The Financial Conduct Authority’s (FCA) recently published updates from the Mortgage Market Review (MMR), concluding that lenders are lending responsibly but there is space for improving customers’ ability to make better choices:
Mortgage lenders need to be more sensitive to individual segments of the population and must produce a range of products that suit their particular needs.
There needs to be greater transparency - consumers face challenges in making effective choices.
There are opportunities to improve processes and make more effective use of technology in the provision of information and advice.
In order to achieve this, lenders will need to make better use of their customer data, conducting behavioural analytics to improve their offering, pricing and the customer experience.
What else needs to be addressed?
Nomis welcomes the latest MMR assessment by the FCA, stressing it could benefit from additional examination of lenders’ approach to retaining and managing existing clients. In a rapidly changing market:
Competition in mortgage lending is rising - 54% of mortgage borrowers re-mortgaged with existing lenders in Q1 2016 – 3% less than 2 years ago (source: RFi Group), whereas gross mortgage lending reached its highest peak since April 2008 (source: CML). As a result, costs of retaining customers and expanding market share are growing.
Buyers have increasing bargaining power, driven by rising property values, falling loan-to-values, and potential interest rate changes (depending on the upcoming EU referendum in the UK).
Increasingly savvy customers are adapting to a new way of consuming financial services, demanding value, simplicity and speed.
This demand for better services and lower costs is squeezing margins while customer loyalty is becoming a less reliable asset as switching becomes easier. Banks have an obligation to existing customers and significant commercial reasons for retaining these customers. To fulfil this obligation, banks should leverage both customer and broader market data to understand the needs, decision-making rationale and preferences of these customers. In order to be more transparent and better equipped to manage the maturities of existing customers, lenders should leverage vast amounts of consumer data through the use of technology. This approach will support business objectives while reinforcing compliance with regulation.
How should lenders respond?
The UK mortgage market offers the greatest return opportunity for retail banks. Lenders compete fiercely for customers as net value of new lending is increasing and demand for re-mortgaging remains extremely high. These market trends attract the attention of the regulator, who wants to ensure consumers are treated fairly and understand intricacies of deals that are offered to them. In essence, lenders are faced with the question: how do we balance the needs of customers, stakeholders and the regulator, especially in circumstances when they do not align?
Lenders should begin with reinforcing their emphasis on the customer. Understanding customer behaviours, attributes and preferences unlocks a wealth of opportunities. The complex underlying relationships between customer, product and profitability data is difficult to identify, and targeted strategies are required to retain the right customers without over-paying and to identify early signs of opportunities.
We advise lenders to consider the following tactics to inform their customer acquisition and retention strategies, as well as profitability objectives:
Establish a granular segmentation of consumer preferences and behaviours.
Implement specific bank data analytics that classify borrowers and assign financial metrics and decision drivers.
Use this data to design strategies and produce actionable business intelligence to improve the customer experience.
Nomis’ products provide lenders with a holistic view of their portfolio mix and competitive position within the market through an understanding of customer behaviour, price-sensitivity and worth. By applying a customer-centric approach to book management, lenders will be able to meet the FCA requirements while meeting shareholders’ needs.
Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.