Regulation has started to put pressure on margins in the life and pensions industry. Companies are being forced to look at new ways to reduce their costs in order to survive in the new sub-1% industry. Due to Government legislation and competitive pressures, cost capping across the entire financial services industry is now imminent.
The mortgage industry is earmarked as the next in line to change its ways. Current initiatives in the industry, such as CAT-marks, have made little impact on standards and have been heavily criticised for taking a liberal approach.
But the tides are set to turn. Mortgage companies are likely to be faced with tough new regulatory measures that will increase their costs with one hand and force them to cut their margins with the other.
Advisers that have not fully exploited the mortgage market are looking here again for new business. For many of them, mortgages could provide an opportunity to cross-sell, as an ocean of opportunity exists in this particular area. But cross-selling opportunities are only possible if they can execute the sales process efficiently.
So, does this new world pose a threat or an exciting opportunity? Perhaps a bit of both. Making e-commerce work will certainly be imperative to future survival. If one lender cannot reduce distribution and administration costs sufficiently, another will. And, quite simply, if intermediaries cannot find a way to get involved and use technology to add value to the process, their businesses will dwindle. Fast.
Indeed the use of new technology, especially the internet, is already starting to proliferate throughout the industry. Regulation will undoubtedly drive this even faster. There is no doubt that today’s customer service capabilities are insufficient, especially as mortgage volumes continue to increase.
A frustrating process
The current situation is that mortgage customers are poorly served in general. Simple loan amendments can sometimes be embarrassing for the lenders and advisers concerned ‘ not to mention frustrating for the customer.
Take, for example, a change in desired monthly contributions on flexible mortgages. To handle this there is often an alarming interchange of paper-based amendment forms between customer, adviser and lender. Assuming these details enter the system successfully it can still take weeks to verify. If there are multiple exchanges of documents, the process can be significantly prolonged. Clearly, this is unsatisfactory. The fundamental point of a flexible mortgage is to be able to modify personal contributions quickly to match changes in personal circumstances.
Mortgage providers cannot afford such inefficiencies going forward ‘ especially when they have had to swallow the majority of this administration overhead. Margins will be tight even for the slickest operation as they will be encouraged to reduce their fees in this new environment. Many are using inadequate legacy IT systems to support expensive call centres, back-office operations and large distribution networks and so can not afford extra overheads on such low margin business. At the same time, advisers are craving the tools to provide enhanced customer service.
Some lenders, who have both IFA and sales force channels, are working to address this issue. These lenders are giving sales people greater responsibility for their own customer service. They are being provided with faster and clearer access to the information held on lenders’ back-office administration systems via the internet. They are putting their administration online.
Once an adviser has registered they can have secure access to the lender’s system and make requests for amendments to mortgages online. Once accepted by the lender a simple email verification alerts the sales person that the changes have been made. The client can be assured everything is in order. The process is significantly slicker and error free.
This means, for instance, that an adviser can now use the internet to track a mortgage application through the system and report back to the client at any given point, rather than having to wait in a call centre queue as they have done in the past. And by having this level of service and reassurance to hand, during what is an unnerving process for the consumer, is critical for advisers going forward.
Clearly steps are already being taken in the right direction. But once systems can be completely opened up, advisers will be able to give unrivalled service by providing a decision in principal on mortgages at the point of customer contact rather than days later.
Of course technology is already playing a key role here in the market. advisers’ laptop-based systems are important for delivering tailored presentations to new audiences and capturing information via fact finds. But this is all secondary if mortgages cannot be effectively executed. Internet-based administration will be vital for the future success of the market.
Many advisers who have not handled mortgages may find that by being able to offer first rate levels of service not only gives additional fee income, but helps open doors to secure additional business. The mortgage is a great way for an adviser to introduce their services to potential long-term customers. First impressions are therefore vital.
The onus is on lenders to ensure clear plans are in place for creating better access to their systems in the future. This is vital if they want to meet advisers’ customer service needs while reducing their own overheads.
Without getting too technical, lenders will need modern technology ‘ which has a multi-tiered architecture ‘ in order to adopt the internet. In some cases this may require systems to be developed using the latest programming techniques, including extensive use of XML. Other options may be to replace antiquated legacy systems or outsource to a third-party provider. The latter may be a preferred option to many who will be able to tap quickly into established operations and expertise without the risk of falling behind the competition.
So, customer service, aided by slick administration and based on modern technology, is crucial for future success. But what does it involve?
Putting administration online means challenging the current operational paradigm. Addressing this challenge is one essential requirement for any organisation that is serious about the financial services market.
The simple new reality this industry is now appreciating is that maintaining the status quo ‘ and continuing with current organisational structures, business models and administrative procedures ‘ is not a realistic option at all. It is widely recognised that new distribution channels ‘ such as mobile technologies and digital TV ‘ will be key to driving down costs.
This is neither complicated nor is it a revelation. But there is another, perhaps even more critical, point that emerges from these observations ‘ business will not be done online without addressing the issue of customer focus seriously and properly. In other words, challenging the current marketing paradigm is as important, indeed a precursor, to challenging the operational one.
The industry has so far merely paid lip service to the notion of a market/consumer led approach. This must change. We must examine the whole industry process and consider what each organisation involved can do to add value along the way. Those who add no real value will disappear. There will no longer be anywhere to hide.
It is the adoption of genuine consumer focus by each link in the chain that is the main challenge facing the UK’s mortgage industry ‘ even more so than the technical challenges of implementing revamped operational infrastructures. Existing players must provide both the commitment to and the infrastructure for tackling these challenges, or be over- run by innovative consumer-focused new entrants.