenders to look for creative ways to grow revenue while, at the same time, maintaining or even increasing margins. Price management may be able to drive volume, but it inevitably harms margins. Therefore, lenders may need to derive increased margins from additional, smaller and more focused product segments, such as later life or specific market segments, e.g. young professionals or emergency services.
However, this approach raises complexity and can increase cost, reduce service levels and increase time to offer.
Given the above, the lending process — especially the underwriting — becomes significantly more challenging. Areas that may have been straightforward now have the added complication of disrupted income streams. With the growing numbers of self-employed people and borrowers with multiple income streams, the overall complexity increases, as does the number of scenarios that require manual case and underwriting reviews. To completely succeed, any solution needs to drive volumes, increase margins and, at the same time, maintain or reduce operating timescales and costs.
The current low-rate environment and the level of complexity in the mortgage journey presents a challenge, but also an opportunity. Due to these conditions, lenders need to evolve technologically.
Digital change in the UK mortgage market has been happening incrementally for many years, but still lags behind other areas in financial services. Back-office processes have been re-engineered using new technologies, and communications have been improved by shifting to online portals. However, in many cases, analog processes have essentially been digitized without fundamental improvement.
Despite significant investment, many systems remain slow and clunky. And the ultimate promise that technological innovation offered — cheaper, quicker and smoother mortgage application processes — has yet to be fully realized. Lenders in search of cost efficiencies and greater volume can grow by leveraging a wide range of digital technologies tightly integrated with existing product capabilities.
Improving consumer and broker servicing
Many banks get the majority of their mortgage business from intermediaries. About 75% (roughly £220 billion) of the UK’s mortgage business is placed each year by brokers. Given that many lenders have nearly identical pricing structures, brokers understandably tend to place business with the lender whose system is the easiest and quickest to navigate.
The brokers are looking for an intuitive system and, where appropriate, one that guides their journey. They need mechanisms that recognize that they deal with multiple lenders and with many different systems, products and case attributes. They need to have a holistic view across different lenders. An easily navigable journey at the end of the initial contract period, and a process that simplifies the many types of contract variation, is also helpful.
The opportunity then is to better serve brokers by creating a holistic, end-to-end journey, where each step is enhanced through better use of data, intelligent process automation and real-time decisioning. That same principle underpins the approach needed to support a consumer base that is slowly building confidence in doing more activity directly. The speed of this change is certainly subject to much debate across the sector, but there is no doubt that if lenders are to capitalize on those that want to go down this route, then the same improvements in the customer journey needed for brokers are essential.
Real-time digital communication is the bedrock of the answer. It does, however, need to be combined with the automated evaluation of customer data and documentation, a configurable rules engine and workflow management tools.
For many years, it has been possible to configure rules and use rules to drive workflow. This has been fine but constrained by the fact that much of the process relies on external data. Any solution will need not only data sourcing from many third-party services — credit reference bureaus, voters roll, surveyors and conveyancers — but also the real-time validation of that data.
All of the information in a mortgage application has to be reconciled and analyzed. In most cases, discrepancies are identified, resulting in an extensive rework of the application for the customer, the broker and the lender. Real-time digital communication and data validation cuts a significant possibility for lag out of the process and provides the prospect of instant answers.
Progressively transforming a legacy system gives lenders a low-risk chance to reimagine the lending process. It presents the opportunity to trial a system where open data and value-added services are made available to the customer or broker at the start of the process. Data is automatically submitted to the lender, and issues like availability and eligibility are checked immediately. The lenders’ system guides the process, passing any issues instantly back to the broker for resolution — and where available, the result of the application is shared on the spot.
An elegant combination of the right technology can drive all of this by enabling greater automation, auto-population, and the hyper-personalization of advice and pricing.
Price pressure in the UK mortgage market is likely to continue and could increase in the future. As such, it is a good time for mortgage lenders to survey their options.
There is a clear need for integrated systems and intelligent process guidance for all stakeholders in the mortgage process. Providing the ability to assess individual circumstances quickly, search the market, simplify information capture and guide the journey will create a go-to lender for broker advisers.
There are no silver bullets, but there is a path forward. In a market experiencing margin pressures, lenders who proactively integrate their systems with digital solutions will be better positioned to win what is likely to be a long war of attrition.