Analysts have echoed the concerns of existing players in warning that the real estate giant’s move into mortgages could be problematic.
REA Group, the partner company of realestate.com.au, increased profits by 12 per cent over FY17 and predicts its 80 per cent stake in mortgage broker Smartline will generate up to $30 million in revenue in FY18.
The ASX-listed group, in cooperation with NAB, is also developing a white-label mortgage offering to be rolled out later this year.
While REA Group is confident that its new mortgage business will deliver strong revenues for the group by leveraging the lead generation capabilities of its property listings platform, some remain skeptical about how successful the play will be.
Morningstar analyst Gareth James noted that REA has been making a number of attempts to diversify its business, with mixed results.
“In addition to improving its core business in Australia, REA Group also continues to attempt to diversify its Australian business, such as via the acquisition of flatmates.com.au,” Mr James said.
“However, new ventures have so far failed to generate a material earnings contribution, and we expect the core business to dominate earnings for the foreseeable future.
“In the short term, the most likely alternative source of Australian earnings is from the new finance division.”
However, while Morningstar expects the new finance division to grow, Mr James stated that “we don’t believe the company has a material competitive advantage in this large but highly competitive segment”.
The analyst pointed to a similar strategy by carsales.com, which “has already encountered problems” in its attempts to break into financial services.
Incumbent warns of challenges
Existing fintech players have also warned about the challenges of breaking into the broker market. Vince Turner, the founder and CEO of online brokerage uno, has been working in the mortgage tech space for over 10 years and said that operators like REA and Domain need to identify which parts of the transaction they can monetise.
Mr Turner warned that breaking into a new industry (i.e., mortgages) is not only challenging from a cultural perspective but also from a customer buy-in perspective.
He explained: “You could argue that it's pretty hard to get out of bed in the morning and be a media company [publishing company Fairfax owns Domain] and a financial services company. It’s very different culturally and it’s a very different set of skills, so I think that will be part of the challenge. . . . These things are not natural to them.”
The uno founder said that his company had partnered with several different companies, but that the thinking was that these partnerships would only be around 10 per cent or 20 per cent of its business.
He said that a large part of the difficulty would be getting customer buy-in, as users of the realestate.com.au and Domain are not primarily visiting the sites for a mortgage but for a property listing/rental listing.
“It's difficult to get a consumer to get onboard with something that is not what they went to the site for. For example, they are using the sites for real estate, not a mortgage, so it's challenging to get them onboard with this new side," Mr Turner said.
“We know it's challenging because we have been working real estate sites and we operate with other sites that want to bundle mortgages into their consumer experience . . . [if] the customer didn’t go there for a mortgage, trying to intercept them and say, ‘Look at this mortgage over here’, it's difficult.”
Another obstacle that these sites could face is the customer-service side of handling a mortgage, Mr Turner said.
“Consumers who are going to these sites are operating digitally, so convincing them to go through the mortgage process, which needs ‘advice’, is challenging,” he said.
Mr Turner revealed that delivering that support and ‘advice’ had been a challenge for uno. He explained that, although he believes the online brokerage is “leading this space in delivering an advice experience and the support experience digitally”, it had spent the last year trying to solve this conundrum and “still has a long way to go”.
“I think it's going to be a long road for Domain and REA in getting this to work for them,” the CEO added.
“I think they have the pockets to push it and they have made it a strategic priority (and maybe they will get there in the end), but it’s not as simple as just bolting on a mortgage broking business. It’s a lot more complicated than that.”
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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