In the past few years mortgage distribution and application processing have largely been driven by rapid advances in technology. In today’s competitive environment, organisations demand big functional improvements in transactional operations and customer service, yet this must be achieved at significantly lower costs. The IT spend of the average lender has soared and there is little evidence to suggest any change is in prospect.
Accordingly, a growing number of businesses are planning to stay ahead of the game by outsourcing their technology needs, with business process outsourcing being a prime example of this. Of course, this is not new, particularly for banks which have been outsourcing cheque clearing operations for years. Similarly, human resources departments have been using third parties to provide payroll services for a long time.
Every lender should be looking to cut costs by embracing BPO. With the life and pensions industry having started the trend, there is now every reason why lenders should also consider the benefits. But is the mortgage market ready for BPO and are conditions conducive to it?
Whether or not the market is ready is neither here nor there. With continued pressure on lenders’ margins as a result of new entrants, BPO is becoming more of a necessity than a luxury if lenders are to have any hope of making productivity gains or cutting costs. And if we see a reduction in remortgage business this year lenders may also struggle for volume, which will have an impact on income.
Cost is not the only factor to consider when thinking about BPO. Companies should identify strategic activities that must be controlled internally, then look to outsource non-strategic activities that can be processed at lower cost without affecting their business plan.
An example is a lender with a competitive advantage in product design and access to funding which may be open to outsourcing its IT and processing to a provider that could offer competitive systems at a cost that undercuts the lender’s competition.
Given that some lenders already outsource distribution to packagers and mortgage clubs, the big savings could come in outsourcing processing, administration and technology. A number of companies such as Vertex and Homeloan Management Limited provide outsourcing services. In fact, the former has enabled new entrants such as DB Mortgages to boast the latest in distribution and application processing.
But the market is ripe for more entrants. The economies of scale that a number of large lenders would achieve if they all used the same outsourced provider could dramatically change their cost to income ratios and return on capital for shareholders.
Interestingly, it is this potential increase in shareholder value that could be one of the main motivators of an industry move towards BPO. This could be the year that even tighter profit margins, higher arrears and reduced volumes in the market force lenders to look at a shared technology platform to reduce costs.