The Third Party Banking Report - Second Tier Lenders has revealed that there is little to separate the nation's smaller banks
While the major lenders dominate mortgage lending in Australia, second tier lenders play a critical role in the third party distribution channel.
Second tier lenders have a 13.6 per cent market share of the residential lending industry in Australia, based on the loans and advances on their books, according to APRA's August 2010 monthly banking statistics. This is a total residential loan book volume of $132.073 billion.
Without a second tier committed to third party distribution, the broker proposition would be seriously diluted and their commitment to the market cannot be underestimated.
This report has garnered broker perceptions around the second tier banks that distribute funds via brokers:
Macquarie Bank has not been included in this year's report as it has only recently re-entered the market.
Compared to the major bank lenders, which The Adviser ranked in April this year, the second tier has performed better across a number of key sectors.
One of the key findings of the second tier bank report is that overall there was very little discerning difference in how brokers perceived the products, technological platforms, commissions and support capabilities of the second tier and major banks.
With an average applied to most criteria, the results were similar - which has both positive and negative connotations for the second tier.
It is worth noting that the majors performed better in the field of cross sell.
Four of the majors scored higher on average than the top performing second tier lender Bankwest.
Looking at the two top performing banks in this criterion, CBA scored 3.82 in contrast with Bankwest's 3.16.
The second tier however fared better when it came to broker interaction. All scored around the circa 3.30 mark (out of 5) whereas some majors fell well below - NAB with 2.33 and Westpac 2.94.
The second tier as a whole also shone in training and education. All lenders scored over 3.00 whereas only one of the majors (CBA with 3.42) was able to achieve a score over that mark.
The majors however have a clear edge over the second tier when it comes to online lodgements.
Four of the majors scored higher than the leading second tier lender in this area - highlighting that there is still significant work to do.
Channel conflict is a key issue for brokers and the second tier is clearly ahead in this field in contrast with the majors. ING DIRECT performed best, with a score of 3.82 compared with ANZ's 3.24.
However even the bottom placed second tier lender Bankwest performed much better than the equilivant major lender NAB, scoring 2.97 compared to 2.56 - even though Bankwest has aggressively looked to increase its branch network over the last few years.
Commissions have hit the headlines recently with Westpac and St George announcing amendments that have not favoured the broker. The results of this report have confirmed that the second tier lenders performed well compared to the majors in this field.
All but one (Suncorp) were able to crack the 3.00 market in terms of commission structure compared to the major banks, where all but one (ANZ) failed to rise above that benchmark.
In terms of total remuneration, the second tier was again stronger, with an average score of around 3.00 compared to the majors' average of 2.60.
FINAL RATINGS & METHODOLOGY
A total of 304 brokers participated in the Third Party Banking Report - Second Tier Lenders. Each respondent was asked to rate the six second tier banks on a scale of 1 to 5 (1: very poor; 2: poor; 3: average; 4: good; and 5 very good) on a total of 17 metrics covering product, support, technology and commissions. For example, a rating of 3.5 would indicate that the bank was between ‘average' to ‘good' in terms of broker attitude.
Out of a maximum 85 points available, the final ratings were as follows:
ING DIRECT has topped The Adviser's Third Party Banking Report - Second Tier Lenders.
The bank achieved an outstanding 11 first rankings out of the 17 categories, placing it firmly ahead of its peers. ING DIRECT's only bottom score was for access to credit assessment staff.
The Adviser applied the following process in undertaking this year's Third Party Banking Report - Second Tier Lenders:
In September 2010 brokers that subscribe to The Adviser BULLETIN, the daily email from www.theadviser.com.au, were invited to participate in the survey
All six lenders surveyed were also given the opportunity to offer brokers that write their product the chance to participate in the survey.
The survey was promoted twice and remained open for two weeks.
Survey data was then assessed and analysed by research house Retail Finance Intelligence.
The pricing, policy and availability of a lender's products are key influencing factors for where brokers place their business
There's no discounting the influence product has in prompting brokers to recommend products outside of the major banks.
Aggressive pricing or progressive lending criteria can have a massive influence on how a product may or may not appeal to a broker's client.
Indeed, lenders are able to use product to quickly manipulate market share in particular segments simply by sharpening pricing or tweaking credit criteria to align with current market demand or a particular market segment.
Considering brokers' perceptions towards second tier banks' products overall, it would appear that they have some work to do.
While few brokers believed that second tier lenders products were poor or even very poor, few brokers scored the second tier high across all factors measured - product range, pricing, policy and cross-sell. While some lenders scored ‘good' in a number of segments, no lender was rated as being ‘very good' accross all areas assessed - highlighting that there is still room for improvement.
