Packaged future

Possible paths of development for packagers include becoming electronic aggregators and developing lending propositions, says Jeff Sutherland-Kay

In recent weeks, much has been written about the mortgage intermediary marketplace as the industry has taken stock on regulation’s first birthday. Some have expressed surprise that packagers still exist, especially as those same pundits forecast their demise a year ago.

Others have not been surprised that packagers continue to play a significant role. But what of the future? How will their role evolve? And who will be the winners and losers?

Packagers currently fulfil three tasks in their ground between lenders and brokers. First, they provide distribution not only for broker-focussed lenders who don’t deal directly with brokers but also for some that do. Second, they provide outsourced application processing for sub-prime lenders including onsite lender underwriting. Third, they provide information and products to brokers to help them source the right deals for their clients, including cascading between products and lenders as a case develops.

But it’s a changing world and packagers are under threat from all sides. For starters, look at distribution. Distribution is critical to the survival of any business, especially one that occupies the middle ground between a manufacturer and its customers. And packagers are increasingly being dis-intermediated by both ends of their value chain. Why?

Lenders that have traditionally used packagers for their distribution are turning more to the internet as a tool to create relationships directly with brokers. BM Solutions has been at the forefront of this trend and has been able to cut out the packager route for its new business. Others have tried to follow suit but their ability to make it a successful strategy is partly down to how much stretch there is in their brands.

The point is that some lenders only get onto the shopping list because they happen to be on packagers’ panels. Moving from this position to one where a lender can source most of its business in a direct-to-broker offering requires significant amounts of resources and the cost-benefit analysis doesn’t always stack up.

At the other end of the spectrum, consolidation among networks will reduce the distribution options packagers have. And some networks prefer to have their packaging services inside rather than outside the network, allowing more control over lender panels, service, product research, management information and compliance. This is likely to become more prevalent as networks consolidate.

The outsourcing of application processing to packagers is still part of the service offering for many intermediary-only lenders. People and premises Icost a lot of money and it’s often cheaper to outsource rather than to do it yourself so packagers have had a major service role to play.

But here again is a threat. As the power of electronic decisions grows along with the ability to obtain electronically more and more of the information a lender needs to make that decision, the value packagers can add to application processing lessens.

Packagers have certainly added value when it comes to identifying suitable mortgage products for a broker trying to sort out a client with an adverse credit history. Packagers do this all day, every day and with non-conforming lender portfolios showing more product and risk options than there are fish in the sea, it has been a consistent area of packager expertise. While lenders are starting to introduce cascading into their electronic decisions, packagers still offer a better option here as they are able to cascade between lenders as well as products.

Despite this, there appear to be more threats than opportunities for packagers. So let’s consider the dynamics of the packaging sector.

There are four notable areas of development. These are online broker services, electronic linking, branded lender partnerships and product manufacturing.

Online services such as online decisions in principle, application submission, case tracking and management information, have become part of the staple offerings from packagers. While brokers include online services in their sales and administration processes as the norm rather than the exception, when it comes to networks and lenders a suite of online packager tools has become essential.

Principals want to know what’s going on in their networks and want the ability to access up-to-the-minute management information. They also want to be sure all their appointed representatives’ business is being accounted for. Anything going round the side will result in lost income and could invalidate professional indemnity cover. So immediate and easy access to information is critical.

Also, lenders expect their packager and distributors to have up-to-date technology to run their application processing, facilitate the transfer of information and deliver management data. A packager that doesn’t have the investment resources to build or buy the technology – or doesn’t have access to an appropriate technology platform – is going to find it harder and harder to survive.

So it’s no surprise that some of the larger packagers are considering how “While lenders are starting to introduce cascading, packagers are able to cascade between lenders as well as products”they can provide the electronic links to throw smaller packagers a lifeline. Of course it’s a commercial, not a charitable lifeline but a lifeline nonetheless. The upshot is that a packager lacking the necessary resources or seeking to control their costs can piggy-back on another packager’s technology platform. It’s a hub-and-spoke solution with linked packagers being, to all intents and purposes, electronic satellites. And while some prospective satellites may feel that they will lose some of their independence, this is better than the alternative. In any case, it has to be a commercial arrangement that adds value to both sides for it to work effectively.

Apart from the electronic benefits, it will give the satellites access to more lender and product options as their hub packager will almost certainly have a branded lending proposition.

Branded lending is a latter-day phenomenon that involves sub-prime lenders seeking to gain a stronger foothold in a packager’s distribution through designing pricing and risk options that don’t feature on the lender’s main portfolio. Inevitably, one side-effect has been that sub-prime product portfolio complexity has grown.

But it’s understandable that packagers want to cement their position in the market more strongly, and branded lending partnerships are one way of doing it. Consumers gain in the end as packagers give away some of their income to improve the products.

It has meant an increase in market penetration as well. Hub-and-spoke links to electronic satellites will allow the satellites to take advantage of these branded partnerships while the hub packager and distributor will gain better access to the local market where a satellite has a stronger name.

And it doesn’t stop there. There has been a good deal of activity, and even more speculation, around the development of new lenders. A new lender has to create distribution and distributing through the packager sector can deliver rapid product uptake. Packagers understand what works and what doesn’t in the sub-prime markets and can, and will, be key distribution channels for any new lenders.

But the packagers are getting in on the manufacturing act. It’s always simpler, and usually more effective, to go backwards into manufacturing from a strong distribution base than the other way around and larger packagers are beginning to realise this, whether as individuals or as part of cooperatives. The power-play of market knowledge and understanding, products, lending criteria, service, technology and distribution creates a perfect storm for a packager-lender and its funding partners.

So what will the packager sector look like in two years’ time? Will there still be a role for packagers and what will that role be?

There will always be survivors but it’s the packagers with strategic vision that will set the pace. At least one of the larger packagers is developing an electronic hub-and-spoke system and this will be a stepping-stone to it becoming an electronic aggregator in the intermediary market for sub-prime mortgages, providing electronic and online services that will benefit brokers, networks, lenders, their linked packagers and, of course, themselves. At the same time, there will be increasing lender development as larger packagers extend their value chains back into manufacture.

So packagers will be around for a few years yet. And the real winners will be those that can take the complexities that sit behind their propositions and make them simple for the broker to use. Now there’s a challenge.

Jeff Sutherland-Kay is director of Sutherland Strategy Limited