A lot can happen in four years and brokers who can see what’s in front of them are more likely to succeed. So what’s in store for brokers and borrowers in 2020? The Adviser looks to the future to find out.
Did you see the GFC coming? Even once it unfolded and the dominos began to tumble, could you foresee the effects it was going to have on the Australian economy, the local mortgage market, the non-bank sector, business growth and consumer confidence?
What about broker market share? Did you accurately predict when brokers would become the dominant market force and account for over 50 per cent of mortgages written?
Looking back, it can be easy to identify the problems, structures and processes which led to what many economists say was the worst financial crisis since the Great Depression in the 1930s. The subprime mortgage crisis can seem entirely avoidable with the benefit of hindsight, and still barely anyone can believe ‘NINJA’ loans (no income, no job and no assets) actually existed. It seems more like a punchline than economic fact.
Similarly, now that broker market share is hovering between 50 and 55 per cent (and still climbing), it feels as though we were always going to end up here. Retrospectively, it feels like an inevitability. Casting your gaze back over the past few years, you can see how trends in consumer behaviour and the increasing professionalisation of the third-party channel built up to the current situation – where a borrower is now more likely to visit a broker than go directly to a bank.
What isn’t as easy is looking forward and knowing what will happen next. Hindsight is one thing; predicting what’s to come and the many and varied ways your broking business could be affected is another.
Even though you may be sick of hearing about ‘fintech’, ‘digital disruption’, and the need for diversification to ‘future-proof’ your business, the fact is the world will continue to change – and the more you know about what might be around the corner, the more you can prepare.
So, what will broking in 2020 look like?
To those of us who still think the 1990s was 10 years ago, it can be terrifying to realise 2020 is in fact only four years away. A lot, however, can happen in four years.
Just four years ago, Julia Gillard was prime minister. We’ve since had three different leaders (KRudd 2.0, Tony Abbott and Malcolm Turnbull), and if the current polls are anything to go by, we may even have to add another name to that list this year. By the time you read this, we could be on our fifth prime minister in four years. Not many would have accurately predicted our current political situation.
Four years ago, London also hosted the Olympics; Barack Obama was re-elected for his second term; Facebook had its IPO; Rover Curiosity successfully landed on Mars; and Costa Concordia capsized off the coast of Tuscany.
Closer to home, in January 2012, The Adviser ran a cover story about the future of aggregation and pondered whether aggregators as we know them now will still be around in five years’ time. The article investigated whether there would be further consolidation in the space and whether banks would push towards acquiring aggregators to further their distribution capabilities.
Since then, Aussie has acquired National Mortgage Brokers (nMB) and the Commonwealth Bank increased its stake in Aussie from the 33 per cent it bought up in August 2008 to 80 per cent in December 2012 – and that’s just one example. There are many, many more instances of change and consolidation in the broking industry over the past few years – some of which we may have seen coming, others which could have caught you off guard.
So what’s next for the third-party channel? The Adviser spoke to some industry thought leaders to try and get 2020 vision on what’s around the corner.
“Increased market share penetration from online lenders is virtually assured” in coming years, according to Finsure’s managing director John Kolenda.
“Online lenders will continue to increase market presence. If brokers don’t embrace internet and social media in the mortgage space, they face the possibility of being locked out of a significant segment of the market – particularly if they do not adopt a strong online presence within five years.”
Brands we already know and recognise could also change the lending and broking landscape, according to Mr Kolenda.
“We are also likely to see the emergence of large consumer brands into the mortgage space in the near future from companies with significant client databases – for example, Coles, Woolworths and Google.”
Traditional lenders will also expect more from brokers, and brokers who aren’t on top of their game will fall behind as the years roll on, he says. They could even suffer financially.
“Lenders have recognised that the third-party channel is a cost efficient and valuable distribution channel relative to branch networks. However, the standard of loan application packaging continues to be problematic for lenders,” Mr Kolenda says.
“This area will receive increased scrutiny from lenders in an attempt to improve efficiencies and cost savings. Historically, they have aligned commissions and/or turnaround times as leverage to improve the standard of loan applications.”
Then, of course, there is regulation, the potential for government intervention and – as you would know – unfolding right now, the ASIC investigation into broker remuneration structures.
Earlier this year, banking veteran Steve Weston – who has served as CEO of mortgages at Barclays and had roles at NAB, St George Bank and Challenger – told The Adviser that a potential negative outcome of ASIC’s review could be the recommendation that trail commissions be removed or changed.
This, he says, would not be good for brokers, the industry, or indeed for consumers.
Mr Weston spent years working in the UK, where brokers have 70 per cent market share but do not get paid a trail.
