Digital mortgage trends lenders can't ignore
Looking at profit reports for big four Swedish banks for the first half of 2021 you would be forgiven for thinking nothing has changed in the mortgage lending sector. Swedbank, Nordea, SEB and Handelsbanken all reported strong earnings in the first half of the year with some posting record profits – Swedbank reported profits of SEK 5.6 billion instead of the expected SEK 4.7 billion at the end of Q2, a healthy year on year performance. Other large banks tell a similar story.
These are good results, but if you consider the rise in housing prices this past year (a national increase of a staggering 15.5%) and an increase in interest rates, it would be surprising if Swedbank didn’t record profit gains. Peeling back a layer however, we find there is a different story to tell. For example, although Swedbank increased lending in the first quarter by 3.8%, the market increased by 6%.
Shifting market share in mortgage lending
Underneath these good earnings results a small but growing body of plucky newcomer lenders is steadily making their mark. Over the past few years niche players like Stabelo, Landshypotek and Hypoteket are all gaining ground in the mortgage lending markets, amassing large customer bases and causing great concern for the long-standing banking giants. Hypoteket has seen its sales rise almost 900% in its first three years, from SEK 8.9 million in 2018 to SEK 86 million in 2020. These smaller, so-called ‘challenger’ banks, are driving up competition in a marketplace long dominated by the likes of Nordea Bank and Swedbank, chipping away at market share at an accelerating rate.
How are they able to gain so much ground? There are several reasons, but among them are legislation advantages, lower operating costs and agility to meet changing consumer demands.
Capital requirements for mortgage lending
Legislation requirements are a big component of the financial services industry and impact lenders of all sizes. These requirements will have a big effect on how banks operate, from bodies such as the Finansinspektionen (Sweden’s financial supervisory authority). However, these rules affect companies differently and are not always fair. For example, some of the major banks feel disadvantaged by FI because they are subject to major capital requirements that many of the smaller banks are not. Notably, bigger banks are subject to risk-weight floors, meaning that for every mortgage issued, banks must set aside a portion of capital to cover losses in the event of a default.
Smaller banks are not subject to these requirements because they don’t carry mortgages on their balance sheets in the same way, but rather transfer it directly to a mortgage fund (this is the most common method but there are other ways). The need to put away a huge portion of each loan is a major disadvantage for big lenders because it adds an additional cost of delivering a mortgage. Higher costs for the bank result in higher interest rates for the consumer.
Advantages in mortgage lending for digital banks
Online banks such as Avanza and Nordnet can provide relatively low rates on their mortgages without having to set aside a big portion of income to meet capital requirements and is one of the reasons why online banks often have much lower interest rates than traditional, bigger institutions. Customers are attracted to the lower interest rates, drawing business away from the likes of Swedbank and Nordea Bank.
Avanza & Nordnet have both recently launched mortgages with fantastic rates, far better than the major banks. And both saw significant growth this past year – new customers at Avanza and Nordnet grew by 38 per cent and 36 per cent over the last twelve months, respectively. Each has a growing customer base of well over 1.4 million.
While many of the large banks are irritated by the unfairness of FI rules, challenger banks are taking advantage and with it, winning a big chunk of new lending market share.
Reducing costs through fully digital mortgage offerings
Challenger banks can also offer lower interest rates by providing a fully digital approach. Providing services online, in contrast with traditional brick-and-mortar buildings, can significantly reduce overhead for lenders through automated processes, lower utility bills and rent, and smaller headcounts. These cost savings can be passed on to the consumer through lower rates.
Moreover, as challenger banks gain ground, the trend towards digitalisation grows and there is a clear desire from consumers to have a more digital experience. New players are more nimble and able to offer customers a better and more efficient customer experience outside the burdens of legacy processes. As bank branches play an increasingly small role, interest rates, speed, transparency, convenience and personalisation become even more crucial. It’s a big challenge for banks to meet these needs.
Banks are starting to respond in kind, albeit slowly: Handelsbanken is closing more than 100 branches across Sweden in a bid to become more digital. It’s a good move for profits – digitising products can reduce overhead costs for the bank thus driving higher margins that go straight to the bottom line.
Adopting a more digital approach could also benefit some of the other larger banks like Swedbank and could be the key to winning over customers. Digitising allows for maximum profits due to fewer manual processes and lower overheads, driving lower costs for the lender. Better margins would also allow banks to simultaneously reduce interest rates and become more competitive in a changing marketplace.
The digital future of mortgage lending
Digitisation of services in the mortgage lending industry is great for consumers and lenders alike if done sooner rather than later. Digitisation can lead to better competition in the marketplace through transparency and ability for comparison which can benefit both borrowers and lenders; borrowers can see rates before applying, easily and quickly online and choose the best option suited to their needs. This transparency can also be a selling point; customers do not need to call around all the banks, to find that accurate rates information can only be accessed after a phone interview, shrouded behind several doors of complexity. In return, lenders can enjoy customers that are a better fit for their services with lower default rates.
While legislation differences are hard to change, the one way bigger banks can alter their services is by adopting more digital solutions. This doesn’t have to be a radical overhaul of the way legacy banks work, nor does it mean the ending of big bank mortgage lending as we know it. It could be as simple as a new product launched aimed at targeting digital borrowers or updating systems to be accessed remotely (a Hallon of mortgages). The answer doesn’t have to be seismic, the answer does need to come sooner rather than later, at the risk of continued declining market share for banks as they further lose their edge against nimble, competitive challenger banks.
A tipping point is coming where banks will start to see profits falling, at which point it may already be too late to win back market share. If banks want to continue to hold or grow market share in mortgage lending, the answer lies in embracing digitisation and meeting consumer demands. The question is, will it be fast enough?
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The high costs of manual processes in mortgages, and legislation make it difficult for big banks to compete with their younger more digital savvy competition. The shift to digital has significant benefits including improved efficiency and reduced costs but the transition isn’t something that has to happen over night – will slow and steady win the race?