How far will mortgage robo-advice go?

Closeup frontal portrait of vintage robot android in white shirt with classical tie over gray background

While brokers who refuse to go digital will be shunned by consumers, the most successful firms will combine technology with the best of their human skills

Ever since the term was coined, ‘robo advice’ has struck fear into the hearts of traditional brokers, who dread being replaced by machines.

In practice, the hybrid use of technology and human input can enhance the advice process by driving efficiency and profit. Going digital does not come cheap, but the price of resisting change may be greater still. Just as Airbnb has dented the profits of hoteliers and Uber threatened the livelihoods of black-cab drivers, experts predict that the mortgage industry may see similar disruption over the coming years and brokers will need to keep up with consumers’ evolving expectations.

Online start-ups

While a fully automated robo mortgage advice service does not yet exist, two online brokerages have launched in the past year that use technology to streamline the process and give consumers a better experience. Both are free of charge. Market commentators refer to Habito and Trussle as ‘robo advisers’, although both businesses have a strong human element to their advice processes and are reluctant to use the term themselves.

Finance & Technology Research Centre director Ian McKenna says: “It is inevitable that digital mortgage advice businesses will emerge over the coming months. Technology has always had a huge potential to support mortgage advice; the sheer number of products available via so many lenders, mortgage clubs, networks, etcetera, simply could not be maintained without extensive use of technology. However, this has never been used to its full potential.

“Traditional mortgage advisers are in an interesting position. By embracing technology and change, they could put themselves at the forefront of this market. Conversely, by denying or resisting its potential, advisers could become increasingly marginalised as a niche community, only supporting complex or difficult customers. The worst thing brokers can do is ignore this challenge; it won’t go away. They need to be planning how to take their businesses digital today.”

Association of Mortgage Intermediaries chief executive Robert Sinclair agrees. He says: “People are moving towards seeking help and solutions that are web, tablet or technology based. The industry can try to ignore it and push back, but they’re pushing in the face of consumer demand.

“We are going to gradually migrate to these types of solution, whether fully or partially, over the next five or 10 years. Firms that embrace and move with it will continue to prosper and those that put their head in the sand will probably struggle because the reality is that consumers drive this type of change. Other people will come to the market with technology that consumers will embrace; therefore ignoring it is dangerous.”

Sinclair points out that the mortgage industry is a long way behind other professions in its use of technology.

“An estate agent can come and measure up your house using an iPad, take the photographs, get you to sign the contract and then upload the house onto Right Move before leaving the property,” he says. “Surveyors can do similar things.

“But in the world of mortgages, which is another part of the chain, we are still not there. We are not as much in the Dark Ages as the legal profession but we are behind a lot of colleagues in other parts of the property transaction process.”

Outdated processes

It was frustration with the fragmented and outdated nature of the mortgage advice process that spurred the founders of both Habito and Trussle to disrupt the marketplace, each having experienced personal disappointment when applying for a home loan.

Habito is branded like many an east London startup. Its ‘About Us’ page features images that are immediate ‘hipster’ signifiers, such as a bicycle leaning against a bare-brick interior, and a bustling outdoor coffee hangout. The website’s animated headings replicate instant-messaging dialogue bubbles, engaging the customer colloquially and directly.

‘Hey, we’re Habito. We exist to make mortgages as easy as possible,’ says the first message, followed by ‘What would you like to do?’

The company’s founder, Daniel Hegarty, explains what prompted him to launch the business in a blog linked to the website. He says: “I bought a house, and the experience was horrific.”

He explains that his first mortgage application was declined because the mortgage broker had made a mistake, listing Hegarty’s partner twice. A week later the application was resubmitted, and again declined, this time because Hegarty’s name had been omitted but his partner was still listed twice. After further problems, with the sale nearly falling through, eventually the application was approved – but Hegarty felt the system had been antiquated and was due an overhaul.

Trussle founder Ishaan Malhi’s experience of applying for a mortgage was similarly shambolic.

“I was working as a mortgages and real estate analyst at Bank of America Merrill Lynch, so I was very familiar with all the mortgage terminology,” he says.

“Eventually I decided to pursue a different career path in technology. I was fascinated by how, in 2014, technology was completely transforming different industries, be it transport, accommodation, communication or financial services. Almost serendipitously, I was going through the process of buying my first home.”

Despite his background in the mortgage market, Malhi felt at sea when searching and applying for a loan. He was recommended a broker by a friend, but matters went from bad to worse.