“In the UK, they don’t have trail and their upfront commission payments average around 0.35 to 0.40 per cent,” he explains.
“I’m a strong advocate of trail for a number of reasons… and the UK broking industry would love to receive trail because it enables brokers to professionalise their business. Trail gives brokers an asset that they build and they’re more likely to look after their customers rather than just put them in a home loan and tell them goodbye.”
If brokers in 2020 face a market with no trail commissions, then businesses and borrowers will suffer, according to Mr Weston.
He has become a strong proponent of trail, particularly after witnessing some worrying trends in the UK market caused largely by brokers scrambling for more income.
“Removing trail isn’t necessarily a good outcome for consumers,” he says. “In the UK market, the most common mortgage is a two-year fixed rate. If you look at the level of broker sales of two-year fixed rates, they are higher as a proportion of all their business than the bank-based mortgage advisers who have more five-year fixed rates.
“And my concern that I raise in the UK is [this]: is the reason so many customers are being [moved] out into a two-year fixed rate because the commissions are so low, that every two years some brokers feel the need to move a customer from one lender to another simply to survive, to earn enough income to survive?
“That is not a good customer outcome. So, my argument was, if you’re paying a trail, the customer is more likely to be put into a product that is more suitable.”
Despite some potentially negative, or even unforeseen, outcomes following ASIC’s review, not all legislation, regulation and investigations are bad news.
Connective director Mark Haron says there can be positives that stem from reviewing industry standards and redefining best practice.
“We have already seen regulation have a positive impact on the industry,” he says. “The NCCP [National Consumer Credit Protection Act 2009] has improved business practices and customer confidence in brokers.
“Changes to banks via regulation have seen a shift in business activity and customer behaviour.
“We will continue to see more of this and, in most cases, there is not much brokers can do except adjust quickly to the new market conditions,” Mr Haron says.
When it comes to ASIC’s review, any panic would be premature and top-performers will succeed in 2020 and beyond regardless of the outcome.
“[The ASIC review] will have an impact in coming years, but I believe there will be adjustments and tightening in this area, not a wholesale and significant change,” Mr Haron assures nervous brokers.
But what if lenders, regulation, technology, artificial intelligence, changing customer expectations, a change in global market conditions – or even a former real estate mogul as the ‘leader of the free world’ and the potential fallout that results – aren’t even the biggest threats around the corner for businesses, and more specifically brokers?
According to Mr Haron, the industry needs to be careful it does not fall into sub-par practices and that everyone needs to work together to ensure the third-party channel continues to go from strength to strength.
“The biggest threat to brokers is brokers themselves,” he warns. “To continue to grow, we need to continue to be trusted by customers. Every time a broker doesn’t complete their compliance obligations properly, puts a customer into a product because of an inducement that is not disclosed, or blatantly does something fraudulent, we decrease the trust of the community.”
To get on top of this threat, and to ensure broker malpractice is a newsflash-worthy anomaly rather than the industry standard, collaboration and vigilance will be key, says Mr Haron.
“As an industry, I think we can be very proud of what we do and we need to keep an eye out for each other. If you feel one of your colleagues is not doing the right thing, speak to them or your aggregator or industry body,” he says.
It probably comes as no surprise that in a discussion about the future and the business opportunities that may come with it, the internet and social media play a central role and their benefits and importance stressed.
“The value of the internet and social media in the mortgage space will continue to strengthen,” Mr Kolenda says.
While the web currently acts as a lead-generation tool for brokers, and an educational resource for borrowers, its role will evolve in brokers’ businesses. The internet will become a lodgement platform for borrowers “without necessarily the involvement of a third party”, he says.
“Gen Ys and Zs who are very comfortable interacting via social media will soon become borrowers who will be relaxed to apply for a mortgage over the internet after doing their research through social media.
“Brokers will need to be a ‘change agent’ and embrace these mediums to generate leads, retain clients and compete. Brokers can no longer be a transactional, ‘set and forget’ operator – but need to be a service-orientated ‘client-for-life’ broker.
“Nurturing a client through multiple service solutions will not only deepen the relationship, but ensure relevance over the long term,” he says.
Choice Aggregation’s chief executive officer, Stephen Moore, agrees that technology needs to be embraced, but says it definitely falls into the “opportunities” column, rather than being a threat when it comes to broking in 2020.
“The industry continues to flourish, and with that comes both challenges and opportunities,” he says. “Technology means change is happening at a faster pace and as brokers’ share of the home loan market has grown, so too has the competition for business.
“Technology will continue to play an important role in our industry, but we see technology as an opportunity. The face-to-face support a broker offers cannot be replaced by technology. We believe technology will continue to support brokers to improve efficiencies and offer an ever-improving standard of customer service,” Mr Moore says.
