The mortgage market has been promoting the benefits of e-transactions for the past three years. However, until recently there were very few high street lenders who had actually launched a proposition into the market.
Initially, the two main innovators in the market were Abbey National and Alliance & Leicester, but in the past year the market has seen a number of other lenders following suit, including Halifax, Bristol & West and BM Solutions. So what has prompted this wave of new propositions? It seems lenders have finally accepted that the cost of developing an e-commerce proposition can be balanced out by more business at a lower cost.
E-transactions allow a lender to differentiate its products to the market place. In the past, lenders have competed on two dimensions: product and procuration fee. With e-transactions, lenders can now compete on a third dimension, service ‘ enabling the lender to offer new services that provide additional benefits to the adviser. When Halifax developed its online proposition it was in response to a survey of its users, which found that 75% felt product range to be the most important feature in selecting a lender, with 72% stating a competitive rate. The development of its intermediary facing website was done to complement its customer service and improve the availability and delivery of these very aspects.
One of the most important benefits to be introduced through e-trading is certainty. The use of real-time, fully-scored Agreements in Principal (AIP) means that advisers can be certain that their client qualifies for the mortgage being applied for, obviously subject to receipt of documents and property details. Many lenders are now providing a real-time, scored AIP as part of their online propositions, including Abbey National, Alliance & Leicester, Halifax and Mortgage Express. All agree that the availability of online AIPs is the motivator for e-transactions.
Furthermore, through e-transactions the lender can offer the adviser a faster transaction. By the adviser submitting the case directly into the back office systems of the lender it is possible to significantly reduce the time that it takes for the lenders to process the case. This allows the adviser to provide a better service to their client as well as earning fees on a more timely basis.
Through the use of e-transactions, lenders can also significantly reduce the cost of processing a mortgage case by allowing it to screen out those borrowers who would not even qualify for the product. By placing an automated AIP process at the point of sale, it ensures that only those borrowers who qualify for a given mortgage product can apply for it. This immediately eliminates the cost of preliminary processing of those cases that would not qualify. Assuming that there are approximately 2.5 million intermediary mortgage applications per year, screening out only 10% of applications would remove the need for lenders to process 250,000 applications that do not meet the basic underwriting criteria of that product.
By receiving mortgage applications electronically, lenders also dramatically reduce the cost of processing those cases. There is no more re-keying of information, no more manual instruction of conveyancers, no more manual instruction of valuers, and no more manual credit scoring. For the majority of cases, there is also no more manual underwriting. By automating the process, lenders can reduce the cost of processing these applications. An additional benefit is that the process has more operational flexibility and can better adjust to spikes in mortgage volume.
So what does this mean to the bottom line? Based on detailed market surveys, Trigold has found that lenders estimate there is a £60 to £90 saving for an electronic application received and processed electronically over a paper application that is processed manually. Based on market statistics, this implies annual industry savings of over £100m and, taking the current banking industry’s price/earnings ratio into consideration, this equates to an increased market value of over £1bn. In other words, if all intermediary transactions were received and processed electronically, the banking industry would be worth £1bn more. The impressive thing is that this is a conservative estimate, using the lower £60 saving, and is based on transaction figures that are almost a year old.
But this will only work if advisers use the system. When e-transactions were first introduced to the market they were touted as the ‘Holy Grail’ of transacting mortgage business. If we were to believe all the promises it would almost seem that the adviser would just have to sit in their office while a computer whirled away in the background servicing clients and handling all business needs. They would only have to stir from their desks to cash procuration fee cheques.
Unfortunately, the reality was slightly different. Most of the early propositions provided greater benefits to lenders rather than advisers. Initially many advisers floundered when faced with the old generation of online business. Jargon was thrown around which was hard to relate to business practices and, more than that, many advisers did not have the technology to actually see benefits for their firms. As a result there was a very slow adoption of e-trading by the market.
Some commentators jumped on this and said that e-trading was doomed and advisers would never embrace new technology, but this has been proven premature. What they should have realised is that advisers will do what is in the best interest of their clients and their business. Give advisers sufficient reason to embrace e-transactions and they will do so with considerable enthusiasm.
The more advanced lenders recognised this and started providing a reason for the advisers to use e-transactions. Abbey National was the first to introduce a real-time, fully-scored AIP system. This allowed the adviser to ensure that their client would qualify for the mortgage. Significantly, the adviser can now close the sale. Abbey National even gave the adviser the ability to print off an AIP document that could be handed to the client. This has greatly reduced the probability of the client continuing to shop for a new mortgage, thereby tying them to the adviser.
In addition to providing a better service to the adviser, lenders started offering enhanced procuration fees for applications sent electronically. Lenders have been willing to pass on some of the cost savings they are making from receiving e-transactions. This is a classic win-win situation ‘ the lender saves money and the adviser makes more money.
To encourage e-transactions, lenders have also been removing some of the obstacles that have prevented advisers from using e-transactions. Originally, they developed independent e-transaction platforms where the adviser would have to go to that lender’s website to submit electronic transactions. The process involved closing down other mortgage sourcing programs, opening the lender website and re-keying information.
Lenders have now realised the benefits of integrating into the various mortgage sourcing engines. By linking the lender’s e-commerce propositions into the mortgage sourcing engines, the adviser has the ability to access multiple lender propositions from a single point. Instead of having to access each lender’s website individually, the adviser just has to launch the lender’s e-commerce proposition from their desktop via the sourcing system. The sharing of client data between the mortgage sourcing system and the lender’s e-commerce proposition, means the adviser does not have to re-key information because it is transferred to the lender’s online application. This has ensured a greater penetration of e-trading.
The market has seen a recent, rapid adoption of e-transaction with high penetration rates. For example, Alliance & Leicester has experienced a constant and dramatic growth from its online business. In November 2001 it received 15% of mortgage applications through its online system. Within six months, 35% of mortgage applications were coming through its website. By December 2002 it was 60%, and by June this figure had grown to 70%. Abbey National has experienced similar growth, with 80% of applications now coming through electronically. Mortgage Express and Halifax have both said that they are receiving the majority of their application forms electronically. And BM Solutions, which only launched its online transactional facility in the last 12 months, is now receiving more than 30% of its business this way.
However, even with such high penetration rates, lenders are still not satisfied. The stated goal of many of the more advanced lenders is for 100% of mortgage applications to be transmitted electronically. Three years ago such a claim would have been classified as typical e-commerce bravado, but not anymore.
E-transactions benefit all participants in the mortgage market: lenders, advisers and end borrowers. These propositions are now a major force in the mortgage market and their influence can only continue to grow.
The quarterly BM Solutions Online Index, which tracks intermediaries’ attitudes to information technology, found that 77% of respondents submit, track and progress to completion at least some of their cases online, which represents an increase of 9% from the last quarter. Of these who are using technology almost 25% said they did so in more than a quarter of their cases. Of those who conduct at least some of their business online, 27% said they had been doing so for more than a year ‘ an increase of 7% from the last quarter, while12% said that they had only just started doing so. In addition, it found that all of the intermediaries questioned had submitted at least some cases online.