“He lost the piece of paper he had put my information on, which didn’t make me feel that safe because he then asked for copies of my passport and financial statements and asked me to pay him a £500 fee. I thought he had been unreliable in my interactions with him.”

Malhi moved to another broker, who informed him that, given his circumstances working as a contractor, he would not meet lenders’ criteria.

“I’d wasted the best part of a month, and been through a lot of stress, only to be told I couldn’t get a mortgage,” says Malhi.

Hence he decided to form his own mortgage advice company – one that would solve the problems he had encountered.

“I thought ‘How can we use technology to design the very best mortgage adviser and make it accessible to everyone?’

“From the beginning, our main philosophy has been that we are enabled by technology but powered by people. At the moment we are not 100 per cent automated. But whether we end up being 10 per cent or 100 per cent automated, there are human judgements and thought going into everything we do.”

Malhi’s next step was to spend several months in a mortgage broker’s office to try to pinpoint where the traditional process could be improved.

“I was trying to absorb how they interacted with customers, but I felt the whole process was lacking a focus on the consumer and it seemed set up to favour the broker: if the broker was working 9 to 5 and was on the phone, they were unavailable to speak to anyone else.

“In other words, the whole process ground to a halt because the client was relying on one individual to research the best deal for them.

“At Trussle, we are trying to design it so that the broker service is available to anyone at any time. In our team we have software engineers, product managers and user interface and experience designers who far outnumber the mortgage experts and case managers.

“From observing the broker’s process, I felt there was so much that could be automated and digitised to deliver value to the customer a lot faster, more transparently and more efficiently.

“There are many parts of the process that are repetitive or predictable or that fall into the bracket of administration and they don’t require an experienced, qualified adviser to spend time on them. We are building the technology so that our brokers are not doing 10 cases a month but have the ability to do over 100 cases a month.”

Loss-making tasks

Habito’s founder also believed there was much room for improvement in the traditional broking business model.

Hegarty says: “A lot of the work brokers normally do is loss making: producing key facts illustrations, going back and forth with consumers over the fact-find and know-your-customer requirements, identity checking and the like. Our goal is to not have brokers doing that type of manual work. We would rather have mortgage experts for their expertise, where they can help consumers rather than fill in forms.”

Habito is close to launching a fully automated mortgage application process, whereby the customer can experience the entire transaction online. However, Hegarty thinks human advisers will remain fundamental to the mortgage process.

“We have spent a lot of time talking to the FCA and understanding where the sensitivities lie,” he says. “Everything will still be checked by a human adviser and in almost all cases we will also have a human broker call the client to make sure they have completely understood the process and do not have any other questions.”

Hegarty adds: “There are obvious consumer benefits to having online approaches to getting advice, where you can see the whole market and are not getting charged £250 by a broker who is limited to a small panel of products.

“But this market has matured over decades and brokers have lots of fundamental knowledge and experience, so they are going nowhere. We are always interested in hiring them because it’s the brokers who train the machines.”

In McKenna’s opinion, the combination of human and digital processes has the most potential to transform the mortgage market.

He says: “Successful firms will recognise that, by mixing the best of their own skills with technology, they can substantially reduce operating costs and provide more streamlined services to more customers. They may earn less per client but they will be able to help far more.

“If you are a new start-up digital mortgage broker, like all firms in the automated advice space you’ve got to spend a huge amount on marketing and advertising.

“We will undoubtedly see a handful of what one day will be very large businesses emerge, but there is plenty of opportunity for firms that already have customers and regular new business to streamline their working to come up with a best-of-breed digital and human proposition.”

Both Habito and Trussle have built much of their own technology although they use existing product data streams. Traditional firms are unlikely to have the technical expertise or to want to make the major investment required to build their own systems.

Sinclair says: “ The amount of investment you have to make in a scalable technology solution means that only the larger firms can invest in this area. But that doesn’t mean that those firms, once invested in it, won’t white label and sell it out to other people. That will give even the one-man band access and capacity in the marketplace.”

Off-the-shelf solutions exist already. 360 Dotnet sells a suite of software products that advisers can use to run their business more efficiently and give the consumer a digital experience.

Chief executive Carlos Thibaut says: “A client-facing fact-find is simpler and much more secure; we know that clients like to do it. They would rather sit with their tablet in a coffee house filling it out than spend an hour or two on the phone or go into the office to run through a load of basic questions and data provision that they could do in their own time in a way that fits their lifestyle. It also improves the adviser experience because it is much faster.”

