Kevin Duffy: March of the digital machines not so scary

Mortgage Introducer

March 15, 2017

Kevin Duffy is managing director of Mortgageforce

I recently praised those lenders who had already introduced a broker-friendly retention pricing policy and Santander admittedly received some utterly fawning and sycophantic love, without any El Clasico tickets ever arriving.

Since then RBS has uninvited me from all of the remaining six nations internationals, Halifax has sought to repossess the house and Nationwide wants its branded post-it notes and mouse mat back.

Mortgageforce reboots in Scotland

I will return to the matter of product transfers shortly and do so within the context of surely the industry’s most scaremongering subject; the dreaded DIGITALISATION, whatever that term actually means in practical terms for brokers since nobody appears to have succinctly defined this yet, be it a threat, opportunity, or both.

By nature, I am sometimes a risk taker and a contrarian thinker. Sure, I didn’t see Leicester winning last year’s title, but I did envisage bloody noses for the establishments on both Brexit and Trump. And on this potentially thorny matter I am also now going to swim against the tide till I’m proved wrong and drown. Here goes.

There is clearly no doubt that the digital era which is now well underway may eventually reduce the size of the intermediated market. But some of the claptrap that I’ve heard from certain peers of late amounts to little more than opportunistic hot air, as some are clearly just trying to disturb brokers into either joining or remaining with a certain network or directly authorised model because that entity is ready to ‘take advantage of digitalisation and provide related value added benefits’.

Some of these peers are even suggesting that the monetary valuations attached to the practices operated by a given AR or DA business are now diminishing because of this inevitable sea-change, i.e. ‘why would we apply a sensible 2017 EBITDA multiple to your business Mr Broker when in five years’ time the lenders will have secured so many of both your old and new clients?’

These people have short memories. I can’t be the only one that recalls Savills’ foray into this over 10 years ago now. Netmortgage it was called. The furore at the time wasn’t dissimilar to the noise we’d heard even earlier back in 1999 when allegedly on December 31 of that year, airplanes would fall from the sky and traffic lights would freeze on amber.

Okay, that’s perhaps a glib comparison. But isn’t it ridiculous how whenever a technological advancement occurs in any commercial field, keyboard warriors and their alleged industry Svengali’s can’t help themselves from over-hyping it?

By the way does anyone also remember GMAC, John Charcol and Birmingham Midshires amongst others espousing the virtues of the 30 second offer letter etc…? And yet several years on, most mortgage-backed property transactions still take up to 12 weeks to exchange and complete, and thankfully over 70% are still intermediated face-to-face.

This digital stampede-thinking has gripped other sectors of industry. But long-term structural changes and buyer behaviours there too are still not in evidence.

Ocado and online shopping was meant to revolutionise retail habits (it hasn’t, as folk still like to physically ‘go shop’ even if it’s not in the high street as such).

We’ve also seen Uber make its debut, and yet, like Ocado, its market penetration and profitability stats are underwhelming.

The buying and reading of books has admittedly digitally transitioned, but at most railway stations I pass through I still see WHSmith and Waterstones doing just fine. Put simply, many of us of whatever age will still/always want to physically touch and hold what we are buying.

Now mortgages aren’t tins of beans or hardbacks. And neither are they homogeneous. At one of our recent management meetings we had cause to granulate down into the albeit modest 5000 deals transacted a year. 30% of these were what you could describe as mainstream and vanilla. And whether we call it robo-advice or otherwise, yes, I can see some of this market being digitalised in the future.

I would also anecdotally suggest however that at least half of these routine vanilla deals would still be done face-to-face because the borrower actually wants to still see the whites of someone’s eyes as opposed to the bytes of someone’s laptop.

However, what I don’t envisage is the other 70% of transactions being handled in the same way.

Brokers might well want to consider the compositions of their own client banks and surmise for themselves whether the following borrower-types really can be effectively serviced by either digital machinery or execution-only styled advisers, be they positioned in a bank’s contact centre, or for that matter, in an actual industrial-sized mortgage brokerage.

These types include offset/HRT applicants, all buy-to-let applicants and especially those in a company name or where the property is unusual or a multi-occupancy. Throw in let-to-buy deals, anything which involves capital raising or debt consolidation, bridging (take your pick of the far too many transactions which are conveniently categorised under that title these days), properties with a semi-commercial bent, and then consider also guarantor mortgages, expats, complex/adverse prime, and the numerous assisted ownership schemes which have thankfully characterised the last few years.

Isn’t it clear to these soothsayers that virtually every single mortgage profile is now individually fingerprinted?

Further, the expression DIGITALISATION is always seemingly accompanied by the word MILLENIALS. I personally have two of these, one at university and one not far off. Given the near impossibility of most young folk to step on to the property ladder without parental assistance these days, can you imagine for one minute one of my two kids being permitted to transact their first mortgage (with some of my blimmin dough!) completely digitally?!

Two hopes…… and Maurice and Bob just left town.

I’ll even pop a new word into the wordsmiths’ miscellany here…..it’s PARENTENIALS……and it defines those parents of millennials (many of whom will still be living at home at aged 30) and who will quite simply not be going digital for the kids’ mortgages. Commoditised purchases such as car insurance, holidays , buildings and contents for sure; life cover too perhaps. But a 25 year commitment for the largest sum they are ever likely to borrow? Nope.

A final and relevant observation on this brings us back to our good friend, retention pricing. Those AMI bulwarks, Robert Sinclair and Martin Reynolds recently pressed for publication of the as yet undisclosed annual volumes being written by lenders offering retention products.

Anecdotal estimates have this at a whopping £80bn. Of which, possibly £60bn is being transacted on what may amount to a ‘non-advised’ basis.

I have always felt that certain lenders have a sense of near-entitlement about this business (hence perhaps, we don’t get to ever hear what the numbers are). And a quantum of loans that size is clearly justifying the huge investment being made by certain lenders on the digital roadmap as the concept would play very nicely to that market segment. i.e. where the client doesn’t require any advice , and it’s a facile like-for-like refinance.

Though of course in some of these cases the client actually is blissfully unaware that he is not receiving any advice, some will possibly think that a product and price comparison will equate to the giving and receiving of advice! This is incidentally slightly disingenuous as I distinctly recall that one of the regulator’s aims within the MMR was to make this perception less muddy?

So, to conclude, if you are a broker who has been becoming concerned about digitalisation, don’t be overly anxious.

As on one level, brokerages may even get to actually work collaboratively with lenders to exploit it for a mutual gain. And secondly, take comfort from the fact that some of the supposed intelligentsia in the broker community who have been tirelessly word-dropping the term into every conceivable conversation, have never actually been a broker themselves or amassed a client bank.

My point being: These back-office clairvoyants are in many cases perfectly affable and intelligent people. But they are by and large folk whose salaries YOU pay for indirectly, and whose rolodex of top 20 friends and colleagues does not include (unlike yours) people whom you have personally helped move home on countless occasions and who are client-friends who won’t be deserting you for a tablet or a Fitbit any time soon.

For sure, the Emperor Digitalis does have some clothes on. But look a little closer and you’ll see that the apparel is actually pretty scant fare.

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