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Comment: How open banking could lead to a digital marketplace

The final report from the FCA’s Mortgages Market Study released in March this year found that the mortgage industry is far from broken, which is significant given the major role it has in the overall UK economy.  Indeed, as at the end of 2018 there were over £1tn in outstanding mortgage balances in the UK, most of which are secured via mortgage brokers. And, unlike some other sectors within financial services, consumers are much more engaged in refinancing their homes, with over three quarters switching to a new deal within six months of moving to a conversion rate, aided by brokers and price comparison websites. Nonetheless, there is room for improvement and the regulator is concerned that consumers are not always able to secure the best deal available.

Over the last decade, mortgage brokers have maintained or even increased revenue streams from the introduction of home loans to consumers, while lenders to some extent have withdrawn from direct distribution. Despite this market dominance, brokers are still struggling to adapt their business from a largely manual model to a more efficient technology-based solution. In this respect, the sector has suffered from under-investment for years, with limited innovation compared to other areas of consumer finance where a greater use of digital distribution channels has facilitated more direct access to products for consumers.

It could be argued that the innovation needed within the broker community runs counter to their interests. Most of the value that brokers bring to the market stems from the provision of advice regardless of any inefficiencies involved in the process. However, this does not mean that the consumer experience is always enhanced. Indeed, the MMS found that around a third of consumers could have found an identical or better mortgage cheaper than the one they bought with the advice they received making no difference to the likelihood of them overpaying.

The regulator is unequivocal in its views on the adoption of technology, stating in the opening paragraphs of its review that it expects greater innovation in mortgage distribution to help consumers to identify, at an earlier stage, the mortgages for which they qualify. Moreover, if brokers do not adapt, they risk losing market share from new entrants – the likes of Mortgage Gym and Habito – that are already offering digital solutions with transparency and efficiency at the heart of their propositions. An end-to-end mortgage solution does not currently exist, but when one comes to market, it will not only disrupt current business models but quickly secure its position as a market leader.

To some extent, innovation for the benefit of consumers is hindered by regulation. For example, customers are frequently ‘channelled’ to advice that is not required, incurring unnecessary costs. This is predominantly due to the regulatory requirement for lenders and intermediaries to provide advice with every face-to-face mortgage sale, whether conducted by a lender directly or an intermediary. Under new proposals, advisers will be obliged to explain to the customer and keep a record of why they did not recommend a cheaper mortgage, if the mortgage recommended was not the cheapest meeting their needs and circumstances. This appears to restrict the ability of lenders and intermediaries to innovate to meet consumer demands for information and guidance in a non-advised, digital environment.

In addition, smaller brokers may feel they do not have the resource to introduce a digital element to their offering or simply do not know where to start. However, the UK is home to one of the most vibrant fintech communities in the world and intermediaries wishing to explore a more digital approach for their business can look there for inspiration. Collaboration between existing financial services providers and digital start-ups is becoming the norm and brokers need not feel that they are alone in evolving their practices.

A digital mortgage marketplace might be the answer. This would see the creation of a portal offering access to a comprehensive range of products with the mortgage broker sitting at its heart. A mortgage is after all only one element within a whole ecosystem of related products and services. Open banking APIs and their promise of sharing details of an individual’s financial status could help unearth the most suitable mortgage at the most competitive price whilst curating the results to help ensure eligibility on application. Beyond the sale, it presents intermediaries with the opportunity to offer insights on local house prices, to secure home insurance and to find the best deals on gas and electricity, helping to cement the consumer-broker relationship.

A mortgage marketplace portal also has the potential of removing friction from the whole process of applying for and securing a mortgage. Most information required as part of the mortgage application is digitised and can be easily uploaded and the necessary client data from payslips to proof of identity can be produced electronically. In addition, all participants in the homebuying process could contribute to this portal, which could prompt the next process step owner to act and confirm once completed. This would vastly improve transparency and efficiency whilst at the same time reduce the significant administrative burden shouldered by the broker. A centralised portal would also improve security by removing the need to email scanned images or post certified copies, with the added advantage of time-stamping both dispatch and receipt.

A combination of a greater emphasis on innovation from the FCA and the market forces introduced by new players disrupting the mortgage industry means that change is inevitable. Brokers can choose to ride the wave of this change or be left behind. The result of this technological transformation should be a mortgage industry offering improved access for consumers to suitable products at the best possible price and enhanced efficiency and transparency for brokers.

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