The 2018 Deloitte Australian Mortgage Report outlines key issues in the sector including the disruptors, technology and open data and how these areas are expected to play out over the next 12 – 24 months.
As Australia’s population hits 25 million this month, Deloitte Access Economics’ Michael Thomas notes that despite the vulnerabilities in the residential mortgage market, underlying demand for residential housing remains solid with strong, albeit uneven, population growth.
Deloitte Financial Services Partner Heather Baister explains how this backdrop influenced the predictions of Australia’s leading lenders and mortgage brokers in the Deloitte Australia Mortgage Report 2018 who believed that the nation’s housing settlement volumes will either remain flat or likely decrease by up to 5% from the highs of previous years via a period of moderation, rather than an abrupt adjustment.
Because of the outlook for interest rates and slowing house price growth, as well as moderating capital gains prospects and on-going restrictions on lending, (interest-only loans, investor loans and foreign income lending), the market will take stock and find a new sustainable base for the long term.
In addition, the uncertainty around possible new rules and legislative change as a result of the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry means that conduct, compliance and distribution challenges will continue to take centre stage for lenders as the Royal Commission moves through 2018.
If we put these shifts into context and the fact that the strong lending growth of the 2013 to 2016 period was never going to be sustainable in the long term, and as the market continues to bed down important consumer conduct improvements, there will be greater opportunity for first home buyers and owner occupiers to get more traction.
A more ‘customer-in-control’ future
These changes - many of which are underway - are already changing the nature of the market and together with the possibilities of next year’s ‘open data’ regime (effective 1 July 2019 for major banks), gives promise to what is becoming a more ‘customer in control’ future.
For instance, the Combined Industry Forum (CIF), comprising banks, broker groups and consumer representatives, is already looking into ways of addressing the issues of transparency, distribution oversight, and accountability around mortgage lending via brokers. This is on the back of ASIC’s review into mortgage broker remuneration, and the continued focus by APRA on serviceability assessments by lenders.
While there are current laws already in place to manage conduct, we expect to see a greater obligation for lenders beyond the current ‘must not be unsuitable’ legislative hurdle and a focus on individual customer debt commitments and expenses.
In the future, lenders will have to consider how they can demonstrate that the customer has a true understanding of their product. This will mean a more thorough assessment process, tailored to individual customers’ unique circumstances and their understanding of the loan. This will inevitably slow market growth and increase knowledge around the mortgage product and its implications for the long term.
Open Banking around the corner
As we fast forward to a post Royal Commission world in 2019 and onwards, greater certainty is likely to mean that lenders will need to refocus and choose whether they remain a manufacturer, a distributor, or a hybrid. It should also provide even more opportunity for the smaller niche and non-bank lenders to sharpen their innovative products and services on those specific customer cohorts where they choose to focus.
Sharing customer data will reduce barriers to entry. So as customers have the option to share their transaction data, mutual and regional banks, as well as specialist non-bank lenders will be better placed to compete by using this information to enhance their product offerings, pricing and services.
This of course depends on customers taking up the options, and niche players and regionals being ready to effectively respond to increased demand. Simply having access to such open data will not of itself be enough for organisations.
Global banks have also emerged from their regulatory driven remediation as we enter ours, and are refocusing on growth. This could reinvigorate their interest in the open banking opportunities of ‘digital only’ retail bank offerings in Australia as a ‘safe’ geography in the ‘East’.
Incumbents see the major competitive threat in the medium term to be the role of digital organisations creating a ‘new normal’ for the way in which customers deal with financial institutions. New entrants, including fintechs, are already bring specialised offers such as loan auction platforms (e.g. Joust) and small business financing (e.g. Bigstone Capital, Brighte and Waddle), and ‘tech-fins’ (such as Amazon, which has already teamed up with Bank of America in the US) to our market.
In Australia we’ve seen the first Restricted Approved Deposit Taking Institution (RADI) licence granted this year, with other groups also ready to launch. This makes the promise of a neo-bank, or ‘digital native’ bank, a step closer to reality and will be a test case for a bank designed around the customer at the centre, and a customer in control future.
To remain competitive in an environment of open data, of fintechs, techfins and neobanks, of changes in distribution channels, and of digital transformation, organisations will need to invest in and build their capabilities to support a customer-centric organisational mindset.
They will need to invest in capabilities in data mining, analytics, technology platforms, and agile decision making. They will need to invest in the ecosystem in which they take these capabilities to market. And they will need to invest in ensuring the customer-centric organisation is supported by processes which create outcomes for customers which are transparent, fair and suitable.
Heather Baister is a Partner in Deloitte’s Assurance & Advisory Financial Services practice, who leads the national securitisation advisory business. She works with banking clients, and those entities using securitisation as a source of funding, including non-bank lenders. She also works with many retail credit originators on the end-to-end lifecycle of retail credit products, and closely with the mortgage broking distribution channel.