Thibaut adds: “The point-of-sale service is much faster than existing systems. It’s fully integrated so you don’t have to go off the system to import documents. And through the use of the portal everything you do within the process is automatically updated to case tracking, so an alert goes to the client if you need extra information. The adviser can use the marketing communication tool in the portal to target communications at that client and keep in regular touch. In our opinion, if the client is contacted only once a year or on renewal, that’s too late. You need to be in regular contact with the client all the time.”

Lender alert

But change, of course, is unpredictable. The mortgage market may see a major disrupter equivalent to Airbnb or Uber come from nowhere and change the landscape beyond recognition. And the intermediary sector is not alone in needing to watch its back.

McKenna says: “Lenders can also expect significant disruption. New data aggregation techniques are enabling far more accurate assessment of credit risk. This will render obsolete most of their previous underwriting processes.

“Lenders that fail to embrace change may protect their market share in the short term but, at some point, their lending volume will simply collapse and they will have got themselves into a position from which it will be impossible to recover.”

Thibaut also sees the potential for dramatic change.

“Who knows?” he says. “Google manages huge amounts of data and has an enormous amount of knowledge about consumers. It wouldn’t take much of a stretch for big data analytics to be used by Google or another technology firm to say: ‘I understand that you may be looking to buy property. Do you want these tools to see if you can apply for a mortgage? Do you want to see your credit score? If you want to apply for a mortgage, I’ve got a peer-to-peer lending platform here because I have millions and millions of clients and finance providers sitting behind me.’

“It’s probably some way in the future but every other industry has seen massive disruption and we have yet to witness that in the mortgage market. Peer-to-peer lending in personal loans exists already and it’s a serious business.”

McKenna also warns existing players not to rest on their laurels.

“Digital commerce doesn’t respect long-standing reputations and digital consumers are notoriously promiscuous. If they can get better rates and a better experience dealing with someone different, loyalty is quickly lost. You need only look at the change that has taken place in the personal lines insurance market in recent years to see how quickly markets can be transformed.”

He adds: “The mortgage industry is facing a tsunami of change over the next two to three years. This will be great for consumers but brokers and lenders alike need to be prepared to embrace new ways of working if they are to continue to be competitive.”

Brokers who fail to adapt and deliver the digital experience that customers increasingly expect may find they can no longer retain or win business. It will be increasingly difficult to keep up with the volume of cases that digitally enhanced brokers can handle and therefore their earnings potential will be greatly impaired.

Advisers who thrive in the modern marketplace will be the ones who embrace technology as an asset to their business, rather than view it as a threat.

Mortgage journey should be a marriage of convenience

bunton-patrick

Patrick Bunton
Director
London & Country

A mortgage is a complex arrangement and is the largest transaction one is likely to make during one’s life. Its subject matter is also such that most consumers are unlikely to stay abreast of marketplace developments.

For these reasons we believe it is important to marry the ability to speak to an adviser with an online journey, rather than try to be online only with no human interaction.

In our experience, most consumers begin their mortgage journey by collecting information online: comparing available products and maybe even filling in enquiry forms and obtaining initial figures. But before they pull the trigger and formally submit their application, usually they want reassurance from speaking to somebody.

In time, some consumers may be willing to take the plunge after an online journey only, but that is some way in the future.

For an online-only proposition, the challenge is that you are subjected to the same rules under the MMR as with face-to-face advice. But will it be the same as advice in the traditional sense? There is a danger the questions may be too limited. Advice is advice; it is not order taking.

We are constantly investing in our online proposition and developing it is one of our high priorities. It is not a cheap thing to do, so it is not easy for smaller brokers. There are 60 lenders with different systems to plug into. We regard our online proposition as something that is alongside an advised process.

Customers who want to start the process online, then speak to someone offline and go back to complete the process online, will be able to do so. It will be like railway lines where customers can move at will between one and the other. It is about dealing with customers in the way that they want at the time that they want, rather than trying to force them down one particular channel.

The big advantage for large brokers is the infrastructure in place. We have all the back-office skills to see those mortgages through. Knowing which product to recommend is one thing, but knowing how to submit the application is another.

Processing the application, including any troubleshooting, requires a skilled back-office team, which established intermediaries have in place but not all tech start-ups will.