The global financial crisis dented consumers’ perception of non-major lenders, but now they’re fighting to regain the public’s trust through quality products and service
There is no disputing the importance of the non-major lenders to the mortgage market.
The non-majors provide competition that drives down prices but drives up quality of service, also resulting in superior products for borrowers.
Ian Rakhit, head of broker sales at Bankwest, says the smaller lenders are necessary to a thriving industry.
“Non-majors support and enhance healthy competition while encouraging all lenders to keep on their toes in terms of quality and price of loan products, which is of vital importance to the health of the market and consumer choice,” he tells The Adviser.
John Minz, chief executive officer of Heritage Bank, adds that this competition keeps the larger banks in line.
“It’s good for the industry to keep the big guys honest, and that then keeps us all honest,” he says.
Greater competition is also vital to the broker value proposition since more choice requires greater expertise to select the right loan.
“It’s better to go to a client who says, ‘I would like the very best deal’, and to be able to say, ‘here is the top one or the top three out of 20’, rather than ‘here is the best one out of four’,” says Mr Minz.
However, while competition certainly exists, it is the majors that still dominate the market.
According to the latest AFG Mortgage Index data, the four major banks have 74.9 per cent of the total mortgage market.
The majors have the capacity to use short-term tactics in providing incentives, commission increases and a perceived value in interest rates that the non-majors can’t, says Mr Minz.
These short-term tactics place and keep the bigger banks front of mind with consumers and affect their perceptions of value, he says.
Rather than these offers, however, the non-majors offer better long-term service.
“What the smaller entities do is ensure we are providing value and service all the time, not just in fine weather and when it suits us, and that’s not the case with the major banks,” he says.
According to Mr Minz, however, the global financial crisis (GFC) also impacted consumers’ perceptions of the smaller lenders.
“There was a temporary fight to perceived quality through size,” he says.
Mortgage broker Allen Collins of Smartline Personal Mortgage Advisers says he saw the GFC put a dent in his customers’ view of the non-majors.
“When the GFC hit, a lot of people didn’t want to use non-majors,” he explains. “It was about a perceived stability in size – and also a perception that some of the smaller banks may go under.”
In response, the federal government in 2008 introduced a bank guarantee designed to maintain public confidence in the country’s banking system. This guarantee was offered for a range of eligible financial institutions, including major and non-major banks, building societies and credit unions.
While the government intervention ensured smaller lenders could continue to offer home loans, the GFC made it much harder for the non-majors to access economically viable funding to compete with the big banks.
According to Mr Collins, as the wider economy moves on from the GFC, his customers appear to be warming once again to non-major lenders.
“I think the perceptions consumers had during and just after the GFC have begun to change a fair bit in the last couple of years,” he says.
According to AFG’s Mortgage Index, the market share of non-majors has increased by 7.5per cent since April 2011.
Phil Wratten from Quick Assist Lending says that while consumers may think that the sheer size of the major banks offers borrowers greater security, this isn’t the only incentive driving them towards the bigger institutions.
Other factors such as tradition and habit also push them to the big four.
“A lot of it is hereditary,” he says. “Mum and dad bank with the Commonwealth Bank so the kids tend to go that way too.
“In the years gone by, the majority of people have been with the majors and it follows suit that their kids go that way as well.”
According to Mr Wratten, many consumers with whom he deals are still naïve about the benefits of using some of the smaller lenders.
“Consumers are not as aware as they should be,” he says. “ The market is flooded with the big four and I don’t think the non-majors give themselves enough exposure.”
While the non-majors offer many products that are superior to those of the bigger banks, Mr Wratten says the challenge is often making consumers aware of what’s on offer.
Both he and Mr Collins told the The Adviser that they sell the non-major lenders’ products by outlining all their features – which means they don’t need to sell the lender itself.
“You just lay the facts on the table, give the borrower the options. It’s about the product more so than the lender,” Mr Wratten says.
“I just focus on the product to win over consumers,” Mr Collins adds.
Smaller lenders, he continues, could assist brokers by be er informing consumers of the benefits of their products and this would convince them to look beyond the majors.
“I just don’t believe the advantages of some of the particular products are getting across to the general public,” he says.
From the lender’s perspective, Mr Minz says brokers have a key role to play in changing the perceptions of consumers. It is the broker’s duty to sell the features of the product and if they do so, consumers will flock to the non-majors, he claims.
“When a customer sits across the desk from them, the broker has a duty to explain the pros and cons, the range of products and the implications,” he says.
Ian Rakhit of Bankwest adds that brokers can use their expertise to comfort consumers in choosing a smaller lender.
“Brokers provide a level of expertise and comfort to consumers in order to acquire the most suitable home loan which meets their needs,” he says.
“Brokers have definitely helped encourage positive consumer perception of non-majors, seen as secure financial institutions which offer greater choice in the Australian market.”
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