In this article, Julian Wells, Director at Whitecap Consulting, explores the dynamics of the mortgage market with specific reference to the building society sector, looking at the future landscape of the market and taking into consideration the potential opportunities that Tech/FinTech developments could provide for building societies to remain sustainable and relevant to future generations.
The key report findings relating to mortgages are outlined below:
Most societies have chosen to compete in underserved niches to enable mortgage lending at acceptable margins
Within the intermediary mortgage market, building societies are often referred to as specialist lenders, but for the majority of building societies ‘specialist lending’ refers to borrowers with a combination of good risk profiles who have non-standard characteristics which are well-suited to manual underwriting. Within our research, 42% of CEOs stated that they would not consider themselves to be niche/ specialist lenders and that they are “prime lenders first”.
Conversely, 58% stated that they have positioned themselves to be niche/ specialist lenders as they cannot solely compete within the mainstream prime markets. In order to retain and further develop non-price competitiveness in mortgages, societies will continue to seek out underserved or complex niches. Some societies have other sources of advantage such as location and strong regionality or a particularly affluent member demographic, meaning the competitive pressure to serve niche/ specialist markets is somewhat alleviated.
There is a significant reliance on the broker market for new mortgage lending and so the building society sector need to be aligned to their evolving technology requirements
Most building societies distribute the majority of their mortgages via intermediary channels, so it was not surprising that the focus on the needs of mortgage brokers has remained consistent over time, particularly standards of service, consistency of underwriting decisions, and ease of access to lenders via enquiry and application processes.
Today, technology and data are playing increasingly important roles in these areas. 75% of the CEOs we interviewed stated that they are seeking to use digitisation to improve their broker journey, a theme consistent with our online survey (81%). The need to provide an increasingly tech-enabled service was also highlighted by research last year which found 52% of brokers feel that technology will have a high impact on their business in the next 24 months; citing slow service and poor online systems as the most common weak areas.
As part of the same research but looking at mortgage borrowers, the demand for efficiency was most evident as 62% of consumers sought “speed of completion” as a preference when looking for mortgage lenders. An insight that supports the need for tech driven improved efficiencies and overall reduced completion times.
Manual underwriting is a key USP in the mortgage proposition, and one that will be retained as the mortgage lending process benefits from increased efficiency, driven by technology
A key challenge for building societies is to balance the adoption of technology with their core strengths relating to service and manual underwriting. Manual underwriting is a creator of competitive advantage for the sector as more complex cases that banks often reject can be processed at higher margins by applying a more considered decision-making process than is possible in the high-volume process driven environments of larger mortgage lenders.
It is also a USP which may prove increasingly valuable post-Covid. According to the Bank of England, 1 in 5 people found themselves in more complex financial situations last year as a result of the pandemic. Building societies are well placed to handle an increase in demand for non-standard mortgages and technology adoption will further drive efficiencies whilst still maintaining the human decision making that is critical to manual underwriting.
The opportunities of tech developments such as APIs and Robotic Process Automation are being actively explored by building societies
The implementation of APIs in the sector has been limited to date, but their increasing importance in the mortgage market is widely acknowledged by the CEOs, especially in relation to the digital transformation of the mortgage origination process. The ability of brokers and lenders to pass case data and decisions automatically between systems without needing to manually rekey information may offer significant efficiency gains.
It is possible that competition could be the key driver in taking API adoption to the next level. This is particularly pertinent at the front-end of the mortgage process, where it has been found that 83% of brokers primarily seek to understand eligibility when assessing the market for options for their clients. The lack of a common data standard within the mortgage industry is regularly cited as a key factor holding back the ability to integrate data movement between lenders, brokers and third-party systems providers such as mortgage sourcing systems. This means lenders need to develop different APIs to integrate with different partners within the sector. In the wider mortgage market, the adoption of APIs at present has been mainly focused on the Decision in Principle process.
For building societies, another key issue is integrating into legacy technology systems. This is an area where there is evidence of Robotic Process Automation (RPA) being trialled. There are several examples in the sector of societies using RPA to handle the rekeying of data into legacy systems, where it has not been possible to put in place data integrations such as APIs. Where an existing legacy system has no easy way of exposing APIs, smart use of RPA coupled with a middleware API can enable building societies to mirror the benefits of APIs. RPA applications can execute routine, rules-based tasks (such as re-keying) without human intervention, which can also minimise and resolve errors and exceptions that otherwise require a high level of human intervention.
For most societies, the ability to compete in the mortgage market at sustainable margins is achieved by a combination of non-standard products and criteria, manual decision making, and a strong and efficient broker proposition. Our research concluded that the mortgage broker market can be more efficiently served using technology and data more effectively, but we also found that bespoke service and decision making will be retained in the short and medium term as a point of competitive advantage.
Background to report:
Building Society Sector Analysis 2021 – A review of the strategic landscape for building societies
The research underpinning the report was conducted by Whitecap Consulting in partnership with the BSA, and involved a quantitative data analysis of all 43 building societies, interviews with 33 of the building society CEOs, and an online survey which received a total of 134 respondents.
This analysis and report was funded through sponsorship from a number of industry stakeholders including: Credera, DPR, EQ Credit Services, Mambu, Moneyhub, Mutual Vision, Nivo, Sandstone Technology, Sopra Banking Software, Shoosmiths, and Phoebus Software.