#Open Banking
#UK mortgages

Open banking & mortgages: A revolution in lending

Mar 22, 2022 - 7 min read
Also Available in : Français
Chris White, Manager of product management at Sopra Banking Software
Jan van Vonno, Director of Research & Thought Leadership at Tink

Mortgages are a key area of competition for UK banks and building societies, but they’re becoming less and less profitable. Technology could hold the answer. Retail banks are facing significant challenges maintaining margins, due to compliance and regulation costs, low interest rates and emerging competition from new players who have identified a gap between customer mortgage expectations and reality.

So far, many banks have been unable to deliver convenient borrower experiences due to complex processes and fragmented systems. The only options available to preserve market share have been offering bundled discounts and cutting interest rates, further reducing margins.

The rise of open banking provides a chance for banks to correct some of the historic issues that have plagued mortgage lending including:

  • High cost
  • Manual processes
  • Lack of tailoring
  • Profitability
  • Slow processes
  • Fraud

In this article, we examine how open banking is creating new opportunities for mortgage lending, resulting in more profitable, efficient and value-driven lending.

The state of play in UK mortgages

Mortgages are one of the most important products in the British financial landscape. However, a range of market, technical and competitive factors have left many banks struggling to turn a profit on their lending books. Incumbents are currently making mistakes, in a market that’s ripe for disruption, with the open banking silver bullet promising huge rewards through a fast and efficient combination of automation and business expert interventions.

Why apply open banking to mortgages?

As the statistics below suggest, mortgages represent significant value for British banks. However, for customers, the mortgage application process is a painfully slow and stressful one.

Open banking could help banks improve the mortgage process for customers. With access to a wider and richer array of data, banks can develop better insights about their customers, therefore improving their customer-facing products and services.

The mortgage opportunity

Improving the customer experience

For many customers, the mortgage application experience is a painfully slow one. Improving the mortgage application process should be key for banks.

  • The mortgage process is ranked in the top three most stressful situations
  • The “time-to-cash” for mortgage applications has risen in recent years. The industry average is 40 days, but top performers can complete the process in just 18, giving lenders the chance to be the fastest element of the process
  • Issue resolution and empathy are named as the most important attributes of customer experience when taking out a mortgage, per KPMG research

Open banking as part of the mortgage value chain

Open banking will create new ways to access customer data and services, enabling the instant transfer of information, initiating payments and automating manual work. The data from open banking can also address some of the major challenges in the mortgage origination process.

A data-centric approach enabling targeted customer growth

  • Enhance data submission with real-time and detailed financial data 
  • Check the accuracy of the data and lower the risk of fraud
  • Retrieve mortgage information to deduct or identify the current mortgage interest rate of customers and improve customer acquisition by targeting those customers with high interest rates

Improved lending efficiency and customer experience

  • Open banking can help support automation across the workflow
  • Reduce “time-to-cash”, manual labor, errors and unnecessary rejections
  • Allowing staff to focus on more specialist lending

Reducing costs and risks

  • By leveraging customer data and analyzing spending and categorization, lenders can anticipate risks and assess financial health and limit defaults
  • In addition, open banking can help streamline the number of systems needed, eliminate labor-intensive system upgrades, software updates and accelerate speed of service and onboarding

Challenges to transformation

While more institutions are seeing the value of open banking process integration, challenges remain in coordinating organizations to take advantage of new technology.

Organization resistance

Pushback from lenders on accepting digital data in place of traditional bank statements, despite these being more accurate, detailed, and less susceptible to fraud.

Managing experience between joint applications

Seventy percent of mortgage applications involve dual applicants but some banks struggle to manage transactions across multiple stakeholders, particularly where there are shared outgoings and a joint account.

Buy vs. build

Banks want maximum control, with many CIOs inclined to develop technology in-house, despite readymade solutions being quicker to implement and update.

Assessing the capabilities of open banking

Currently, open banking enables lenders to examine a prospect’s current account data, which is essential for assessing affordability. Since regulators demand that spending and income be categorized, evidence submission is still required. While the scope is likely to expand, current capabilities must be considered.

Below, we take a look at some mortgage-related use case and see how open banking applies to them.

Vanilla mortgages

Straightforward mortgages are the bread and butter of lenders and present the best opportunities for open banking.

  • Small margin, so volume is key
  • Standardized process
  • Good target for automation
  • Identify high-cost areas and remove bottlenecks

Enabling product switch

Product switch currently represents over 40 percent of mortgage activity and is a process ripe for automation. Open banking can streamline the processes further and enable a near fully automated solution.

  • Product switches with no human interaction
  • Staff to focus on value-add work
  • Removing unnecessary robot tools
  • Transferring tens of thousands of mortgages in a single day

Specialized mortgages

To maximize the efficiency of this mortgage type, lenders will require the advent of open finance (seen as the next step in open banking), which is expected to open up customers’ entire financial footprint to trusted third parties, including mortgages, savings, pensions, insurance and consumer credit data.

  • Specialist lenders need to collect more data than open banking can currently offer.
  • Requires a combination of automation and manual intervention to enable decision criteria and data gathering.

The future of banking is open

The Open Banking Implementation Entity’s (OBIE’s) latest report shows that adoption of open banking services in the UK continues to grow, with 8 percent of digitally-enabled consumers estimated to be regular users of at least one open banking service – up from 5.5 percent in December 2020.

The report also shows:

  • Over threequarters (76 percent) of users will or are likely to continue using the services
  • 90 percent say they are easy to use and set up
  • 83 percent of respondents would be interested in expanding their use of open banking-enabled services
  • February to August 2021 saw 11 million open banking payments, compared to 700,000 in the whole of 2020

The mortgage market is poised for transformation. New digital challengers have created an increased level of customer expectation in financial services, and it is only a matter of time until they target the lucrative mortgage opportunity.

While this creates new competition for banks, it also provides the chance to evolve. For incumbent institutions, now is the time to rethink traditional approaches that add little value for banks, customers or the bottom line.

Open banking is a powerful tool for institutions to level the digital playing field by leveraging the full potential of technology to streamline processes, manage risk and provide the experience that modern financial consumers expect. Banks that invest in their digital future will be those poised to succeed in the new, open banking world.

This article is taken from a white paper produced by Sopra Banking Software in collaboration with our partners Tink. To read the original white paper in full, please click here.

Also, why not take a look at our Digital Mortgage Platform? Find out how our solution helps banks and building societies deliver best-in-class customer and broker experience.