When you think about businesses that are most exposed to digital disruption, industries like taxis, retail or, ahem, newspapers are probably what spring to mind.
But recent trends suggest disruption is also emerging in a sector that is unglamorous but hugely financially significant for investors and consumers alike: the $1.9 trillion mortgage market.
National Australia Bank, ANZ Bank and Westpac have failed to expand their mortgage portfolios in line with the market when their growth over the last six months is annualised, according to Morgan Stanley. Commonwealth Bank has bucked the trend and expanded its already enormous slice of the market, largely because it has the systems to say “yes” quickly to a deluge of loan applications.
Outside the big four, the standout performer has been Macquarie Group, which is growing at an annualised pace of about 30 per cent. While MacBank is growing from a lower base, it is also reaping the benefits of a technology upgrade that allows speedy approvals.
Market share will always bounce around for all sorts of reasons. But in an age of sweeping digital change, these trends raise an intriguing question. Is digital disruption a threat to the banks’ mortgage engine rooms, which are a pillar of bank profitability?
Some think so, such as Evans and Partners analyst Matthew Wilson. He says Macquarie’s rapid growth in home loans is clear evidence that disruption is already occurring in the market.
But over the longer term, he says a bigger change is likely, as a new breed of fintechs that offer low-cost digital loans compete for a slice of the profit pool. In a recent note, Wilson estimates banks make an “exorbitant” return on equity of 40 per cent from mortgages, even though he says the loans are effectively a government-supported commodity.
With a profit pool so large, and when home loan debt is such a large expense for households, it is inevitably a market that is ripe for disruption.
A case in point is the United States digital lender Rocket Mortgage, a $US39 billion ($50 billion) company that has expanded its market share from 1.3 per cent in 2009 to about 9 per cent at the time it floated last year.
Many have tried to disrupt home lending in similar ways in Australia, with limited success. But Wilson argues the banks will face a key competitive battle in fighting non-bank lenders such as Athena Home Loans and Nano, both of which use technology to deliver quick, low-cost mortgages through online channels.
He says that over the next three to five years, the mortgage market could undergo the sort of disruption that Uber inflicted on taxis.
To be fair to the big banks, they are starting from a position of enormous strength and they will not back away from a fight over mortgages.
They have very established brands, cheaper funding than smaller rivals, and huge budgets for technology and marketing. Big foreign banks such as Citi, HSBC and ING have competed in Australian retail banking for decades without making major inroads. So what’s different today?
Those convinced a big shake-up is coming say the critical difference is that technology is more powerful, and the move towards digital banking has been accelerated by COVID-19.
Nano, a digital lender founded by former Westpac executives Andrew Walker and Chris Lumby, claims to have a fully digital process that can complete an approval for lower-risk loans in under 10 minutes.
Walker says Nano can pump out such quick approvals because it uses algorithms to sift through customers’ banking data, instead of requiring payslips and bank statements. It is also targeting lower-risk loans.
The pitch is that automated approvals are disruptive because they are not only more convenient for customers, but also dramatically cheaper for the lender.
All good points, but won’t deep-pocketed banks simply be able to roll out similar technology as their fintech challengers? They are undoubtedly trying, through multibillion-dollar technology spending and their own in-house venture capital units.
But those tipping a wave of mortgage disruption, such as Airtree Ventures partner James Cameron, point out banks have often struggled with major technology transformations. Cameron, whose fund is invested in home lender Athena, says banks are in some ways “victims of their own success”. They are huge institutions that have been around for many decades, if not centuries, so rapid change does not come naturally.
Banks are scrambling to change all the same, and analysts expect they will continue investing in their own fintech ideas, teaming up with fintechs, and potentially buying competitors.
It’s also worth remembering banks did successfully respond to new competitors in the mortgage market in the 1990s, when brokers such as Aussie Home Loans and non-bank lenders such as Wizard and RAMS came onto the scene. Some highly-respected bank watchers such as Jefferies analyst Brian Johnson are also unconvinced the banks are vulnerable to a wave of mortgage disruption. Johnson points out the “neobank” model has hardly shot the lights out, and thinks the real disruption will come in the small and medium business sector.
Even so, the international experience and the big shift changes in areas such as consumer lending suggest mortgages will inevitably face a digital shake-up.
At the very least, the home loan market appears to be on the cusp of a wave of digital innovation focused on making it simpler to apply for a loan.
Whether this takes some of the shine off the big four’s home loan profit factories will depend on how well the incumbents respond to the threat.
Originally published by Clancy Yeates, 6 June, 2021, https://www.smh.com.au/business/banking-and-finance/banks-beware-fast-cheap-loans-set-to-disrupt-1-9-trillion-mortgage-market-20210603-p57xu6.html