The findings and recent recommendations by the Banking Royal Commission have not only battered the reputation of the mortgage broker industry but also forced them to review their business models, opening the door to a new wave of challengers in Australia, says GlobalData, a leading data and analytics company.
With the number of products and providers on the rise, the lending environment has become increasingly complex from a consumer perspective. Over the past few years, this has contributed to growing uptake of the broker channel in Australia.
According to GlobalData’s Retail Banking Insight Survey, 40% of Australian respondents indicated that their provider choice was influenced by a broker in 2016. Within only two years this proportion has jumped to 52%.
In its report, which was released on 4 February 2019, the commission recommended a ban on conflicted remuneration earned by mortgage brokers. From 1 July 2020, banks will be banned from paying mortgage brokers trail commission.
The report further states that the borrower, not the lender, should pay the mortgage broker an upfront fee. Over the next two to three years, all other commission fees will be phased out, effectively forcing the industry to adopt a consumer-pays model aligned to other professional services such as accountancy and legal.
Heike van den Hoevel, Banking Analyst at GlobalData, comments: “One of the main aims of these changes is to restore trust in an industry plagued by mis-selling scandals. The suggested best interest duty on loan referrals, similar to the practice enforced in the financial advice space, will now force brokers to identify the best product for consumers as opposed to their pockets. However, the reputational damage has been done.”
Normally this would benefit Australia’s big banks, given the importance of brand image in the decision-making process. Yet the big banks are equally desperate to improve their tattered reputations. After being criticized for their sales cultures, Australia’s incumbents may still face criminal charges, instilling little trust that they are better suited in helping consumers to make the right choice.
Hoevel adds: “Consequently, consumers will be increasingly inclined to explore other options such as digital challengers, many of which offer more competitive rates. Being a relatively complex financial product in the eyes of many, consumers prefer a bit of hand-holding when it comes to mortgages. Traditionally this has benefitted bricks-and-mortar providers, but this is changing as digital journeys become more sophisticated and simpler for consumers to navigate.”
According to GlobalData, only 11% of Australian mortgage holders applied for their mortgage online or through their mobile. Yet when asked which channel they would prefer if they were to apply for a new mortgage, 41% chose a digital channel.
Hoevel concludes: “Advances in technology such as video-assisted online applications mean consumers are increasingly willing to opt for digital-only providers. As other options are becoming more viable, the broker industry and Australia’s big four are set to suffer. Aided by the Banking Royal Commission, smaller challenger brands are well positioned to grow their mortgage books at the expense of traditional players if they play their cards right. To achieve this, presenting themselves as a credible and trustworthy alternative will be key.”