This article is a continuation of our editorial "Strategic trends and implications for bank operating models". As part of the debate on how Swiss banks can transform their operating models towards the 'new normal', we discuss the possible future role of lending platforms.
Drivers of change in the mortgage lending market
Mortgage lending is a core element in the Swiss financial market; and especially for retail banks, mortgage loans continue to be a central pillar of earnings. However, the market has been under pressure for several years due to low interest rates and narrow margins for lenders. The problems have been intensified by the entry into the market of institutional investors (e.g. pension funds) in search of investment alternatives. They are positioning themselves as providers of capital to mortgage platforms. Together with digitalised processes and ecosystem strategies, mortgage platforms are currently one of three fundamental drivers in the mortgage market:
- Platforms: Mortgage platforms bring together lenders, distributors and end customers. They are already in widespread use, especially abroad. They offer transparent mortgage comparisons and, depending on the platform, advisory services. The development of disaggregated value chains in banking is resulting in the emergence of platforms in the financial services industry, and the retail market is particularly open to change due to easier access and the potential for standardisation.
- Digital processes: Digitalisation of the customer experience is moving beyond a pure cost perspective to a focus on the end customers. Indicative offers, extensions and individualised additional services can sometimes be processed within seconds after data input; and these features are increasingly in demand as standard by customers who have become accustomed to a fast digital service with other products (such as consumer credit and car insurance).
- Ecosystems: Mortgages are an entry-level product and provide numerous connecting points for additional offerings to retail customers, such as insurance products. For a long time, such opportunities were hardly used in Switzerland, but in the search for alternative sources of revenue more market participants are setting up their own ecosystems, predominantly in the housing finance sector.
The topic of platforms is increasingly dominating developments in the mortgage sector. Compared to other European countries, platforms have a relatively small share of the Swiss mortgage lending market (about 5% of yearly sales), and this suggests enormous growth potential. The use of platforms is much more advanced in Germany (about 45%), France and the Netherlands (about 65%), and the United Kingdom (about 75%). Accordingly, the online mortgage landscape in much of Europe is characterised by FinTechs that have taken on the slow-moving mortgage sector. Similar developments can also be observed in the Middle East. The government of Saudi Arabia, for example, is eventually planning to introduce a central mortgage comparison platform that is mandatory for all banks in order to create the highest possible transparency.
Types of mortgage lending platforms
Most innovative approaches in the mortgage sector are geared towards platform solutions, to simplify the matching of demand and supply in the borrowing and lending process. Digital platforms offer end customers a broader range of products (e.g. 25-year fixed-rate mortgages), increased price transparency and more favourable offers through best-price approaches. They also enable participating financial institutions to expand their potential customer pool geographically and so diversify their portfolios. However, platforms reduce barriers to entry into the mortgage market. In a search for alternative investment opportunities, insurance companies, pension funds and (soon) corporate treasury departments are entering the market - without any product or advisory expertise but with less restrictive regulatory capital requirements. Thus, the mortgage market is also experiencing a disaggregation of the value chain, in which there will be a clear focus on the respective best practices, for example in advisory, processing or refinancing.
There are basically three archetypes of lending platforms, although they are not always clearly distinguishable from each other in the market since they can also appear in mixed forms (Figure 1).
Figure 1: Selected platform archetypes in the mortgage lending sector
The three archetypes have the following characteristics:
- Open B2B platforms: These are characterised by multiple entry points for the end customer, which are provided by the distribution channels of the participants in the platform (e.g. trusted customer advisors). Participating institutions can act as both distributors and lenders and, depending on the set-up, can also take on the advisory function. Institutions acting as distributors form the customer base of the platform and receive a commission for a successful referral. If distributor and lender are different, the distributor retains the customer relationship (and so the cross-selling potential) and the financing institution assumes the credit risk. The parameters for operations, on the other hand, are coordinated centrally by the platform. The processing and servicing of requests can be carried out either by the participants' own operations unit or by the platform's strategic business process outsourcing (BPO) partner. Price comparisons and contracting usually take place in white labelling i.e. brands are not explicitly mentioned. Examples of this type are the successful Credit Exchange in Switzerland or Genopace (DE) and Starpool (DE) in the European market.
- Closed B2B platforms: These have just a single point of entry – namely the platform operator or its dedicated distribution partner. Other participants act exclusively as providers of credit finance. The platform takes over all processing steps from acquisition and advisory to servicing of the mortgages after deal closing, thereby maintaining the customer relationship. If necessary, the platform can also position itself as a provider of finance. As with the open B2B model, product management is controlled exclusively by the platform. Examples from Switzerland for this type are key4 by UBS or MEX by Moneypark. Internationally, Qualitypool (DE) or Europace (DE) incorporate such a concept.