Digital disruption and social media will certainly change the face of broking as we know it, but brokers need not fear the unknown, according to Mr Moore, who believes humans still want help from other humans – no matter what.
“For brokers, it’s going to be critical to embrace technology, not to fear it. But remember that technology cannot replace the human element. Success will come from marrying the digital world with high-quality personal interaction,” he says.
Mr Haron goes so far as to say technology will encourage the banks to work with, and rely on, brokers even more closely than they already do and will help them continue their upwards trajectory in terms of market share.
“I believe broker market share will continue to increase at a similar pace for the next few years. As brokers embrace technology to make the process better for their customers and improve the customer experience, more customers will continue to turn to them,” he says.
This is already unfolding in 2016, according to Mr Haron, with brokers using software to keep customers informed about the progress of their loan application through automated messages, customer portals and other platforms.
“But regardless of how much technology is involved, there is still a strong desire to have some personal contact and relationship, even if it happens through their computer or smartphone,” he says.
“We work with some brokers who are at the forefront of lending services and others that are competing and beating the banks in the online marketing space. I see, and expect to continue to see, the lenders supporting brokers with this through their own technology and adjusting policies to enable more technology to be used without compromising security or increasing risk.”
It seems always to come back to technology and the lenders when discussing the future of broking. And with technology opening up more lending options for customers and prompting the emergence of new platforms which, in theory, threaten market share, it would be easy to panic about technology and lenders almost working together to squeeze brokers out.
This, however, would be misreading the situation, according to Mr Haron, who says this perceived threat could indeed be an opportunity in disguise.
Brokers in 2020 will have “access to more and varied banks and funders” which they can embrace “to give their customers more products and greater service”. A win for customers, a win for brokers.
How can you prepare?
Even when engaging in hypotheticals and crystal ball gazing, knowledge is power – and the more you know about what might be around the corner, the more likely your business is not only to survive but to thrive in 2020 and beyond.
Brokers need to accept diversification as a necessary inevitability, says Mr Kolenda, and to arm themselves with more knowledge and skills.
“Brokers need to be delivering broader solutions as they are the central hub of a special relationship other industries rarely gain – and they should cherish that,” he says. “By securing this trust, brokers need to explore, invest and deliver high-quality trusted solutions.”
They will need to secure a greater share of consumers’ wallets by cross-selling or referring other services, such as insurance and wealth, Mr Kolenda says, and should improve their knowledge across areas such as specialist lending, commercial and equipment/asset finance solutions.
Keeping on top of what may be around the corner, and remaining highly-educated about new opportunities, lenders, loans, customer needs and emerging platforms will help brokers succeed in 2020, he says.
“Being aware of these changes, which are almost certainly going to cause significant disruption to the mortgage broking industry, will be key to ongoing and long-term success,” Mr Kolenda says.
Embracing, rather than resisting technological change and innovation from lenders, aggregators and even consumers will also be important for brokers who want to thrive in 2020.
“The banks’ ability to use technology in respect to customer identification, document signing and title exchanges will also be an area that brokers must embrace,” Mr Haron says.
“The increase in funders available to brokers with smaller banks and other lenders wanting to distribute their products via brokers is also benefiting brokers and will continue.”
Forecasting does not, however, necessarily need to be focused on the internal goings-on of your business and the evolving third-party channel. Ultimately, brokers who want to be ready for tomorrow’s market need to look to tomorrow’s customer.
“Brokers need to ask themselves, what will their 2020 customers look like?” Mr Kolenda explains.
“We believe they will have an instant focus and demands – i.e. they will want everything immediately through smartphones. They will have a high propensity to give instant feedback (complaints) via social media,” he says.
This means lenders, aggregators and brokers need to be technology-driven in order to cater to the next generation of borrowers.
“Brokers should look towards Uber as a good example of what a technology disruptor can do to an established market. Uber are now the largest taxi company without owning any cars. They have achieved all of this via a mobile phone app.”
Mr Moore agrees that one of the greatest challenges businesses will face is the evolving consumer, and brokers need to prepare to meet the needs of 2020 customers.
“Customers are increasingly recognising the value a broker can bring, and we’ve seen that as the industry’s share of the home loan pie has grown. This places brokers in great stead for the future. The challenge will be rising to meet the increasing expectations of customers.
“As an industry we all need to continue to raise the bar and keep ahead of customer expectations,” says Mr Moore.
“I expect to see increasing focus on our industry, as we continue to grow our share of the home loan market. As brokers come to be seen as leaders in this market, it will be important to act as leaders. And this will mean focusing on high-quality advice and best practice.”
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