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Why brokers are beating the banks at their own game

Why brokers are beating the banks at their own game

By Martin L North, General Manager, Fujitsu Consulting, Fujitsu Australia and New Zealand

New research from Fujitsu and JPMorgan has revealed a significant transformation is taking place in the Australian mortgage industry. Banks are becoming increasing reliant on mortgage brokers, who are in turn generating increasing numbers of new loans and investing in new CRM and business intelligence platforms. This is prompting the banks to reassess their business and technology strategies to improve profitability.

According to a recent Fujitsu/JPMorgan report, mortgage brokers now account for 45 per cent of new loans and around 30 per cent of existing loans across the industry. That’s a very significant increase compared to a few years ago and is continuing to grow steadily. It also mirrors the experience of mortgage industries overseas - brokers now generate 65 per cent of new loans in the UK and 60 per cent in the US.

Furthermore, market share data sourced from The Australian Prudential Regulation Authority (APRA) confirms that major banks are losing housing market share to non-bank mortgage providers. The major banks’ market share has been picked up largely by non-bank mortgage originators, a trend that is expected to continue, particularly with General Electric/Wizard and HBoS/BankWest emerging as major players.

People are attracted to mortgage brokers for two reasons. They believe, rightly or wrongly, that they get more independent and objective advice from brokers. Many people also don’t have time to visit multiple banks so using a broker who can explain the various loan options is more convenient.

This puts the banks in a quandary. On one hand, they rely on brokers to generate new loans and bring in revenue. On the other, their costs are spiralling because they have to make hefty commission payments and maintain their branch network and other distribution channels. In effect, they have double cost exposure.

The question facing the banks is whether they should allow their share of the market through brokers to continue to grow, or pull back and make more use of their branches and other traditional channels to generate loans. Either way, the broker genie is well and truly out of the bottle.

Winds of change

Australia is in the middle of a considerable transition in the mortgage industry, exacerbated by the fact that the real estate market is going off the boil. So it is ever more critical for brokers and lenders to understand their respective businesses better by moving from high-level portfolio management to segment-specific strategies based on the profitability of specific customer groups and their distribution channels of choice. Banks, in particular, need to develop business strategies that include the more than 10,000 brokers in the industry if they want to maintain their profitability and provide good customer service. They need to identify which brokers are able to originate profitable loans, and shape their commission structures accordingly.

There are two ways in which lenders can improve the profitability of home loans sourced through the broker channel. They can renegotiate commission structures to better align broker payments to profit outcomes. Some Banks have commenced this strategy, for example changes were announced by the ANZ Bank and the Commonwealth Bank of Australia in December 2004. But further and more sophisticated innovations are expected across the industry.

Banks also need to better segment brokers by profit contribution, allowing them to focus on more profitable customers and incentivise brokers accordingly. In the UK, for example, no trailing commissions are paid to brokers; they receive a fixed one-time payment.

Taking care of customers

Lenders need to know their end-customers better. Because brokers are now the relationship point for customers, banks may lose their traditional relationship with their customers. Not all customers, channels and products are profitable. Banks need to segment their customers to get the information they need to make decisions that will help them win business in a shrinking market. A better understanding of customers will also help banks cross- and up-sell other products.

Banks should also consider re-engineering their branch operations. Those institutions that have a wide branch network face high maintenance costs so they need to look for cost efficiencies and ways to streamline their branch footprint. If they are establishing new branches, as the ANZ Bank, the Bank of Queensland and others are doing, they need to be more selective about where they open these branches.

Faster, more powerful technology

Technology is, of course, vital to both banks and brokers. In many cases, brokers are driving the banks to spend more on automation and efficient loan processing systems. Brokers want to work with lenders that are prompt. When they submit an application they want quick confirmation that the bank will proceed with the loan.

Nowadays, electronic submission systems such as Lixi are the norm. The system enables brokers to submit applications electronically and receive go-ahead confirmation swiftly and efficiently.

All the major banks have heavy-duty customer relationship management systems and many brokers are investing in similar platforms. In the past, they passed some limited customer information to the banks. Now there is a drive to capture more information at the point of entry for their own benefit as they seek to nurture the customer relationships they possess.

Banks and brokers are also getting more sophisticated about data mining. They know they have to make information readily accessible to the right people so they can make more informed decisions more quickly.

Improving profitability

Process improvement and technology change are a complex undertaking, whether you are a broker or a bank. This is where Fujitsu Consulting can help. We have a deep understanding of mortgage economics and have completed detailed profit diagnosis studies for many financial institutions. We can typically help organisations to improve their profitability by up to 30 per cent in 12 months.

Fujitsu's Yield Improvement modelling service looks at every aspect of a mortgage business and identifies the profit dynamics. We use international benchmarks to help local organisations determine their profit leaders and become more sophisticated in terms of customer segmentation and broker negotiation. Fujitsu can also help redesign processes, recommend better use of business intelligence and CRM systems and improve workflow management.

The mortgage industry is at a crossroads. Current commission structures are unsustainably high and will be subject to revisions in the next two years. Brokers will also be more heavily regulated, whether through their peak industry body or through stronger legislation. These factors will force consolidation in the third-party broker market. There will definitely be both winners and losers in the next 12-18 months.