Rethinking business models for European mortgage providers
The European mortgage industry has weathered several storms in recent years, both causing disruption and creating opportunity.
Following the Brexit announcement in 2016, the Bank of England dropped mortgage interest rates to an all-time low of .25%, encouraging homeowners to refinance. Meanwhile, Europe’s 2018 General Data Protection Regulation forced mortgage providers to rethink data privacy or risk severe penalties. Heavily reliant on data mining for accurate underwriting, lenders consolidated tremendous amounts of consumer data and invested in technologies and training to ensure compliance.
Now the COVID-19 pandemic has created an additional layer of uncertainty to an already complex industry. The issuance of new mortgages has come to a virtual standstill, and many countries have mandated payment holidays. The U.K.’s largest lender, Lloyds Banking Group, granted about 400,000 mortgage payment holidays and 480,000 payment breaks on business and personal loans, credit cards, and auto financing.
Even before the current economic downturn, the European mortgage market was growing slowly, and profitability was thin. Falling loan repayments hindered the industry despite high European Union employment rates and a healthy loan origination trend. In the U.K., Europe’s largest market, outstanding residential mortgages grew by just 2% per year in real terms between 2007 and 2018. And last year, the 15 biggest lenders in the U.K. were engaged in a price war.
At the same time, the industry has been navigating the disruption created by emerging technologies. Deep-pocketed incumbents face tough competition from startups building new processes from scratch, at dramatically lower costs. Fintech companies created aggressively customer-centric banks, online offerings for unsecured personal credit, and peer-to-peer lending platforms for short-term liquidity. Even with these innovative models, it has taken fintechs significant time to make inroads into the mortgage industry, one of the most complex areas in financial services. Moreover, such models are less resilient to market shocks like the current pandemic.
Under pressure to improve customer experience and deliver greater efficiency, many traditional lenders have started multi-year digital transformation initiatives. However, these transformation programs themselves present new challenges.
Traditional mortgage lenders need to invest in many areas including origination, servicing, and collections. In a wide-ranging transformation, there is a risk that these areas could push aside efforts to improve customer experience. A recent Infosys survey of mortgage providers found that 77% were investing in their originations processes, 78% in servicing, and 78% in collections. Enhancing customer experience was only ranked ninth on their list of priorities.
Among those surveyed, the most significant challenge was integrating data, systems, and processes. Fifty-seven percent of executives said this was very or extremely challenging, a reminder that managing IT-related issues is critical to a successful transformation. At the same time, mortgage providers are having to learn or incorporate technologies, such as artificial intelligence, machine learning, advanced data analytics, and robotic process automation. Predictably, cybersecurity is also a high priority for most organizations.
In many cases, banks are reconsidering their business models in response to growing pressure from fintechs. Startups, such as the U.K.’s Starling Bank, are building their banks as platforms, offering multiple services from third parties connected by open APIs. Solaris Bank in Germany offers white label “banking-as-a-service” to other companies that want to provide banking and payments services without owning or operating the infrastructure. This trend toward platform business models is part of the reason Infosys acquired 75% of Stater, ABN AMRO’s mortgage processing business. Open APIs provide the ability to access data from multiple parties to speed up the application and closing processes. The technology also enables the creation of a services ecosystem, such as real estate and home insurance services, that should ultimately enhance the profitability of the core mortgage business. Currently, the platform serves €320 billion worth of mortgage assets and allows banks in the Netherlands and Belgium to mutualize the mortgage servicing costs.
The long-term impact of the coronavirus pandemic is uncertain, although a global recession seems inevitable. However, the demand for digital transformation in the mortgage industry seems likely to grow as providers try to reduce manual intervention and improve efficiency. It will also force companies to consider very carefully the strength of their partners, mutualize costs structures, and ensure that their operations and the ecosystem is robust and resilient in a crisis. Even though some hardship is likely in the short-term, mortgage providers must fundamentally rethink their business models, decide where they want to focus their investments, and build those capabilities while there is still time.