In April, The Telegraph1 published an article analysing the performance of fintech companies and challenger banks. Not a day goes by without the trade and national press releasing stories explaining how technology will overthrow the large established players, and how new brands will dominate the provision of financial services. But contrary to the usual news flow, this article had a very sobering tone and illustrated that the new entrants were some way short of the radical shake-up many were predicting.
The number of people switching current accounts is closely researched and shows the propensity of people to move away from established patterns of financial management. The current account is central to many people’s finances and provides a suitable benchmark for people’s attitude and behaviour.
Inertia remains strong
The latest current account switching figures to be released showed that the number of people switching had fallen by 3% between the first quarters of 2018 and 2019. Moreover, the number is falling, and not increasing as many had forecast.
In addition, the economic reality and the costs involved in providing new services are beginning to bite. At their launch, some new entrants were promising to offer services more cheaply than the established players. However, there are now signs of repricing as the need for income grows. If customer numbers are below forecast and income is down, the shortfall has to be made up from somewhere.
This could be an indicator of just how far technology will change the industry.
Housing and Lending
What will the lenders of the future look like? Who will lead and who will lose market share? What will determine success? Is technology the critical driver of change? We have been discussing these questions for some time now at our head office in Saffron Walden, and have concluded that while technology will undoubtedly have a role in shaping the industry’s direction, other factors are more significant. Many of you may have heard this said of technology:
“We always overestimate the change that will occur in the short term, and underestimate the change that will occur in the long term.”
I think we are at a similar point in the mortgage industry. Technology will have a role to play but I think this will be felt over the long term. In the short term, it will continue to grab headlines but not have as big an impact as other factors.
Speed to Market and Choice
We believe that the ability to help people with complex requirements will be the biggest driver of change in the market. With macro-economic and political uncertainty likely to continue for the foreseeable future, launching niche products and adapting to unusual circumstances will be more important than innovation in IT. Sound judgement, backed up with experienced underwriting, will be the most valuable assets for lenders and brokers.
Recently, we’ve been adapting products in response to analysis of the prevailing conditions and the increase in requests from brokers. For example, we have made several enhancements to our self-build mortgages; we’ve developed an option for self-builders who have less money up front to start their development and we now accept applications with outline plans rather than full planning permission.
We’ve also launched a family support mortgage to help simplify inter-generational lending and opened our buy to let Mortgages to limited companies.
That’s not to say that product alone will be the critical factor. Customer experience and simplicity will be important in any part of the financial services industry. Again, those able to take a fresh look at where the pinch-points are will gain an advantage. We do not force brokers down different distribution channels for self-build, but allow them to deal with us directly to keep the process simple.
A refined understanding of customer segments, and the methods of distribution, will have a massive role to play over the next five years. Technology will be able to support this, but it won’t be the silver bullet.
One thing we can learn from technology is successful implementation. ‘Agile software development’ refers to a group of software launch methodologies based on iterative development, where requirements and solutions evolve through collaboration between cross-functional teams. ‘Agile’ generally describes a disciplined project management process that encourages frequent inspection, adaptation, and rapid innovation.
While the industry may view the majority of building societies as solid and staid, nothing could be further from the truth. We believe the winners in lending will be those who evolve and adapt the quickest. Identifying the gaps means we can quickly react and launch new products to make sure that we’ve fully covered the breadth and depth of the market.
It’s impossible to predict who the top lenders will be in five years’ time but I think the best lenders will have certain characteristics. We believe they will be the ones that can consistently monitor changes in the market and fill the gaps with refined products which are easy to apply for.
1 Challenger banks are failing in their job to shake up the market and get people switching, The Telegraph April 2019