- B2C platforms: Like the closed B2B archetype, B2C platforms have just a single point of entry via the platform itself, but they bring private customers (borrowers) and lenders together directly and the entire customer base is the market. The platform takes on more of an intermediary role, providing (initial) advice as needed. A striking feature is that the lender chosen by the end customer is responsible for the customer relationship, processing and ultimately portfolio management. In other words, there is a transfer of the end customer from the platform to the customer of the financing institution which obtains the client relationship from then on. The list of providers of B2C platforms is extensive and ranges from national examples such as Valuu or Finance Scout 24 to international FinTechs such as Trussle (UK), Mojo (UK), Habito (UK) or Ikbenfrits (NL).
Characteristics per platform archetype
Each platform archetype has advantages and disadvantages, for both end customers and institutional participants:
Figure 2: Advantages and disadvantages of the platform archetypes
The value of the platforms for end consumers is clearly demonstrated by the convenience and transparent comparison of interest rate offers. B2C archetypes are characterised by the greatest transparency on mortgage offers as well as the best comparability due to the large number of participants. However, the fee structure of B2C platforms can sometimes be opaque, as brokerage commissions are ultimately priced into slightly higher interest rates without breaking this down transparently for the customer. Alternatively, with B2B solutions, the customer foregoes transparency and free choice of offers in favour of higher service quality and more comprehensive advice. In contrast, however, B2B platforms offer a digital customer journey from a single source and credit decisions in real time. Especially in the case of initial financing, customers' need for advice is high. Therefore, customers of B2C platforms often make a ‘traditional’ visit in a branch, as they do not have any advisory option otherwise.
From the bank's perspective, easier price comparison puts pressure on margins, regardless of the platform archetype. In addition, the offer of a mortgage becomes a commodity, especially in the B2C area, which makes effective market differentiation more difficult and usually results in a squeeze on the final price. Nevertheless, participation in B2C platforms is worthwhile for lenders, as the customer interface is transferred directly to the institution without any acquisition effort. This customer relationship for the lender is sacrificed in closed B2B platforms in favour of lower overall costs and simplified risk diversification. In B2B archetypes, the barriers to entry are low for both the distributor and the financing partner. The biggest challenge is often the willingness to compromise on standardised process and credit risk parameters for the offerings.
Strategic outlook for the Swiss mortgage lending market
If we look at developments abroad, we see that there has been a big increase in B2C platforms in Europe. B2B platforms tend to operate with less public attention: open B2B platforms, such as Credit Exchange in Switzerland, are less actively advertised, but nevertheless have a growing market share and a significant number of participants.
We forecast that developments in Switzerland will depend less on the emergence of one dominant platform type, as market participants may well pursue different and multiple platform approaches. It is much more likely that a few big players will develop and prevail, and will distinguish themselves through their ability to generate leads (See Blog on Lead Generation) and to provide a favourable customer experience. A clearly structured business model will be the decisive factor for success, and not the underlying platform type.
Financial institutions must ask themselves strategic questions about whether and how they want to participate in the lending platforms. If the share of the mortgage volume brokered annually via platforms in Switzerland increases from 5% today to, say, 30%, then in the future around CHF 54 billion per year would no longer be addressed via traditional channels.
Hence, in our opinion the following questions are of central importance for financial institutions:
- What are the strategic goals regarding the mortgage business (management of existing client base or growth ambitions, pure financing of borrowers or securing client relationships)?
- What are the financial ambitions both in terms of volume growth and profitability in the mortgage business?
- Given the specific situation of the financial services provider, can platforms be used to improve capital performance?
- Is it worth investing in internal loan processing or are cooperation models and Business Process Outsourcing more appropriate?
- How important is strategic flexibility regarding possible add-ons to the platform, such as a liquid secondary market?
- What would be the impact of an increased use of platforms on the distribution model and the organisation (e.g. more digital advice, higher standardisation, or adaptation of credit risk policy)?
There is no conclusive answer to the question whether and which platform type is the most suitable. It is rather an interplay between the strategic orientation and existing capabilities of the bank and market factors such as customer acceptance and market penetration of existing and new platforms. Based on these insights institutions must make their own specific decision.
The examples of platform type representatives mentioned in the blog symbolise an exemplary outside-in assessment by Deloitte at the time of publication and are neither a valuation of the providers nor a complete or conclusive selection.
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