Distribution is king in Europe

Mortgage Distribution across Europe has grown massively in the last 10 years at the expense of the traditional high street bank branch and will continue to grow, research published last month suggests.

It says mortgage lenders are having to re-think their distribution strategies across all channels and business practices and predicts indirect distribution across Europe will continue to grow so that, by 2010, 50% of all mortgages in Europe will be distributed through intermediary organisations.

European Mortgage Distribution: changing channel choices is a piece of research that has been produced by financial services consultancy firm Mercer Oliver Wyman. It examined 13 European mortgage markets, including the UK, Spain, Poland, Denmark Germany, France, Ireland and the Netherlands. As a whole, the 13 countries accounted for a little over 95% of outstanding mortgage balances in the European Union in 2005.

The research also precedes the publication of the EU’s white paper on mortgage credit which is expected in June. And it has the backing of the European Financial Management & Marketing Association, a body of banks, insurance companies and financial institutions throughout Europe.

Mercer Oliver Wyman says high street lenders are losing ground to alternative distribution channels across Europe where third-party distribution through mortgage intermediaries now accounts for 40%, (around E500bn) of mortgage lending among the 13 markets each year.

Moreover, the report warns “lenders that stick to the old branch model and merely dabble in other emerging channels will be out-competed by focused distributors and will risk further erosion of their share of distribution and profits unless corrective action is taken”.

That said, mortgage distribution across Europe is a mixed bag of differing models and levels of consumer financial literacy, the research says. While in the UK and the Netherlands more than 60% of mortgages are distributed through indirect channels, in France and Germany the share of intermediary business is around 20-30%. The report argues there are four main factors affecting the level of intermediary distribution within each market. These are competition and market structure, product complexity, branch density and the financial sophistication of consumers.

In markets such as the UK and the Netherlands where there is huge mortgage product choice there is also a greater need for financial advice moving consumers toward the indirect distribution model. Meanwhile, the increasing number of mortgage lenders entering these markets increases competition to the point where new entrants are reliant on intermediaries to gain a national presence.

Branch density – the number of branches per 100,000 people – in the UK and Netherlands is low, with a correspondingly high ” Lenders that stick to the old branch model and merely dabble in other emerging channels will be out-competed by focused distributors”intermediary share as a consequence. Moreover, the level of financial literacy among consumers also affects the extent to which they will seek advice and so has an effect on the size of indirect distribution.

Lesser factors that affect the size of indirect distribution include financial regulation, the proportion of new-build properties in the market and the relative process efficiency of direct versus indirect distribution.

The report suggests every country is at some stage in the development of an intermediary market. Poland and Turkey are in the early stages, with intermediary businesses only just being created, often as family-run operations. The UK and the Netherlands have relatively mature markets which are beginning to show signs of consolidation as the need to offer greater choice and transparency to consumers and the increased need for consumer protection resulting from this grow.

Mercer Oliver Wyman argues the next stage of development for these markets is likely to be one in which “previously unbundled” services along the value chain can be integrated into one large technology platform. This, says the report, is already taking place through a platform used in Germany called Europace. It says Europace could well represent the next stage in evolution for sourcing systems as the platform enables users to access a greater number of services including data management, securitisation and customer relationship management.

Meanwhile, mortgage lenders across Europe are increasing attempts to deal direct with intermediaries. The report says 69% of lenders offer both education and IT support to intermediaries, adding that this is one of the most important support issues for intermediaries across the EU. It also says lenders that fail to provide such intermediary facilities will gradually lose volume until a common IT platform for the mortgage market in which they operate emerges.

The report also looks at the potential for cross-border lending in the EU and argues that a significant barrier to its growth is the lack of, or immaturity of an indirect intermediary distribution channel. The majority of lenders surveyed (37%) say cross-border lending is their preferred method of expansion into new markets over acquisition (28%) and organic growth (21%).

But the report also says access to distribution is critical to any market entry strategy and those markets dominated by branch and tied distribution would prove extremely challenging to any lenders looking to enter them. Markets where distribution is more accessible – such as the UK – have seen a greater level of foreign access in recent years, most notably several large US investment banks. The study expects this trend to continue.