Mortgages 2018: A ‘Customer in Control’ future

As Australia’s population hit 25 million in August, Deloitte Access Economics’ Michael Thomas notes that despite the vulnerabilities in the residential mortgage market, underlying demand for residential housing remains solid with strong, albeit uneven, population growth.

Source Deloitte Australia Mortgage Report 2018

Deloitte Financial Services Partner Heather Baister explains how this backdrop influenced the predictions of Australia’s leading lenders and mortgage brokers in the Deloitte Australia Mortgage Report 2018 who believed that the nation’s housing settlement volumes will either remain flat or likely decrease by up to 5% from the highs of previous years via a period of moderation, rather than an abrupt adjustment.

Because of the outlook for interest rates and slowing house price growth, as well as moderating capital gains prospects and on-going restrictions on lending, (interest-only loans, investor loans and foreign income lending), the market will take stock and find a new sustainable base for the long term.

Source Deloitte Australia Mortgage Report 2018

In addition, the uncertainty around possible new rules and legislative change as a result of the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry means that conduct, compliance and distribution challenges will continue to take centre stage for lenders as the Royal Commission moves through 2018.

If we put these shifts into context and the fact that the strong lending growth of the 2013 to 2016 period was never going to be sustainable in the long term, and as the market continues to bed down important consumer conduct improvements, there will be greater opportunity for first home buyers and owner occupiers to get more traction.

A more ‘customer-in-control’ future

These changes – many of which are underway – are already changing the nature of the market and together with the possibilities of next year’s ‘open data’ regime (effective 1 July 2019 for major banks), gives promise to what is becoming a more ‘customer in control’ future.

For instance, the Combined Industry Forum (CIF), comprising banks, broker groups and consumer representatives, is already looking into ways of addressing the issues of transparency, distribution oversight, and accountability around mortgage lending via brokers. This is on the back of ASIC’s review into mortgage broker remuneration, and the continued focus by APRA on serviceability assessments by lenders.

While there are current laws already in place to manage conduct, we expect to see a greater obligation for lenders beyond the current ‘must not be unsuitable’ legislative hurdle and a focus on individual customer debt commitments and expenses.

In the future, lenders will have to consider how they can demonstrate that the customer has a true understanding of their product. This will mean a more thorough assessment process, tailored to individual customers’ unique circumstances and their understanding of the loan. This will inevitably slow market growth and increase knowledge around the mortgage product and its implications for the long term.

Open Banking round the corner

As we fast forward to a post Royal Commission world in 2019 and onwards, greater certainty is likely to mean that lenders will need to refocus and choose whether they remain a manufacturer, a distributor, or a hybrid. It should also provide even more opportunity for the smaller niche and non-bank lenders to sharpen their innovative products and services on those specific customer cohorts where they choose to focus.
Sharing customer data will reduce barriers to entry. So as customers have the option to share their transaction data, mutual and regional banks, as well as specialist non-bank lenders will be better placed to compete by using this information to enhance their product offerings, pricing and services.

This of course depends on customers taking up the options, and niche players and regionals being ready to effectively respond to increased demand. Simply having access to such open data will not of itself be enough for organisations.

Global banks have also emerged from their regulatory driven remediation as we enter ours, and are refocusing on growth. This could reinvigorate their interest in the open banking opportunities of ‘digital only’ retail bank offerings in Australia as a ‘safe’ geography in the ‘East’.

Incumbents see the major competitive threat in the medium term to be the role of digital organisations creating a ‘new normal’ for the way in which customers deal with financial institutions. New entrants, including fintechs, are already bring specialised offers such as loan auction platforms (e.g. Joust) and small business financing (e.g. Bigstone Capital, Brighte and Waddle), and ‘tech-fins’ (such as Amazon, which has already teamed up with Bank of America in the US) to our market.

In Australia we’ve seen the first Restricted Approved Deposit Taking Institution (RADI) licence granted this year, with other groups also ready to launch. This makes the promise of a neo-bank, or ‘digital native’ bank, a step closer to reality and will be a test case for a bank designed around the customer at the centre, and a customer in control future.

Investment needed

However, all the opportunities of open data, of fintechs, distribution change, and technological enhancements will only bring greater competition through the willingness and ability of organisations to invest in the capabilities needed to harness the information and act on it.

This will mean investment to include access to funding or capital, capabilities in data mining, analytics and technological platforms, and ultimately an ability to strategically understand how to take these opportunities to market in a flexible and agile manner, whilst continuing to focus on the customer and their ultimate outcomes.

This article was first published in Asia-Pacific Banking & Finance.

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