Author: Christine St Anne. This article first appeared in the AB + F Magazine.
According to CoreLogic CEO Lisa Claes, the opportunity for mortgage innovation will be underpinned by the ability of mortgage providers to be informed by data, allowing them to offer bespoke and customized credit offerings.
Claes also sees opportunity for better pricing strategies – more on that later – as well as scope for digital strategies to underpin the availability of transparent data such as speedier decisions in the loan approval processes.
“Lenders will also be better positioned to segment their customer base, effectively carving out niches.” Lisa Claes, CoreLogic
Lenders will also be better positioned to segment their customer base, effectively carving out niches. Data availability allows these businesses to tap into customer segments,” Claes said. “For example, some banks have been targeting highly skilled professionals in the medical industry as part of growing their SME business. We will most likely see a similar trend with mortgages.”
Under the Open Banking regime, big banks won’t be required to share their data on mortgages until February 2020. Deloitte partner Simon Pelletier – who works with the big four as well as the ACCC and Data 61 on the development of the framework, still sees “significant opportunities for lenders to leverage the open banking framework in the near term”.
As echoed by Claes, he believes lenders will be positioned to evaluate their customer. He also sees real innovation around making better and sharper credit decisions particularly in conjunction with Comprehensive Credit Reporting. This combined framework will open up new sources of information allowing these lenders to make better decisions where they have not been able to do in the past.
An open data world will also pave the way for better customer experience. Here Pelletier sees better experiences through the loan application process and onboarding as well as eyeing better experiences from the information banks can garner from their customers. Such experiences include making better use of information sharing initiatives such as dashboards and the introduction of services such as spend categories and better alerts.
Another implication for the mortgage sector is of course better transparency on pricing. The mortgage teams Pelletier is working with are already focused on being sharper with their pricing ability and are currently developing individual based pricing models that will leverage the open banking capability.
Similarly, Claes notes that customers will be better positioned to get a better deal on price. The former banking executive adds that banking is still all about pricing for risk adding that an array of pricing options could be apply to customer segmentation as highlighted earlier.
Home loan digital disruptor Tic:Toc is already well positioned for the new environment. “Our proposition at Tic:Toc has always been about being transparent with our home loan products. We are transparent in the way we communicate our products both through our website and by not having traditional disclaimers to hide information.
“We are fully supportive of industry simplification and transparency and we are very well placed to benefit from a framework like Open Banking.” Anthony Baum, Tic:Toc
“We are fully supportive of industry simplification and transparency and we are very well placed to benefit from a framework like Open Banking. The changes that are coming will be positive,” Tic:Toc CEO Anthony Baum said.
Not only will customers be able to have a better understanding about product and pricing decisions but there will be an opportunity for the sector including fintechs to offer a myriad of services that go beyond traditional banking needs.
Baum who will be a panelist at the Australian Mortgage Innovation Summit, notes that an open data framework will provide the business with a better understanding of customers through greater access to their data. “We will be able to provide better customised products and services at competitive prices to customers who are willing to share their data. We are excited about that,” Baum said.
While he would not disclose what the business will be offering – due obviously to competitive considerations – Tic:Toc has set up a firm roadmap in terms of what it plans on delivering to enhance and expand the customer proposition.
Innovation for innovation’s sake
“An open data framework will mean slicker lending decisions but I would like to see innovation in products that “leverage data to personalise offerings to specific customers to a greater extent than we currently see and are more tailored to their specific needs.” Heather Baister, Deloitte
While the general industry view is that Open Banking will underpin transformation in mortgages, Pelletier’s colleague Heather Baister – partner, assurance and advisory at Deloitte - real product innovation is yet to come. Baister who works with mortgage originators and brokers, acknowledges that an open data framework will mean “slicker lending decisions”, however she would like to see mortgage innovation in products that “leverage data to personalise offerings to specific customers to a greater extent than we currently see and are more tailored to their specific needs”. For example first home buyer products or those borrowers early in their careers with potential for earnings growth. She acknowledges the importance of balancing innovation with compliance but adds she is not seeing much appetite for product innovation among the ADIs,” Baister said.
Pelletier concurs adding that this type of innovation has not really played out in the UK market – who introduced a mandated open banking framework in January 2018. In part, this is because the legislation as it currently sits is not “particularly enabling” as a standalone reform.
“During our conversations with our peers and regulators in the UK, it is clear that open data has not really been a significant change from an innovation product sense in the UK to date. One suggestion is that this will only really happen when we look at strengthening the legislation change from a ‘read only’ to a ‘write access’,” Pelletier said.
Read access only allows data to be shared, however under write access, third parties can also initiate transactions on behalf of their customer. According to Pelletier, there is conversation among participants and regulators that, in the future, the NPP could provide the basis for write capability in an open banking environment and could consequently drive significant change in the market.
There will also be opportunities that are “not driven by regulation”, according to Pelletier. In fact, a Deloitte report on mortgage innovation in an open data world highlighted a number of examples of how businesses are already delivering on providing specialised services – driven notably by the fintechs.
Specialised offers such as loan auction platforms (e.g. Joust) and small business financing (e.g. Bigstone Capital, Brighte and Waddle), and ‘tech-fins’ – for example, Amazon, which has already teamed up with Bank of America in the US to deliver a lending program.
Closer to home, real estate platform REA Group has eked out a deal with National Australia Bank. Pelletier sees implications for customer relationships. For example, where REA is accredited as a data recipient, customers can see themselves as a REA Group customer rather than as a bank customer “There is a potential to disintermediate the underlying lenders,” he said.
Going forward, Pelletier sees open banking playing to the advantages of the incumbents. “As it currently stands, open banking advantages scale players. In terms of drawing commercial benefit from the data, firms will need the technology, scale and sophisticated pricing capability. Midtier banks and mutuals could see a real and present risk with the big four who are well positioned to lead on providing better mortgage rates. I can see a campaign in the market where the mortgage acquisition teams of the big four can sharply price for better risk in a market where they want to attract above system growth.”
He acknowledges the emergence of the neobanks who will offer mortgage products. They are also free from legacy and from day one can interface through open banking. However, he noted that when it comes to trust, within the prudential framework and managing data, trust still sits very squarely with the incumbent.