Overall, ING DIRECT and Suncorp are the only two lenders to deliver what brokers consider to be good pricing. No lender produced ‘good' or ‘very good' lending policies for cross-sell support.
While some lenders have a range of products that support most market segments, others seek to target niche market segments and offer fewer products albeit tailored and usually very competitive.
Considering the overall quality and comprehensiveness of a lender's residential mortgages, ING DIRECT was deemed to have the best products - which is reflective of its market positioning and ability to service a wide range of borrowers with comparatively well priced products.
A significant 71 per cent of brokers said ING DIRECT's products were either ‘good' or ‘very good,' giving it an overall score of 3.82 per cent. Two other lenders were also perceived to have a strong product range: Bankwest and Suncorp, scoring 3.59 and 3.53 respectively.
Citibank was cited as having the worst product range out of all six lenders, which no doubt reflects Citibank's previously reduced appetitive for mortgage lending.
Citibank made a strategic decision to scale bank lending during the global financial crisis. The bank made it clear that while it remained committed to the third party channel it would only write profitable business - a strategy that saw its pricing rise sharply.
While Citibank has recently looked to sharpen its pricing, the effects of a more competitive offering will not be seen until next year's report.
"Bendigo and Adelaide Bank has improved greatly and are much better post-GFC."
"AMP has the best pro pack and the most flexible master/global limit in the market. Their basic plus offset is the best in the market. Whilst pricing is not the number one issue, all other aspects such as service, products, BDM support is the best - plus back office operations. The others have a way to go to beat them."
PRICING & POLICY
The competitiveness of a lender's pricing and policy of products across key market segments was a key influencer of broker opinion.
It is this particular area that lenders have the most control - pricing and policy can be altered in order to open up or close down volumes with almost immediate effect.
With robust communication channels to broker networks lenders can move swiftly to promote products and pricing enhancements.
In terms of pricing, brokers recognised ING DIRECT as having the most competitive pricing, with 72 per cent of brokers flagging it as ‘good' or ‘very good'. Suncorp was also seen as a lender with good pricing, scoring 3.55 per cent. In contrast Citibank only registered 20 per cent of the broker vote brokers saying the lender's pricing was ‘good' or ‘very good'.
On the area of policy, Bendigo and Adelaide Bank was perceived as having the most competitive policies, Citibank the least. There was little to separate Bankwest, Suncorp and ING DIRECT, with a spread of just 0.01 between them.
"While some lenders have good products, they are let down by pricing. Unfortunately for the second tier lenders, clients are still very price sensitive, primarily (I think) because of media coverage of interest rates and how much increase/decrease in interest rates affects an ‘average' home loan amount."
"Being a broker in a regional area I find many of the second tier lenders' policies difficult to satisfy.
The opportunity for brokers to cross-sell non-mortgage products to their clients at the time of writing a mortgage has grown in popularity in recent years.
This is in part because of an aggressive push by the major lenders to reward brokers for originating the sale of these products. The second tier has also sought to increase profitability of efficiencies by offering other products via third party distribution channels, with varying degrees of success.
Bankwest was viewed by brokers as the number one lender in terms of availability, quality and support to provide additional products. This was closely followed by Suncorp, ING DIRECT, AMP and Bendigo and Adelaide Bank.
There was very little separating the six lenders. Consistent with other areas measured under product, Citibank ranked bottom in this criteria.
"Cross-sell works best when there is relationship between the branch manager of the local branch and the broker because these two parties can work together to help new customers feel comfortable and get all the cross-sell products they can."
"Our customers are happy that we don't cross-sell. They are sick and tired of having everything thrown in their face - personally I do not like the ‘do you want fries with that' approach."
After being coerced to migrate to full online lodgement, brokers feel that more can be done to truly increase effectiveness
Not too long ago, lenders received all applications via fax. Over the last few years lenders across the board have worked hard to submit all lodgments online - and give brokers the skills and resources in order to automate this process.
In many cases this has required a carrot and stick approach whereby lenders dangle commission bonuses based on online lodgement. More recently brokers have been penalised for not lodging online.
The shift to online lodgements has no doubt increased efficiencies across the board, however some lenders' platforms are more user friendly than others - which is reflected in this ranking.
An extension to this is the overall effectiveness of a lender's web presence, which was also measured in the Third Party Banking Report - Second Tier Lenders.
According to the repondents, just two second tier lenders provided what can be described as ‘good' online lodgements, the remainder were deemed to have ‘average' facilities in terms of efficiencies, usability as well as functionality.
