Market pioneer

28 July 2008 | By Robert Thickett

When MoneyQuest was bought by Paul Gratton, former chief executive officer of Egg, in March this year there were a few raised eyebrows in the industry.

The market was eight months into the credit crunch. Packagers and specialist lenders were closing their doors and the mortgage market was looking increasingly unattractive.

John Charcol had failed to find a buyer when it put itself up for sale for a rumoured £50m so what made MoneyQuest different?

An even bigger question mark was left hanging over the firm when on July 18 the company announced that MoneyQuest had been placed into administration, with all 130 staff and the old firm’s client bank transferred to new entity MoneyQuest Mortgage Brokers.

It’s been an interesting five months for Gratton - placing one firm into administration and transferring its staff to another attests to the difficulties he has faced.

So why did Gratton choose to invest in distribution in the middle of a major market meltdown?

There are two answers to this. First the price was right. Although it has not been publicly revealed how much he paid for the Glasgow-based firm, industry sources indicate he got it for a song.

The sale was announced on March 14 and as part of the deal two of the brokerage’s three founders - Steve and Derek Pollard - resigned as directors. Fellow co-founder Paul Reynolds remains with the firm.

But it wasn’t just Gratton’s eye for a bargain that motivated him.

Founded 18 years ago, MoneyQuest pioneeredonline and telephone-based advice and therein lies the second reason why he was attracted to the firm.

Throughout his career, Gratton, now executive chairman of MoneyQuest Mortgage Brokers, has successfully used technology in financial ser- vices, from phones to the internet.

He set up First Direct for Midland Bank, internet bank Egg and was also involved in creating franchise brokerage mortgageforce and a number of other firms.

Chatting to him you quickly realise he’s fascinated by how technology interacts with consumers on a psychological and social level and how it affects the decisions they make when buying financial services.

In the flesh Gratton comes across as more of an academic than a businessman. He happily admits his day job isn’t just a means to pay the bills - it’s his abiding passion.

“I can get dragged around and embarrassed on the golf course but the thing I enjoy most is spending time with people who have ideas and trying to work with them to turn their ideas into reality,” he says. “My hobby is the thing I do in my day job.”

A quick glance at his CV confirms this. Rather than taking up a place at Birmingham University when he was 18, he got a job at Midland Bank. After four years he was sponsored to do a course at Cambridge University, after which he was fast-tracked into various management roles. He attributes his first step up through Midland Bank’s ranks to the chance arrival of its HR director at his graduation dinner.

“He pitched up to my closing dinner and I managed to get most of a bottle of port down his throat,” says Gratton. “By the following morning he’d offered me a managerial position. He had no idea what he’d offered me but he honoured the commitment.”

This led to him holding a range of posts in the bank until in 1988 he was charged with setting up First Direct, or Project Raincloud as Midland Bank cryptically called it at the time.

“In the late 1980s it was Thatcher’s Britain and wealth creation was going on in the South-East,” Gratton says. “Midland Bank - the clue’s in the name - had its heartland in the Midlands and was underrepresented in the ABC1s who were earning big money.

“The challenge was increasing our penetration without having to buy regional branch infrastructures and balance sheets.”

The answer was the phone. At the time Direct Line had just started to sell car insurance and it appeared that consumers were finally becoming comfortable with transacting business over the phone.

Phone-based distribution presented itself as a means of gaining a national client bank without having to buy rival firms across the country.

“It looked like we were at the inflection point in an S curve,” Gratton says, his stock expression to describe when consumers get behind a new form of technology.

Although consumers were used to doing business over the phone at work, the phone at home had traditionally been used for social communication, not as a business tool.

“All the research suggested that this was changing so First Direct became the UK’s first telephone bank,” he says.

Gratton left First Direct in 1996 when he was headhunted by Sir Peter Davis, then CEO of Prudential, to set up a direct arm for the insurance giant that ultimately became Egg.

“It became clear that the Pru didn’t work as a direct brand,” he says. “It was about solidity, not innovation - it just didn’t fit the brand. That’s why we had to create a new brand, Egg.”

With First Direct, Gratton exploited the inflection point for consumers’ willingness to buy financial services products over the phone and Egg tapped into their growing familiarity with the internet.

“If you go back to 1998 the internet was the new thing,” he says. “It had been presented as life-changing but you could only look at stuff - you couldn’t do anything else.”

But Gratton employed psychology to change consumers’ attitudes to financial services via the internet.

He says Egg’s proposition played to their rational need to understand how a lender could offer great rates. They understood that by doing deals online it was cheaper than using branches. It was all wrapped up in a technologically-savvy, attractive brand.

“Those two things came together - consumers’ desire to use the internet and the need for their money to be safe with the Pru,” says Gratton.

Egg had hit the S curve for online banking but it was still comparatively early days for maximising the opportunities offered by the web.

A decade later, Gratton says the financial services market is approaching a similar inflection point. Having stabilised the firm and ensured its long-term future, MoneyQuest Mortgage Brokers is well placed to capitalise.

With the growing popularity of social networking websites such as MySpace and Facebook, many consumers, especially those in their 20s and 30s, are happy running their lives online. The internet has ceased to be the new thing and is now commonplace in customers’ personal and business lives.

