Banks: Fix your mortgage process by becoming truly digital

 Ross Gallagher photo
Ross Gallagher Venture Manager at 11:FS
4min read

This article was originally published in February 2021. In light of a looming cost-of-living crisis, soaring inflation and spiralling interest rates, we feel it’s more relevant now than ever. So, after a bit of tinkering, we’ve republished it. Enjoy.

Mortgages are broken.

Yep, we said it.

Mortgages are an essential (albeit painful) part of the home ownership process. The products themselves are complex and intimidating, offering very little differentiation or added value across providers. Lenders compete on price rather than service, with mortgages becoming little more than complicated commodity products. Not to mention turnaround times for applications, which often take months and place an administrative burden on wannabe homeowners.

These complex processes also happen to be highly inefficient, resulting in higher costs for lenders. This in turn hits their profitability.

So it’s a lose-lose for big banks and lenders, and a lose-lose for customers...

What’s been done about it?

Digital transformation efforts have resulted in shiny new veneers powered by the same ineffective underlying technologies and ways of working. Customers can now manage parts of the application online, but branch visits and paper-based processes are still a basic requirement.

Digital transformation efforts have resulted in shiny new veneers powered by the same ineffective underlying technologies

If anything, this hybrid approach is actually worse for customers, because it’s less personalised and removes none of the admin load.

The first wave of digital challengers entering the mortgages space have found clever ways to abstract away from the pain without actually addressing the fundamental issues. Digital brokers, like Habito and Trussle, have established themselves as key players in the space by managing the application process on behalf of applicants and delivering a more streamlined experience.

Where it all went wrong 📉

While margin on transactions has traditionally remained high over the years, there’s been no real incentive for change. As margins began to decline, traditional lenders have looked for ways to strip out costs while simultaneously trying to keep interest rates as low as possible in order to remain competitive. This relentless attempt to drive down costs has seen lenders dismantle and outsource many of their internal activities and processes. But by introducing these external third parties, lenders also positioned themselves further away from the customers whose problems they should be trying to solve, creating a vicious, self-defeating cycle.

Then came the global pandemic.

Bank staff began working remotely and customers were unable to visit bank branches. The manual core processes that underpinned the mortgage market stopped working - almost overnight. Their outsourcing arrangements collapsed because those outsourced staff couldn’t work from home. Banks rushed to implement ‘digitised’ solutions but these proved ineffective.

Before they knew it, they were faced with spiralling backlogs and turnaround times as applications stacked up.

Digitised front ends won’t fix it (and outsourcing makes it worse)

The true potential in the shift from analogue to digital was misinterpreted by incumbents, who saw this shift mainly as an exercise in cost reduction.

The true potential in the shift from analogue to digital was misinterpreted by incumbents

The new digital front ends designed to help customers self-serve, powered by the same underlying technologies and processes, created user experiences that flattered to deceive rather than delivering enhanced value to users. (If you’ve ever tried to apply for a mortgage online, you’ll know what I’m talking about).

Over time, lenders continued to outsource more critical business activities. Little did they realise the impact this would have on their ability to address the needs of their customers.

Providers are now realising that they’ve reached the limit of what can be achieved through this outsourcing approach. Last year, JP Morgan’s CEO Jamie Dimon referred to the “horror stories” lenders have spun, from what he termed “outsourcing your heart, your soul and your nervous system”.

Providers are now realising that they’ve reached the limit of what can be achieved through this outsourcing approach.

By digitising their analogue processes and outsourcing key activities and processes, big banks have disintermediated themselves from their customer base. They’ve left a huge opportunity on the table - inevitably to be picked up by a new breed of mortgage providers offering truly digital solutions to real customer problems.

A new wave of challengers is emerging 🐣

Rather than using existing mortgage products as the starting point for digital transformation, these new challengers are scrutinising the entire journey to home ownership. This helps them to solve some crucial user problems along the way and, in some cases, rethinking the role of the mortgage entirely.

They’re not bound by legacy products, infrastructure or processes.

Instead, they:

  • Focus relentlessly on their target customer

  • Have a detailed understanding of their pain points

  • Design truly digital services that deliver real value, positioning them as a natural partner for hopeful homeowners

  • Deliver exceptional experiences, underpinned by modern technologies and digitally-native ways of working

Will the home ownership experience ever be truly digital?

All signs pointed towards 2021 being the year of property.

There was an enormous opportunity for incumbents if they chose to embrace that disruption on the front foot.

They stood to create innovative, value-adding propositions informed by an in-depth understanding of the customer and their needs, while offering customer experiences that are underpinned by digitally-native workflow capabilities and ways of working.

But did it pan out that way?

Well, 2021 has been dubbed “a golden year for mortgages”. A perfect storm of factors - from the lockdown-induced rush to buy to the UK stamp duty holiday - brought about market growth in excess of 27%.

UK house prices have soared in the wake of the pandemic. According to Rightmove, average property prices increased by £55,551 in the past two years, compared with a £6,281 increase in the two years before the pandemic. The situation is the same in the US, where house prices increased by 16.2% from 2020 to 2021.

Banks, still hamstrung by unfit processes, have been left struggling through enormous backlogs of mortgage applications, to the frustration of expectant buyers.

While rapidly-rising interest rates will likely cause the market to cool, Rightmove also predicts that demand for properties will continue to outstrip supply for at least the rest of the year.

It's not enough for banks to focus on simply weathering the storm in the hope that things will soon settle down. Digitising those old, outdated processes hasn't worked. It's time to embrace the true potential of digital.

 Ross Gallagher
About the author

Ross Gallagher

Ross has considerable experience designing and optimising card payment and other digital banking services for tier 1 banks. At 11:FS his focus is working with global brands to build world-class digital challenger banks.