ING DIRECT leads the field in this criterion, with a score of 3.58, closely followed by Bankwest's 3.54.
Suncorp was behind these two businesses with a reasonable gap between the lender and its peers.
Bendigo and Adelaide Bank's online lodgements was deemed by brokers as the worst.
"It's a shame that ING DIRECT has a tedious paper based application for additional borrowings."
Consistent with its online lodgements, ING DIRECT was perceived to have the most effective web portal, with 52 per cent of respondents finding it ‘good' or ‘very good' - with an overall score of 3.49, ahead of Bankwest's 3.35 and Suncorp's 3.28.
Brokers were least satisfied with the effectiveness of Bendigo and Adelaide Bank's web portal with only 29 per cent rating it as ‘good or ‘very good'.
"I have found that all of the second tier lenders only provide basic information and comments on their respective websites."
Over recent years commission structures have become more complicated with many hurdles now between the broker and maximum payment
Like product and pricing, commissions vary considerably between the majors and second tier lenders.
There were a number of standout performers in terms of the simplicity of commission structure to quality for total available commissions.
This was reflected in broker rankings, with brokers regarding ING DIRECT as having the best overall commission structure, with 44 per cent of brokers describing its structure as ‘good' or ‘very good', with an overall score of 3.37.
Citibank was nipping at ING DIRECT's heels however, with 43 per cent of brokers saying its commissions structure was ‘good' or ‘very good', scoring 3.35. Suncorp has the worst commission structure, scoring 2.89. Just 27 per cent of brokers said its structure was ‘good' or ‘very good' while 30 per cent said it was ‘poor' or ‘very poor'.
"Better than the major banks but still nowhere near sufficient to support the long term growth and viability of the broking industry".
"AMP pays well with no differentiation for volume."
In line with commission structure, ING DIRECT was seen to have the best broker offering in terms of overall commission paid, with 35 per cent saying it was ‘good' or ‘very good'.
However there was a disconnect between structure and remuneration for Citibank - highlighting the simplicity of its commission offering to brokers but the realities of securing top commissions from the lender.
Suncorp was deemed to have the worst broker remuneration, most likely because it doesn't pay trail in year one.
"To be honest, I never consider commission. I couldn't tell you what these lenders offer. I have always looked for the best product and ignored (often to my detriment) the commission being paid." Andrew, VIC
Ongoing and targeted support can have a major impact on brokers' customer servicing capabilities as well as the overall strength of their business
As well as the obvious need for brokers to have a diverse product offering to meet the needs of clients, the second tier by and large have a strong broker service offering that is sometimes not muddied by the perpetual issue of channel conflict - where banks offer possible preferential treatment to branch- based business as well as proprietary products for customers that deal direct with the bank.
Notwithstanding this key issue, the second tier is often seen to be more broker-friendly and well-resourced to meet their needs, across a range of areas.
Access to, and the capabilities of, BDMs has long been a key differentiator between all lenders. With some BDMs required to service hundreds of brokers, service obviously wanes.
Considering the results of the ranking, Citibank's top billing by way of its access to BDMs, their productivity and effectiveness in solving problems reflects to investment they place in this sector of its business.
With Citibank now sharpening its pricing, it would appear well poised to capitalsie on market inroads should it maintain the capabilities of its BDMs.
With a score of 3.47, Citibank narrowly beat Bendigo and Adelaide Bank with a score of 3.46. It was close across the board though, with ING DIRECT scoring 3.36 and AMP and Bankwest both tabling a score of 3.34.
Suncorp bottomed out the ranking with 3.20.
"Some of the second tier lenders will only support the brokers that give them deals on a regular basis. They should learn to accept even one deal a year."
CREDIT ASSESS. STAFF
These unsung heroes are a key touch point for brokers. Working in unison with a lender's BDM team the speed that they can process deals can directly influence a broker's servicing capabilities.
Brokers believe that Bendigo and Adelaide Bank have the best credit assessment staff, with a score of 3.42, followed by Citibank, with 3.25. ING DIRECT's team was perceived to trail the pack by way of its access to and ease in dealing and communicating with credit assessment staff, with a score of just 2.99.
"With Bankwest you don't have any access to credit staff, you are encouraged to use Lendnet, which I always do as a first port of call, but sometimes I don't think it has appropriate notes that tell me what I need to know - and then I have to spend a long time on hold to speak to someone."
Brokers are reliant on lenders in the large part for their clients' overall experience in securing finance. They are a key influencer in how a borrower feels about their mortgage, and their capacity to service it.
