As more mortgages are transacted over the internet, intermediaries and len ders alike will reap rewards through the utopia of imp roved customer service, combined with transaction cost and labour savings.
In the short term, specific savings to intermediaries have been documented and are fairly clear to identify. They include reduced sales processes, improved compliance and greater management information. But if an internet-based common trading platform is going to become an integral part of the future mortgage sales environment, it will need to appeal to and have clear benefits for the lending community.
Without understanding the benefits that e-commerce will bring to lenders, how can intermediaries feel confident that their significant investment in technology, training and resourcing is valid?
The most obvious benefit to lenders is likely to be significant monetary savings. Established lenders in the UK marketplace have estimated that the cost of transacting a mortgage will be reduced by up to £500 through internet trading platforms. This sum, when spread across a significant proportion of a lender's business represents large-scale savings.
It remains to be seen how lenders will use these savings but there is potential for savings to be spread across customer benefits and a lender's bottom line to create a win-win scenario both for lenders and consumers. Even better for intermediaries, the future may even see higher procurement fees.
Lenders will see improvements come from different sides.
Balance sheet management
What to do when interest rates are moving? It is one of lenders' biggest battles and can make a difference of millions of pounds each year. It is also the most heated discussion between the lenders' treasury dep artments and sales and marketing functions.
In a falling interest rate market, lenders' prevailing products become uncompetitive so that while the lenders' margins rise, volumes of applications are low. Conversely, in a rising interest rate market a lender can quickly be flooded with applications for a loss-making product.
From a lender's point of view this inability to balance the lending side of the balance sheet against anticipated cost of funds is a major profit drain. The process of informing the entire market each time products are launched and withdrawn can mean up to two weeks elapsing before the task is known to have been completed.
From an intermediary's perspective, keeping up to date with current product ranges is almost a full-time job in itself. The two-week delay can mean that clients benefit during interest rate rises but they will lose when interest rates fall and it is the intermediary who ends up playing guess the rate move.
Taking a hypothetical example, assuming the average £80,000 mortgage on a five-year fix and the cost of funds move 0.25 per cent, the
n for each new mortgage a lender takes on they are subsidising it to the tune of £200 a year, £1,000 over the duration of the fix. If a lender were to write just 1,000 extra mortgages, then it has cost them £1m.
What lenders and intermediaries need is immediate price management. Rates should be able to be altered in minutes rather than days so that all parties know that the price that they are quoting is the price that is payable. This is one area where the internet comes into its own, especially with a common trading platform where lenders are responsible for inputting their own data.
If lenders can migrate to online communication with brokers, this will enable lenders to make considerable cost savings from other forms of communications. From the humble rate flyer to the all singing all dancing IFA sales aid, each requires changing up to six times a year. Given that over the last three years base rates have moved on average five times a year, then changing the rate flyer alone costs upwards of £10,000 or £50,000 annually.
If a common trading platform leads to the paper-based application form being cut out, this alone can save tens of thousands of pounds a year, as each one costs over £1.
The billion-pound pension misselling “scandal” is still not completely behind the industry and regrettably endowments are similarly suffering the effects of retrospective or hindsight compliance.
It, therefore, makes sense for suppliers and advi sers alike to take steps to minimise the risks of future compliance problems by making sure that there is a clear compliance trail for mortgages as well as any ancillary products sold.
The use of generic application forms, with lender-specific sections, means that there is far less oppor tunity for errors in completion.
Where a similar step-change has taken place in other industries errors have been reduced by a factor of 500 per cent.
Being an electronic process, it has integral validation, which when added to reduced risk of human error, lessens the risk of error still further.
Another advantage for lender and adviser will be the ability to match borrower criteria with lender criteria immediately so you are not relying on a six-month-old brochure to see if a thatched cottage or converted lighthouse will be accepted and the lender will receive only appropriate applications.
Also, subject to lenders' specific criteria, the application form will be credit-scored there and then, providing approval in principle and avoiding the embarrassment of applicant rejection some days after the form being submitted.
It is difficult for lenders or advisers to claim to have excellent management information systems, primarily because the cost of implementing an effective system is often prohibitive for the adviser and a low priority for the lender.
The advantage of systems such as the common trading platform is that the management information is held within the system and is not dependent on either party's back-office systems.
This means that advisers will be able to be certain how much business they do with each lender and how long it takes to complete – an important factor when making recommendations.
Similarly, lenders can have access to detailed information enabling them, for example, to establish the success of their mortgage products on a regional basis.
This level of information can empower them to market mortgages appropriately and also to assist with future product development.
The same quality of information will also allow advisers to manage their own business more accurately, by having access to information, including the relative effectiveness of sales territories or even which adviser converts the most business.
This information has a multitude of uses from planning marketing activities to managing a sales incentive programme. It also helps create a level playing field so advisers who are delivering consistent conversions but do not operate next to the local 200-home Barratt development can still be rewarded fairly.
So what does the future hold? Thankfully not a change-management programme that stretches into the next millennium or the need to double training budgets overnight. The challenge for the industry is to develop a common trading platform which will be relevant, applicable and genuinely beneficial for all players involved.
It is currently impossible to predict what each lender will do in the short-term as much more control is given to all parties in the process. We can expect considerable jostling for position over the coming months.