Competition critical to broker survival

In early 2007 the four majors accounted for 53 per cent of the market. Other banks held a 17 per cent stake, and non-bank lenders held an unprecedented 30 per cent market share.

Fast forward to 2012, and it’s a case of ‘back to the future’. The big four banks once again dominate, controlling 75 per cent of the market. Other banks account for 12 per cent, and the non-bank lender share has more than halved to 13 per cent. (including building societies and credit unions)

Economists may describe the dominance of the big four as an oligopoly, but consumers know it as lack of choice. My take is that it’s simply not healthy for households or the industry, and it certainly won’t favour brokers in the long term. In June 2012 the broker channel accounted for 39 per cent of the market  - down from 45 per cent in 2007.

Worryingly, are predictions of further concentration within the industry. The International Monetary Fund has found that the big four have grown market share of Australian assets by 10 per cent since 2008.

In its 2011 mortgage market report, IBISWorld forecasts “the level of concentration of the four largest players will remain at close to 90 per cent of the banking market over the coming five years, unlikely to be threatened by the smaller banks and non-bank mortgage lenders.”

Concentration may be a feature of a number of mortgage markets globally. But it doesn’t have to be. And there are examples where industry players have innovated to build a more competitive environment.

In Canada for instance, where the economy and levels of home ownership are similar to Australia, five major banks dominate the financial scene. However these five account for only 65 per cent of the total market (versus 75 per cent in Australia) and non-bank lenders have a 25 per cent stake. And more importantly smaller banks in Canada are growing whereas in Australia the reverse is true.

However it’s the post-GFC rise in market share of banks outside the big five that is especially noteworthy.

Despite challenging trading conditions, Canada’s smaller banks have grown market share from 8 per cent in 2007 to 10 per cent today.

Yes, there has been government support in terms of access to funding, but that alone doesn’t build market share. Their growth was achieved by viewing the market for what it is – a composite of different segments requiring quite diverse approaches, rather than one catering to a single homogenous mass market.

In the past, a number of segments of Canada’s home loan market had been under serviced. Today, niche players including the smaller lenders are specifically targeting these customers.

As a guide, one Canadian bank is focusing on the aboriginal segment. Another is pitched at the “emerging high net worth individual” market. Other banks are focusing on Canada’s burgeoning East Asian migrant population.

These strategies involve developing value propositions uniquely targeted to the respective market segment. And it’s paying off. Growth in market share is being achieved – and it’s forcing Canada’s big five banks to take notice.  

More importantly however, it also means under serviced consumers are receiving the attention they deserve, and by keeping competition alive, the entire market benefits.

As Australia’s fifth largest home lender, ING DIRECT has injected competition into the industry, and as a direct bank, the broker channel remains a core part of our business.  

But it’s hard to argue against the view that the current level of concentration is not good for customers or brokers.

12 months ago I suggested that the dominance of the big four did not augur well for the long term health of the broker industry. My view hasn’t changed. Inevitably banks with extensive branch distribution will strategically prioritise channels over the longer term.

Lisa Claes is ING DIRECT's executive director distribution