At the same time, with the current market downturn, Gratton says there’s a heightened sense of paranoia among middle England consumers.

“Customers are more scared,” he says. “Perfectly creditworthy consumers think they can’t get a mortgage, which is rubbish.

“What the credit crunch has done is heighten awareness and we’ve seen clients coming to us much earlier. Rather than six months they are approaching us 18 months before their fixed rates run out. It’s a shift in customer behaviour that’s all about fear.”

Against this backdrop, Gratton says his goal over the next decade is for MoneyQuest Mortgage Brokers to become the UK’s most trusted online financial services brand. He sees a gap in the market and is looking to fill it.

“If you look at the needs of consumers in terms of mortgages, investment and protection, you have got this increased level of risk that’s been placed at their door,” he says.

“There’s been a transference of risk from employers and governments to individuals responsible for their own financial futures. That’s what we’re interested in.

“In 10 years’ time we’ll hope to have created the definitive trusted advice brand that fulfils its relationships with clients remotely,” he adds.

And it may not deal exclusively with mortgages either. Engaging customers emotionally is the key and Gratton says this could be applicable to a variety of products.

“There’s an opportunity to emotionally engage customers remotely in a way that wasn’t possible five years ago because they weren’t ready,” he says. “This will be useful for selling mortgages but it will be equally useful for protection.

“Over time, if you’ve gone that far you could move into investments and pensions with the same group of customers, although there are no firm plans yet. I’d like to think we could broaden our proposition from being mortgage-centric to a direct remote advice-based brand.”

But Gratton paints a gloomy picture for the broker market. Having been a manufacturer and a distributor he can see the problems from both sides.

From the perspective of lenders, Gratton says the pre-credit crunch mortgage market didn’t make sense financially. They saw their margins eroded to such an extent that firms like HSBC decided it was not worth allocating capital to the domestic market.

“It wasn’t that it was incapable of having a big mortgage business, it just chose not to,” he says. “I remember talking to someone at Cheltenham & Gloucester last year who intimated to me that its mortgage range was actually value-destroying.”

Firms that previously had minimal interest in the UK market have now expanded their share. For example, products like HSBC’s Rate Matcher have boosted its market share from 3% to 9% and it still won’t deal with the intermediary channel.

With brokers effectively cut off from at least 10% of a contracting market, Gratton knows that times are tough.

And for MoneyQuest, the current market made even less sense and that has been a bitter pill for Gratton to swallow in his first five months.

The credit crunch, with dual pricing favouring lenders’ direct branches, has changed the market’s dynamics. Just as lenders found themselves in freefall in August 2007 when securitisation effectively shut down, May 2008 offered a similar defining moment for brokers.

Gratton says that when he first went into MoneyQuest in March he was able to stabilise what had been a loss-making business and leave it in profit for April. But May was a different story.

“That was when dual pricing was at its peak,” he says. “While I don’t think customers flooded into branches, they sat on their hands and stayed on their SVRs.”

He started talking to insolvency practitioners four weeks ago to gauge the firm’s options.

“We took the decision to streamline the business and safeguard as many jobs as possible, putting the business in a better position to weather the storm over the coming months.”

After placing the old MoneyQuest into administration, Gratton simultaneously bought its existing customer database from the administrators, which was transferred to MoneyQuest Mortgage Brokers. The new organisation will be an appointed representative of Legal & General.

All 130 staff have been transferred to the new firm but it’s not all good news.

“Unfortunately, the streamlined business will not require the same level of overheads and staffing,” he says. “Therefore, we are presently in consultation with all staff as some redundancies will result from the closure of MoneyQuest.”

He hopes to maintain two-thirds of the current staffing levels. And having put the firm on a firmer financial footing, he still insists it has a bright future ahead.

“Our sale costs are a lot cheaper than those of face-to-face brokers,” he says. “Our staff can speak to five or six customers a day because that’s the model.

“The productivity of our staff versus our costs means it’s possible for us to exist in a lower proc fee world compared with brokers who see one customer a day and only sell to one in three. It is those firms who are squealing and it will push some of them out of the market.”

With lenders hungry to claw back margins, Gratton says the days of a 70/30 or 60/40 market split in favour of brokers are over.

He foresees a 50/50 split between brokers and direct lenders. This means the former must drastically scale down their costs and prepare for a leaner market.

But as befits a man who has just invested in the long-term future of mortgage distribution, Gratton is positive that firms like MoneyQuest Mortgage Brokers can adapt to this tougher market environment.

If brokers can reduce their costs - just as MoneyQuest Mortgage Brokers has done - there’s still everything to play for.

But while the market may swing in favour of lenders, Gratton adds there are still question marks over the extent to which borrowers trust them as a result of the constant stream of financial scare stories in the media.

He thinks this credibility gap offers the perfect opportunity for MoneyQuest Mortgage Brokers.

“We’re seeing more customers come to us for help,” he says. “And it’s not just the ones in the proverbial - it’s prime customers who are concerned because the Daily Mail has done a good job of spooking them.”

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat