The Adviser takes a look at how the ‘challenger brands’ are differentiating themselves from the big four, and why more brokers are now seeing them as a genuine alternative
In what might be seen as a David-versus-Goliath battle in the home loan market, there is no doubting the important role the non-major lenders play in offering an alternative to the big four banks.
The relationship that non-majors have with brokers is vital both in sustaining and growing their size and market share. Put simply, the ‘challengers’ need the third-party channel in order to survive.
As the rate war between the non-majors and the majors continues, how are the smaller players sticking it to the bigger fish, and what obstacles do they have in their way?
The price war
Aggressive price cutting by many challenger brands in 2014 has helped drive down interest rates across the mortgage market.
Suncorp Bank strengthened its push to be the bank that brokers consider first, by reducing its fixed and variable home loan rates in July last year and again in October.
Adelaide Bank also cut its fixed rates by 20 basis points in July and its variable rates by 45 points in October.
After the big four dropped their five-year fixed rates to 4.99 per cent in July and August, ME Bank undercut the majors by dropping its five-year rate to 4.94 per cent.
Other non-majors that made significant rate cuts throughout 2014 include Macquarie Bank, AMP Bank, CUA, Citibank, Teachers Mutual and Wide Bay Australia.
But the highlight of the non-major bank rate cuts last year was Heritage Bank’s slashing its one-year fixed rate to 3.99 per cent, the lowest of any kind in its 139-year history.
Astute Financial principal Sam Ayliffe says the non-majors have been aggressive at trying to gain more market share by running promotions never seen before.
“We’re seeing the largest discount off standard variables that we’ve seen in a long time, which is 15 years plus,” he says.
“We’re seeing them rebating and refinancing costs and waiving annual fees. It’s the most competitive I’ve ever seen it.”
However, despite the push by the non-majors to increase their presence in the mortgage market through favourable pricing, the majors still seem to have the edge.
According to a report by Standard & Poor’s Ratings Services released in November last year, Australia’s regional and mutual banks are losing the home loan market’s pricing war to the majors.
The report shows that the big four grew their loan books by more than 7 per cent on an annualised basis in the six months to 30 June 2014 – just above the 7 per cent industry average. Compare this with the lending growth of the regionals and the mutuals – 4 per cent and 3 per cent respectively – and you notice that they are well below the average.
But the report singled out the success of Macquarie Bank, which achieved growth of 71 per cent in its residential lending book in the 12 months to 30 June 2014.
The growth of Macquarie’s mortgage book was supported by investment in listed mortgage broking companies, its broker commission structure, and its 2013 acquisition of a loan book worth $1 billion from ING Direct.
The report observed that factors underpinning the major banks’ favourable pricing position are their funding cost advantage, their superior operating efficiency and the more favourable regulatory capital treatment of their home loans.
“This dynamic has made it difficult for other, smaller residential mortgage lenders to compete against the major banks in an increasingly cut-throat Australian residential lending market, and could bring downward rating pressure on regional banks and banking mutuals if this competitive struggle were to escalate,” the report stated.
The report also highlights that the big four have a strong economic incentive to maintain the status quo in their market share and pricing position.
“At the end of the day, the smaller, retail-focused Australian financial institutions cannot afford a long-term price war with the major banks while continuing to maintain their business franchises, financial viability or current ratings,” the report says.
“Nor is it in the best interest of the Australian major banks to instigate a price war within their high-profile home lending businesses, as that could lead to cannibalisation of the profitability of their sustainability larger loan portfolios.”
But the non-majors are adamant that slashing rates has helped them grow and prosper in the third-party space.
ME Bank’s national manager for brokers, Stewart Saunders, says the record-low offers as well as other discounting activity by all the banks have been a big positive for the regional lender.
“ME Bank has gained significant share of the fixed-rate market in recent years by outpricing the other banks in terms of the offers we have available,” he explains.
“We offer some of the lowest fixed rates for home loans currently available in the market, and we’ve seen this translate to a significant increase in broker home loan applications and settlements over the last year.”
David Ure, head of branch and third-party channels at Heritage Bank, agrees that competitive pricing is helping the non-major gain ground on the big four.
Mr Ure says Heritage has been “smashed” with applications since reducing its discount variable home loan rate from 4.69 per cent to 4.39 per cent in November last year.
CUA’s general manger of products and marketing, Jason Murray, says the credit union is focused on growth, and therefore has the most incentive to try and offer competitively priced products.
“We take great pride in having very competitive rates out there and we have consistently had that,” he says.
“Our standard variable product has been 50 basis points cheaper than the average of the major banks since April 2010.”
Not all about price
Although the data in the Standard & Poor’s report paints a pretty bleak picture for the non-majors, smaller banks insist that remaining competitive isn’t all about rates.
Fons Caminiti, senior manager of broker distribution at Adelaide Bank, says while product and price are key factors, “they are only two legs on the home ownership stool”.
“Experienced brokers know that support is paramount, and this is the third leg which follows through at Adelaide Bank once the handshakes are concluded,” Mr Caminiti told The Adviser.
“Brokers have the utmost confidence in knowing that when they send an application to Adelaide Bank, regardless of whether it’s their first dealing with us or their 101st, they will receive a premium service.”
Mr Caminiti claims Adelaide Bank strives for consistency and reliability.
“Our turnaround times don’t blow out when we have special offers on the table that can cause volume spikes and stress our people,” he says.
“We resource effectively and we pride ourselves on our determination to be reliable.”
Wide Bay Australia’s general manager of third-party and strategic alliances, Charlton Nevis, agrees that service and support are crucial to retaining and growing market share.
“It’s about the ability of the broker to have a one-person contact for all of their transactions and all of their troubles they experience throughout those transactions,” he says.
“In fact, we have a higher-cost model because we make sure that our relationship person controls every deal that they have from the broker.”
MyState’s general manager of sales and distribution, Huw Bough, says that building trust with brokers is an essential part of the bank’s support framework.
“Brokers need to trust that we will look after their customers and affirm their decision to recommend our products,” he says.
“Trust is also built on consistently delighting brokers and their customers in moments of truth – and if we get it wrong, we fix it fast.”
Of course, the non-majors are bound to say good things about their service and support, but brokers are echoing their value proposition.
Hayley Grant, director of HMG Home Loans, feels the non-majors offer a more personalised service to her clients through the life of the loan, and that their processes are often more streamlined.
“BDM support from a non-major tends to be more personalised and consistent, which assists my business and the service I provide my clients,” she says.
“Direct access to a credit analyst also helps in workshopping a deal, and they tend to look outside the box a bit more.”
Finance Made Easy director Tony Bice likes using non-major lenders because they allow him to get a lot closer to their credit departments to discuss decision making.
“If there is something that needs clarification, I can discuss the issue either with a BDM who will take it up directly with the assessor, or I can speak to the assessor directly,” he says.
Ivo DeJesus, director of Sanford Finance, agrees that the ability to speak to assessors is one of the main reasons why he deals with non-majors.
“Speaking to the person who is assessing the deals is vital in our business and can save a lot of time,” he says.
“I tend to find the major banks’ broker support channels to be nothing more than gatekeepers that offer little to no assistance.”
Mr DeJesus adds that non-majors generally have a more common sense approach to lending, which he believes is not always evident with the big four.
It is crucial for the non-majors to differentiate themselves from the big four – it increases competition and gives both brokers and their customers greater choice.
Matt Baxby, group executive for retail and online banking at Bank of Queensland, says that operating as a ‘relationship bank’ as opposed to a ‘transactional bank’ is a significant advantage.
“We think our approach is one that appeals to mortgage brokers, who have to have similarly strong relationships with their customers,” he says.
“There will always be people that would prefer not to bank with the big four, and we’re a credible alternative for brokers that want to provide this option to their customers.”
ME Bank’s Stewart Saunders says the bank is in a unique position within the banking community because a majority of ME Bank’s customers are members of industry super funds, who are happy for the bank to provide a lower return on equity for their investment and pass on those savings to customers.
“We see that as a really unique position where we don’t have the focus on profit, but rather trying to pass on the lowest-cost products that we are able to our customers, and we really want to build on that,” Mr Saunders told The Adviser.
Mr Caminiti, meanwhile, says Adelaide Bank’s location and level of exclusivity sets itself apart from the majors.
“Firstly, Adelaide Bank customers can only be introduced by our broker partners, so we’re exclusively a broker-only bank, he says.
“Then there’s the ‘Adelaide factor’. Our people are lucky to live in an affordable, well-planned city with an enviable lifestyle that shines through in their voices.
“We’re easily contacted, easy to talk to, easy to deal with and easilyidentified as people who care about and clearly understand our brokers and their customers.”
David Ure says Heritage Bank’s customer satisfaction rate of 90 per cent (Roy Morgan Research) is a crucial point of difference for the regional lender.
“I often say to my brokers, What about after? What is the satisfaction level of customers going to be once they’ve settled their loan?” he says.
“We can guarantee that we’re providing a high-level service, and that’s driven by the fact that we’re a mutual bank.”
Unlike the majors, he explains, Heritage does not need to worry about generating profit to satisfy shareholders because they do not have any.
The importance of brokers
No one can deny the significance of loan writers in the success of the non-majors and in driving competition in the broader Australian mortgage market.
Steven Degetto, head of intermediaries at Suncorp Bank, says the regional lender views the broker channel as an integral part of its overall strategy to become the best challenger bank.
“Our broker business is very important to us, which is why we’ve invested in the channel significantly over the past 12 months with people and our service proposition to brokers,” he explains.
“We aim to deliver a consistently high level of service that brokers can depend on and we will continue to recognise brokers as a crucial partner to us.”
MyState’s Huw Bough says brokers even out the playing field for non-majors and provide opportunities for customers which they may not have considered earlier.
“Brokers are a key part of our strategy and we have implemented a number of initiatives to provide them and their customers with a better experience, and we will continue to improve our broker proposition,” he says.
Meanwhile, Wide Bay Australia’s Charlton Nevis says the operational infrastructure that the building society has created for the mortgage broking channel allows it to relate to brokers in a way that is a true business-to-business proposition.
The lender’s level of commitment to brokers is “fantastic”, he claims, allowing it to grow in the third-party channel.
Keeping the competition alive
As the third-party channel grows and more players enter the market, it is vital for the non-majors to remain relevant and competitive. But how exactly can they achieve this?
In its submission to the Financial System Inquiry last year, professional services firm KPMG Australia made three recommendations designed to benefit the mutual banks: explore the scope for concessional risk weighting for low-risk lending; allow mutuals to be licensed as banks; and recognise perpetual debt instruments as capital without their being required to be converted to equity.
The Customer Owned Banking Association (COBA) also voiced its opinion last year, calling for financial regulation reforms to deliver a more equitable banking sector.
COBA chief executive Louise Petschler said it is important to recognise that competition and choice are diminishing within Australia’s concentrated banking market.
“If no action is taken to even up the playing field, the major banks will continue to get bigger and to increase their already dominant share of the banking market,” says Ms Petschler.
“It’s a mistake to confuse the strength of the big four banks with the overall health and sustainability of our banking system.”
Ms Petschler called for more action to ensure smaller players can function on a par with the larger banks.
“Under the competitive neutrality principle, customer-owned banking institutions should be able to compete on equitable terms with their large listed competitors without being handicapped by unfair treatment or subsidies to competitors,” she says.
From the non-majors’ point of view, focusing on delivering the best possible service and distinguishing themselves from the big four is crucial.
“You’ve really got to focus on what makes you different – how can you stand out from the majors? – and if you don’t, then it’s easy to become inconsequential as a financial institution and you’re just going to be a smaller version of the majors,” Heritage Bank’s David Ure says.
This cannot be achieved solely by offering cheap rates; forming and maintaining healthy relationships with partners is also needed.
“It’s about giving brokers and their customers a chance to be placed with an institution which provides ongoing service to them, and that’s where [Heritage Bank] try to differentiate ourselves in the marketplace,” he says.
CUA’s Jason Murray says focusing on customer satisfaction is the credit union’s primary philosophy.
“Sure, every bank will say that customers are important, but when you are customer-owned and that is your only stakeholder – you don’t have shareholders that are external to your organisation – then you should be excellent at it. We should be the pinnacle of customer centricity,” he says.
“I think for all of those challenger brands that are non-majors, that is the answer to it. You’ve got to differentiate and be true to what your purpose is. Clearly, as a member-owned organisation, that has to be your purpose.”
Suncorp’s Steven Degetto believes technology will play a large role in the success of all banks, and that the challenger brands need to look at ways to integrate it into their operations.
“Customers expect banks to be technology leaders and to make it simple for them to access banking services,” he says.
“Suncorp Bank is committed to investing in new technologies that will bring benefits to both our brokers and customers, streamlining our systems and enabling greater customer convenience.”
Banks that watch and listen to what brokers are doing with their customers and their businesses are the ones that will really thrive in the future, according to Sam Ayliffe from Astute Financial.
Mr Ayliffe says it is not just about the products themselves; “it’s about how they can match them with brokers’ businesses”.
The feeling’s mutual
The Adviser talks to Mark Middleton, national manager for third-party distribution at Teachers Mutual Bank, about the lender’s position in the mortgage market and how it can remain competitive
How is Teachers Mutual Bank currently placed in the third-party channel in terms of competition?
Teachers Mutual Bank has just celebrated a prosperous first year in the broker channel. We have been able to successfully compete in the mortgage space, with highly competitive rates, excellent service and an ever-growing product range.
Our 100 per cent offset facility sets us apart from the competition, as there are very few players in the market with a 100 per cent offset available on all fixed and variable loan products.
We are dedicated to helping first home buyers take those daunting first steps onto the property ladder and continue to adapt our product offering to meet their needs.
We have recently introduced construction loans for this segment, where members are able to borrow up to 98 per cent inclusive of LMI.
How important are brokers to Teachers Mutual Bank?
With Australians increasingly turning to brokers to help them choose the right mortgage, the third-party channel is vital for growing market share.
Teachers Mutual Bank operates nationally but has a limited branch network, meaning the broker channel is particularly important for us to grow outside of our home state of NSW.
Brokers allow us to access potential members and grow our membership base in states across Australia where we do not have a ‘bricks and mortar’ presence. We have seen strong growth, with the percentage of loans coming from outside NSW growing significantly.
To support this growth, Teachers Mutual Bank has invested additional resources in broker development, with BDMs now positioned around the country.
How does Teachers Mutual Bank remain competitive in today’s environment?
To remain competitive, we know that we need to continue to offer excellent rates as well as market-leading products and customer service.
We also believe that our focus on the education community and their families is a huge advantage and offers brokers a unique business development opportunity. We have seen brokers utilise our products to target their marketing towards this niche group with great results.
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