Retail Banking

Retail Banking

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Fast cars and expensive houses: what can mortgage lenders learn from the automotive industry?

Fast cars and expensive houses: could the automotive industry teach mortgage lenders a lesson?
 

What would you say is the most important factor when buying a new car? For some it will be performance, for others it may be price or economy. Whatever you may think, up until recently, German car manufacturers were convinced that it was horsepower. At the height of the 2007 financial crisis, the German automotive industry was involved in a seemingly never-ending cycle of one-upmanship and excess.

If BMW announced that it was making a 450bhp estate car, Audi would counter with a 500bhp offering. Porsche would then step in and reveal that they had been testing a 600bhp car for the past year and that it would go on sale the following week. It was Mercedes who ultimately called an end to the farce in 2009, proclaiming that “the horsepower war is over”. Since then, car manufacturers have been less concerned with offering their customers bigger and bigger numbers, instead choosing to differentiate through innovation and optimisation.

 
New rules, new opportunity
 

Whilst the automotive sector ultimately came to a gentlemen’s agreement to curb excess, the Financial Conduct Authority felt legislation a more fitting solution for the mortgage market. For years, mortgage lenders had been happy to engage in high risk lending, meaning that consumers often borrowed more than they could afford. The Mortgage Market Review (MMR) was introduced a little over a year ago and seeks to protect borrowers, whilst ensuring that consumers still have access to affordable mortgages.

As a result of the MMR, the onus is on the lender to ensure that the borrower can afford the loan. Gone are the days when a borrower could artificially inflate their income on the mortgage application form, safe in the knowledge that lenders would be clamoring to offer them the biggest loan.
 
To win customers post-MMR, lenders must aim to provide an efficient, streamlined service that minimises the time between mortgage application and availability of funds. By offering an improved customer journey and ensuring that the mortgage application process is as efficient as possible, lenders can now compete on more than just the numbers. Far from being seen as restrictive, the MMR should be viewed as presenting an opportunity for disruption, allowing lenders to differentiate themselves from the competition. 
 
Room for improvement
 

Recent figures from the Council of Mortgage Lenders show a decline in mortgage lending since the introduction of the MMR, with first time buyers particularly badly affected. The National Association of Estate Agents stated that two-thirds of its members reported a decrease in the number of buyers.  Is the MMR to blame for the drop off in lending, or are there other factors at play?

On average, it now takes over 50 days to receive a mortgage offer. The longer it takes to receive an offer, the higher the chance of broken chains and sales falling through. It seems perverse that during a time of rising employment, increased consumer confidence and historically low interest rates, property sales may be falling through due to inefficiencies within the mortgage application process.
 
Optimise and innovate
 

Whilst the MMR may have limited the ability of lenders to vary their lending criteria in order to compete with each other, they are still able to differentiate themselves on a customer service level. Key to this is identifying bottlenecks in the current mortgage application process and ensuring that the lender is operating in a lean, efficient manner that best serves the customer. As is so often the case, innovation and optimization will likely be driven by investment in both human capital and technology. 
 
Through investing in new IT systems, lenders can improve the customer journey and simplify the mortgage application process. For example, if a borrower already holds a current account with a lender, then it may be possible to pre-populate much of the mortgage application form and verify the customer’s information more efficiently. Online banking means that many people never need to visit their local branch in person. Yet, when those same people come to apply for a mortgage, chances are that they may have to attend a face-to-face meeting.

Rather than applying in person and then waiting 50 days for a response, the norm should be that you can apply online and get an answer within 30 minutes. Lenders could even offer a ‘virtual advice service’, whereby customers can talk with a qualified advisor via video link. In the age of digital and big data, lenders have a rare win-win opportunity whereby they can simultaneously cut costs and improve customer service. 
 
After declaring the horsepower war over, Mercedes has recently posted record sales and profits. Their cars can now detect pedestrians, automatically avoid collisions and can even park themselves – innovations which would have been unthinkable just a few years ago. Car manufacturers realized that big numbers didn’t sell cars and that they needed to start focusing on the overall customer experience. The MMR might just help mortgage lenders to come to a similar conclusion.


Risk and Regulatory Compliance

The sponsor for Risk and Regulatory Compliance at Capgemini Consulting UK is Anuj Kumar, Head of Risk and Regulatory Compliance ConsultingConnect with Anuj via his LinkedIn profile here.

 

 

 

About the author

Mark Smith
Mark Smith
Mark is an Associate Consultant working within the Business Model Transformation capability team. His professional interests are centred around banking and financial services, whilst his interests outside of work generally involve cars and motorcycles. Prior to joining Capgemini, Mark worked in city law firms specialising in debt finance, equity finance and private acquisitions.

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