Dinosaurs dying on the high street

Throughout this year we have seen a stream of societies closing their high street branches. The dinosaurs are slowly dying out. As I shall try to explain, this is effectively a vote in favour of intermediary sales and a recognition that intermediaries make for a low-cost distribution channel for all mortgage lenders. Too low in my view – totally unbiased, of course.

The closure of each high street branch should be a bugle call to major intermediary channels such as mortgage networks and clubs to put pressure on lenders to increase the size of proc fees.

A few weeks ago we saw Newcastle shutting down 19 branches and in last week’s Mortgage Strategy (September 19) it was the turn of Birmingham Midshires under the headline, ‘BM to chop branch network by 48’. This represents no less than 70% of its 67-strong branch network. This is part of a wider review by its parent company, HBOS Group, that will see the remaining branches rebranded as Halifax and the name Birmingham Midshires disappearing from the high street.

Branch offices are there to sell products – new business – and to service the needs of existing customers. To retain branch offices as a distribution channel for new business has probably become uneconomic for most high street lenders. From their perspective, there are four main methods of selling mortgage products – a presence on the high street, telephone sales, internet sales and intermediaries.

High street branches, which began in the 1800s with the emergence of the building societies, suffer from relentless increases in rent, staff, maintenance, security, and rebranding costs when a lender changes name or merges. Look at the tens of millions spent by Abbey in recent years – and you can still find remnants of the house-shaped umbrella logo with its green and red colouring. And it will be another 10 years before people stop calling it Abbey National. Following its recent acquisition of Abbey, Banco Santander should have taken the bull by the horns and renamed it Abbey Santander.

Telephone sales have been around for 20 years or so, pioneered by the likes of Direct Line for motor insurance and more recently mortgages. Despite the policy of Direct Line to sell vanilla mortgage products that were easy to explain over the phone, volumes never really took off.

Similarly, when The Mortgage Corporation launched in the mid-1980s it undertook extensive TV advertising (remember Barry Norman riding up the escalator?) which encouraged the public to contact the firm by post or telephone. Within six months TMC’s distribution strategy had switched to the intermediary channel, primarily through the life companies such as Scottish Life and Scottish Provident that were pre-eminent at that time.

The major cost of telephone sales is the millions of pounds of advertising required to raise public awareness.

Internet sales in the UK started five years ago, when Charcolonline launched in late 1999, to be rapidly following by ELOAN in January 2000. Within 15 months, ELOAN and its contemporaries, Netmortgage and Moneygator, had closed down in this country.

Network Data was closely involved with these companies at the time. The lesson we learnt was that the great British public generally does not have the capability or confidence to choose the right mortgage products for themselves.

Last but not least, we have selling through intermediaries. Mortgage brokers have been around for 30 years since the early days of John Charcol. I expect brokers to be around for another 30 years at least, dealing with another generation of the British public who will be confused by the plethora and intricacies of the mortgage products on offer.

Given the educational standards in this country, which have gone down the toilet since my grammar school days in the 1960s, it will take a minimum 30-year recovery period before most young people become financially literate and capable of making their own decisions. But I have little confidence this will actually happen.

All four distribution channels involve a cost of selling that can only be borne by lenders. One way or another, this cost of selling has to be built into the price of their products. This happens in all other markets, for example, travel and consumer goods.

Which of these channels represents the lowest cost of selling? At the recent Mortgage Strategy Mortgage Summit conference in Jerez, I put this question to a panel of speakers, in particular to Jeff Sutherland-Kay in connection with his long tenure at Alliance & Leicester.

After a bit of persuasion he admitted A&L had looked into this, which is hardly surprising as it is what every major lender should do. I pressed on. Had the results ever been published? No, said Jeff, it would have been too embarrassing. Draw your own conclusions. Can you imagine a major lender publicly admitting the cost of selling through brokers is far less than the cost of selling through its branches? It has never happened and never will.

Another panellist, representing Nationwide, virtually admitted its branch network was being subsidised by the lower cost of sales through intermediaries.

I’m not suggesting for a moment that lenders should get rid of all sales channels except the cheapest one. There are sound commercial reasons for not putting all your eggs in one basket. What I am saying is that intermediaries should receive the recognition they deserve as a major distribution channel providing advice and guidance to the public.

Along with such recognition must come the realisation by lenders that intermediaries are poorly rewarded for the work they do. The days of lenders being able to say, “They’re all right, they make their money from the sale of endowment policies,” are gone.

Lenders should wake up and stop bleating about how they cannot afford to pay higher proc fees to brokers.