Why the mortgage business is so hard to disrupt
My last blog triggered quite some interest, and inspiration for a follow-up post. It was on the (r)evolution of the mortgage business. It explained why the mortgage process is worth disrupting.
The story started with KBC announcing to have Instant Mortgages, meaning you get credit approval, and an interest rate within 10 minutes, for both customers and non-customers.
The feedback I got from quite a few of you shows that are the beginning of a wave of innovation in this domain. It will not be an easy wave to surf on. The battle will probably be a lot tougher than what we’ve seen in payments.
In this post, I try to structure why it is so hard to disrupt the process.
High level of regulation
It shouldn’t come as a surprise that the high level of regulation is the number one challenge for innovation in this field. It is not purely banking regulation, but also fiscality, there are local flavours that are country- or even region-specific.
This high level of complexity is a blessing for financial advisers. Consumers are, in general, impacted only a few time in their life by a mortgage loan. As mortgage loans are highly complex products, impacting the consumer’s life for the coming 20 to 30 years, they need trust. They need the guarantee that they are in good hands with the one they sign a mortgage. How do you provide trust?
Like Rachel Botsman explained at a conference I attended last week: “Trust is something that’s given to you. You can’t say you’re going to build more trust with me. It doesn’t quite work like that. I have to give you my trust and you have to continuously earn it.”
This means that trust is built by what you did, and how you did it, in the past. Avoiding change in uncertain situations works. The personal approach works with complex products.
High level of risk
Unlike the ‘simple’ debits and credits of a payments transaction, mortgage loans pose a high risk for the bank issuing the loan. We are not talking about 100, 1.000€ or 10.000€ transactions here.
On top of that; the bank is no longer an intermediary, but a direct participant. They are the counterparty taking the risk. Therefore, the process must be bullet-proof, and fraud should be avoided. That probably explains why financial institutions remain so loyal to paper documents (or scanned copies of paper documents).
This may also explain why in some countries “Instant Mortgages” is a fancy word that is not defined by the time it takes to provide the mortgage conditions, but by the level of digitization. ING is currently testing in France how it can eliminate all paper documents. Their guarantee today is to provide an answer within 48 hours.
I agree that by digitizing a process you also cut in the processing time, but I think that consumers have a certain idea of what ‘Instant’ is, and that is not what most banks seem to provide when talking about instant mortgages.
High level of technical complexity
I explained that KBC now set up an instant mortgage process of 10 minutes, for both customers and non-customers. So also non-customer can get a credit guarantee + interest rate (on the condition that the collected documents in the follow-up process proof the consumer were honest).
I couldn’t go until the end of the process.
Why it didn’t work with me? The 80/20-rule was to blame. Thus far 80% of all possible cases are in the scope of the process. Mortgage loans have a huge amount of parameters to calculate the right level of risk. That is not just about knowing the customer, and about knowing its financial situation. It is also a matter of estimating the new real estate, often estimating an already existing real estate. Is the existing real estate also paid with a mortgage loan, and if so, at with financial institutions? Does the consumer also need a bridging loan?
The reason why the Instant Mortgage process of KBC didn’t work with me was that I was at the 20-side. I simulated to have a mortgage at another institution and I need to bridge a period between buying real-estate B and selling house A.
That is the complexity of properly estimating a customer’s worth, and its house of his/her dreams. Then there is the complexity of validating all this.
For customers, the financial situation can be deducted from his account information. How do you deal with non-customers? You could build on PSD2 APIs that provide access to the customers’ account information at any bank, in theory…
Or, like in the Netherlands, you connect with Ockto that will look for the necessary information the consumer by web scraping your government documents etc…
This mix provides few chances for blunt global scalable digital transformation at this stage. That may also explain why we don’t see challenger banks entering this market thus far.
This is the complexity where an organisation starts from when it wishes to disrupt mortgages, and that is just for the existing process.
Innovation should look at the much bigger picture like I said in my first blog.
Banks must find the right position IN the customer journey of finding a house. That comes with a lot of possible scenarios.
The journey is more than just selling mortgages. It also includes a reflection on insurance products, maybe even additional services like moving services, providing a network of handyman services, reflect on possibilities to ‘green up’ your house solar energy etc…