ING DIRECT's post settlement support was viewed by brokers to be the best, with 52 per cent of respondents saying it was ‘good' or ‘very good'. With an overall score of 3.43, Bankwest trailed ING DIRECT's 3.50, highlighting its strong capabilities in this criteria.
Citibank was deemed to perform the poorest, with a score of 3.15.
"A constant problem for brokers is that clients call the broker when they get an unsatisfactory response from the lender's call centre about a specific problem. Often we know how to fix it but lenders won't speak to us for ‘privacy reasons'."
Ongoing communication is key to ensuring that brokers remain abreast of policy and pricing changes, but also familiar with a lender's product - so they can effectively present options to their clients.
ING DIRECT, Suncorp and Bankwest were all viewed as lenders that were effective in their communication with brokers. Interestingly, while brokers found that ING DIRECT's credit assessment staff were the most difficult to deal and communicate with, brokers were most happy with the lender regarding its overall level of communication, scoring it at 3.50.
Bankwest and Suncorp scored the same at 3.43, followed by Citibank with 3.32. Bendigo and Adelaide Bank scored lowest with 3.15.
How lenders communicate with brokers when there are issues or delays can influence their overall perception towards a lender.
Lenders that are quick to notify brokers of potential issues can have a major impact on a customer's overall experience - which will in turn influence their perception towards their broker.
Bendigo and Adelaide Bank and ING DIRECT both rated highly when it comes to communicating with brokers when dealing with issues, scoring 3.38 and 3.36 respectively. Overall, 47 per cent of brokers said Bendigo and Adelaide Bank's communication was ‘good' or ‘very good' while 45 per cent claimed the same for ING DIRECT. Bankwest fared worst in this criteria, scoring 3.23, just behind AMP with 3.24 and Suncorp, 3.28.
ING DIRECT is good but only when the BDM/state manager gets involved."
Helping brokers grow their business is a key component of most lenders' training and education programs. How the second tier service brokers in this area can have a profound impact on their success in having brokers recommend their products as it keeps the lender top of mind
However as with training and education, very few brokers described any of the second tier lenders' commitment to broker business building as ‘very good', with just an average of 6 per cent stating this.
ING DIRECT was deemed the strongest in this area, scoring 3.04 - the lowest score registered by a criteria leader; 33 per cent of brokers agreed that the lender is ‘good' or ‘very good' at committing to support broker businesses.
Bankwest performed poorest in this category, scoring 2.85. Indeed, only ING DIRECT was able to break the 3.00 mark, and this is the worst performing area of the second tier lenders' broker proposition across the whole survey.
"Good brokers provide a constant flow of valuable, profitable business to banks. Better yet, this business is relatively cost-free for the lender because the broker is forced to bear most of the costs that the banks would have to pay to find service and retain a customer."
One key concern for brokers is channel conflict between the banks' retail and third party mortgage distribution channels.
It is therefore not surprising that brokers feel that ING DIRECT takes the best approach to the broker channel relative to a branch network - given that the bulk of its distribution remains via the third party channel.
A significant 69 per cent of survey brokers said ING DIRECT's approach to the third party channel was ‘good' or ‘very good', scoring 3.82 overall - one of the highest scores achieved for an individual criteria
Bankwest was rated worst in this criterion, which is most likely due to the bank's retail drive in recent years. The lender scored 2.97 in this criterion - markedly down on the next placed lender Suncorp with 3.36.
TRAINING AND EDUCATION
Ongoing education is essential to a broker's service proposition and lenders are increasingly looking to support their brokers in this field.
With NCCP now around the corner there training and support is likely to grow in importance in line with the increased compliance demands.
Less than 40 per cent of surveyed brokers felt that any lender training or education programs were ‘good' or very ‘good', highlighting that there is still some work for second tier lenders to do. Scores were relatively low across the board on their criteria, with ING DIRECT scoring highest with 3.20.
There were a number of lenders hovering around the 3.00 mark, showing that brokers expectations towards training are not being match with what the second tier are currently providing. After ING DIRECT, Citibank scored second best in this area with 3.10.
Poor turnaround times were a major issue for brokers a couple of years back, particular for the majors that were inundated with applications. The second tier fared much better though there were occasions that turnaround times blew out.
The hangover of this issues is reflected in this year's survey, with less than half of all brokers classifying the turnaround times of any of the second tier lenders over the last six months as ‘good' or ‘very good'. However scores were on average reasonable, with most around the 3.25 mark.
Bendigo and Adelaide's turnaround times were rated the best, scoring 3.38; Bankwest the worst with 3.09.