In the mortgage market, some analysts predict these new lenders to take as much as a 60% share by 2018.
Such growth will of course depend on capital restrictions and the impact of increasingly stringent legislation – including the Mortgage Credit Directive (MCD) which comes into play next March.
Of the 20+ challengers currently in the system at the pre-licence phase, several are eyeing up the mortgage space.
For the first two or three years after market entry, their lending appetite may initially be modest. If, however, they can deliver something genuinely new by way of product or innovation, their impact could be significant from day one.
Today’s conditions dictate that competitive edge has to be won on price, distribution or service, all of which could prove tough for new firms still finding their feet. But challenger optimism comes from being unhindered by legacy problems and outdated technology which is expensive to overhaul. The pull factor of new brands will also inevitably draw in consumers.
The successful challengers will be those able to keep costs low and resist the temptation of high fixed overheads such as extensive networks of branches. They must also stick to proven but flexible systems and processes and be extremely careful when choosing outsource partners and suppliers. My advice is to avoid over-ambition in the early years and build up a meaningful and measurable USP, while controlling distribution from both a volume and risk perspective.
Overall I believe the rise of the challengers should be embraced by mortgage brokers, since consumer and broker choice is always better with more organisations competing for business.
More lenders, more products
Following the Mortgage Market Review (MMR), over 70% of the sector is now handled by intermediaries, and consumers are now more informed than ever before.
But more lenders means more products, which could in turn lead to greater confusion among customers as the challengers grow. Prospective borrowers must also now face increasingly detailed and involved advisory mortgage interviews.
The result is greater demand for broker advice, which has already been one of the most notable trends to come out of the MMR. Increased numbers of challengers will only enhance this; after all, why would a customer sit through a lengthy interview to be offered only one lender’s products when a broker can give a clear picture of the entire market’s many options in the same amount of time?
Brokers must work harder to get to grips with an ever-broadening product range – and, anecdotally at least, I believe they are well prepared to do so.
They – and the new lenders themselves – must also understand clearly how products might change post-MCD. The onus is on the challenger banks to establish whether their systems and outsourced processes can truly cope with all the new demands MCD will impose.
Their ability to do so could make or break their market entry and influence whether or not they can establish a solid foothold.
For brokers, challengers represent new opportunities to engage with new customers. But they should also be handled with caution and assessment of their offerings clearly must go far deeper than the products’ headline numbers, to establish if they really are prepared for the sweeping changes ahead.
