"Far from being a catalyst for disintermediation, open banking can be a powerful tool from an origination standpoint."
The UK mortgage space is heavily led by brokers. They are the vital link to originating applications and driving deal flow. In fact, the role of the broker has grown over the years and today accounts for 75% of residential mortgage originations in the UK. So it’s fair to say that any technological change will ignore this community at its own peril.
The need for speed
So what’s the problem? Put simply, the current processes in mortgage origination are slower than they can afford to be in the new digital era.
Without doubt the greatest cause of pain and delay in this subsector is the paperwork. Taking up to sixty days, mortgage origination is the lengthiest, most complex process in retail lending.
The application process is rife with inefficiencies that are entirely avoidable. Often, once a bank generates a legally binding letter of intent (LoI), some of the most critical checks are carried out after this point. In some cases, this can render the LoI invalid, causing legal and reputational risk for the bank.
Document submission and data gathering is another area. Reams of paper need to be copied and data from them entered into systems, leading to possible human error of omission and commission. At times, a section of a document isn’t sufficiently visible, so the applicant needs to scan and resend it. This is hugely counterproductive, particularly given that 70% already consider buying a property as a “nerve-wracking” experience.
The surge of cloud and AI-powered solutions, together with greater data availability over the last few years, can finally turn the situation on its head.
What’s up with the status quo?
Banks are using brokers as an extended CRM arm, with the sole purpose of supplying the necessary customer information. Further, technology tends to serve the two extreme ends of the market – big-ticket corporates and FAANGs get the cream of the crop. This creates a classic product vacuum for the middle.
Brokers don’t have the same wherewithal as banks to invest in extensive technology solutions to upscale their operations. Add to this the competition from the trendy wave of ‘neo lenders’ such as Molo and Habito, all capitalising on increased mobile-based solutions to offer ‘Mortgage-as-a-Service’ directly. The ones that lend can do it quicker than traditional providers, by implementing the right kinds of APIs.
These challengers are impressive but they tend to focus on the first-time, younger buyer. Let’s not forget that mortgages are nuanced processes and many applicants prefer advisory support and hand-holding throughout. Moreover, going via a broker almost always garners a better deal than going direct. Therefore, the broker’s position remains firmly rooted in the market in terms of value added. Nonetheless, they need to modernise in tandem with a market that is changing by the day.
This is part of a wider trend gathering steam in the industry. The Financial Conduct Authority, for instance, has proposed a change to mortgage advice guidance to help remove barriers to innovation. Crucially, harnessing innovation would free brokers up from cumbersome tasks so they can focus on nurturing customer engagement.
And the answer is...
Open banking adoption has seen some encouraging progress. So far, 198 registered financial services providers and a growing number of SMEs and third party companies have joined the ecosystem. Brokers can benefit from the speed and efficiency that open banking brings, acting much like an AISP. All a customer has to do is authorise access to their data; the broker can then build a comprehensive credit profile upfront without asking tens of questions.
API-enabled digital tools empower the broker to make a thorough assessment, connecting seamlessly into the likes of Experian or ClearScore. This leads to unparalleled levels of speed, accuracy and security, as the real time technology can also integrate any variations or irregularities in customer data.
With the ability to do more in less time and gain a better view of the prospect’s risk profile, brokers can increase the top of the funnel. They can now include ‘thin credit’ and ‘near-prime’ customers – almost a quarter of UK eligible borrowers, by some counts.
How can brokers achieve this level of frictionless service? One way would be for banks to extend their own capabilities to their partners. This would greatly improve the process of interaction and data sharing between an individual bank and a broker. However, brokers usually work with multiple banks, each with its own platform. As such, for best execution purposes, the broker will still end up duplicating their efforts. A better option would be a SaaS utility allowing data aggregation that will make the proposition platform agnostic, giving brokers all the information they need in one place.
Open banking – friend or foe?
Opinion is split amongst brokers on the topic of open banking. Some fear that with the same data available to the lenders, intermediaries would lose their USP. Actually, far from being a catalyst for disintermediation, open banking can be a powerful tool from an origination standpoint. This is key, as mortgages are all about origination. The main roadblocks generally occur at the beginning, while maintenance of the finalised agreement is straightforward.
By leaning into open banking and its accompanying next-generation technologies, the principal components of the origination cycle can be automated and expedited. And that’s without the need to request documents and painstakingly enter the data into spreadsheets.
This can result in an immediate time reduction of 60% in the origination process, and verification can take place in two hours rather than thirty days.
The only way is tech
Larger players are already reaping the benefits of predictive analytics, enabled by advanced machine and deep learning technologies. Such tools can analyse vast amounts of disparate details, including behavioural data. This can enable intelligent decisions about lending, based on how likely a person is to honour their mortgage repayments. If intermediaries had access to this technology, the quality of data flowing to the banks would be further improved.
Over the next couple of years, the transformational momentum of open banking will continue apace. In fact, the CEBR estimates that this could bring an additional £1 billion annually to the UK’s GDP. The next step is for a service that levels the playing field by catering to the small and medium advisory business. The market needs a tailored, cloud-hosted, SaaS application architected on a flexible pay-as-you-go, white labelled model.
Ultimately, open banking will allow brokers to direct more well-informed, eligible cases to the banks and minimise non-viable applications, faster than ever before.
