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THE ILLUSION OF GROWTH IN THE UK MORTGAGE MARKET

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The Illusion of Growth in the UK Mortgage Market

By Tony Moroney, Managing Director International Financial Services of Berkley Research Group

The UK economy is in growth, with GDP reported to be up 0.7% in the second quarter of 2015. This figure, which looks set rise to 2.6% over 2016, is causing many to predict a rise in interest rates within a short time frame. Growth and confidence have also initiated an apparent return of growth to the UK mortgage market and, of late, the remortgage segment. [1]

Mortgage lenders and mortgage brokers are set to further benefit from an increase in customers remortgaging and, for some time, have been aggressively competing to attract new customers. Customers are seeing exceptional value as the pricing differential with existing customers continues to broaden.

While lending strategies, at face value, appear to have been successful in their immediate goal of driving new business volumes, fixed-rate products have increased to 90% in 2014, up from 50% in 2010, creating a new dynamic for ongoing re-offers to existing mortgage customers. Furthermore, our analysis of the data shows that new mortgage pricing has actually reduced profitability for most banks. Critically, in the myopic pursuit of new mortgage lending volumes, lenders seem to have lost sight of existing customers.

While an aggressive acquisition strategy enables banks and building societies to report larger mortgage lending volumes (and perhaps market share), in the absence of effective retention strategies, it results in lenders having to lend even more just to stand still, never mind achieve net lending growth. Therein lies the paradox, as retaining an existing customer base is far more cost efficient and, with the right tools, easier to plan for than customer acquisition.

In 2007, at the mortgage-lending peak, to grow total net lending by £100 required lenders to advance £350. In 2014, banks would have needed at least £850 of new lending to achieve the same net lending growth.[2]

Experience suggests that this is an unsustainable misjudgement of fundamentals of the lending market, yet it is currently underreported in the mainstream media. The combined factors that brought about such an unbalanced approach from lenders are complex but in short include new regulation, increased competition for the most credit-worthy customers, a historically low bank base rate, and relatively low levels of new customers entering the market.

The unskewed reality is that lenders are running hard to effectively stand still. Figures show that of the £300 billion written in the 18 months to June 2015, net lending was just £35 billion (12%).[3]

Net lending totals have long been a problem, but mismanagement of back books—and of existing customers in particular—is now also on the radar of the regulatory authorities which are looking for fair pricing, open lines of communication and timely availability of relevant information. A reliance on customer apathy or information asymmetry is no longer acceptable.

Incumbent mortgage lenders must be wary of ‘unloved’ existing customers defecting to competitors, including new entrants in the UK mortgage market. Although the top six players continue to control over 70% of the market, we are seeing competition from brands such as Tesco Bank and Virgin Money. Apart from new banks and financial institutions attracting customers away, customers will and are turning to the ever-more-trusted alternative finance providers. These primarily online alternatives are growing in size, availability and levels of consumer trust. The challenge is clear: ‘protect your mortgage assets or lose them’.

In reality, against a backdrop of increasing rates and intensified competition, mortgage lenders have no choice but to face the mortgage-book retention challenge head on. To address these trends, boards will need to redefine ‘what good looks like’ for existing customers. This will require more sophisticated retention strategies, including customer segmentation, behavioural-based pricing analytics and due regard to regulatory obligations to treat customers fairly.

As per our recent blog published in partnership with Nomis Solutions, we advise lenders to ask themselves three key questions:

  • Can you profitably grow your book and offset falls in net interest margin if you need to lend £850 for every £100 of net book growth?
  • With 90% of new customers on fixed-rate mortgages, how do you plan to retain these customers in a rising interest-rate environment, and can you handle the operational peaks?
  • As intermediary lending continues to grow and as the remortgaging market returns, how do you plan to deepen relationships with customer?

The first step is to better understand what is important to your customers so that appropriate offers can be made based on a real understanding of needs. Only by doing this can mortgage lenders drive retention, book size and ultimately their return on assets. Why else should lenders expect customers to stay with them?

Building customer loyalty creates an extremely valuable asset for banks which necessitates being much more scientific to preserve and cultivate. Of course, there will always be healthy competition for new customers, but investing in acquisition alone at the expense of retention is not efficient; yet neither need be at the cost of the other.

Analysing the data held within an organisation allows lenders to collate and segment customers based on preferences to determine the optimum price for any given customer. This is key to building loyalty, realising planned return on assets and treating customers fairly.

Incumbent mortgage lenders need to respond now or risk damage to existing loan books and loss of stock-market share to competitors, both from outside and within the traditional lending space. In the current climate of new mortgage opportunities, lenders must be careful not to neglect the opportunities and advantages they already have within their existing mortgage customer base.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position or policy of Berkeley Research Group, LLC or its other employees and affiliates or Nomis Solutions (Europe) Ltd.

About the Author: Tony Moroney is a managing director and has 34 years of experience in the financial services industry, of which 28 have been in mortgages. His extensive experience uniquely combines business advisory and executive management of mortgage divisions and mortgage banks spanning origination, servicing, arrears management, balance sheet management and governance.

Mr. Moroney has been a leading advisor on mortgages in both the UK and Ireland and has undertaken significant advisory engagements including strategy, pricing, market-entry strategies, service diagnostic and target operating models for both mortgage lenders and servicers. He has also spoken at industry conferences on topics ranging from ‘risks inherent in the UK buy-to-let sector’ to ‘management of credit and conduct risk in the UK mortgage market’.

[3] IBID.

Finance

Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna

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Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna 1

Payment processor Mollie reveals the most popular payment methods for Black Friday

Mollie, one of the fastest-growing payment service providers, has revealed insights into the most popular payment methods used this Black Friday. The data, which provides a year-on-year comparison of 2019, shows that payment methods allowing customers to pay flexibly – like ‘pay later’ service Klarna – has more than doubled in 2020. The study spans 101,000 merchants across Europe, primarily from Germany, U.K., France, the Netherlands and Belgium.

Black Friday trends: 

  • In 2019, Mollie saw a 36% increase in the overall number of transactions on Black Friday versus the previous year. In 2020, this shot up to a growth of 56% on the 2019 numbers, representing a difference of 20%.
  • And this year, even in the four days leading up to Black Friday, there was a 58% YoY growth in transactions.
  • Use of ‘buy now, pay later’ services on Black Friday (such as Klarna or ClearPay) has more than doubled from 1% of all payments in 2019 to almost 2.5% in 2020.
  • Use of mobile payment methods on Black Friday is consistent on the previous year – 0.20% in 2019 to 0.25% in 2020.

“There is a lot of pressure on consumers’ wallets at the moment, which is making people look to payment methods that offer them financial security,” said Ken Serdons, Chief Commercial Officer at Mollie. “It makes sense that fintechs like Klarna, who have performed phenomenally well this year, have been so popular this Black Friday. The increase is in-line with this growing trend towards more flexibility in how consumers pay for goods.”

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Beyond Transactions: The Payment Revolution

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Beyond Transactions: The Payment Revolution 2

By Marwan Forzley, CEO of Veem 

The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.

As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.

For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.

With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.

A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.

If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.

Putting the user in the driver’s seat

Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.

The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.

For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.

With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.

Marwan Forzley

Marwan Forzley

Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.

Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.

In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.

Relentless transparency

Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.

Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.

This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.

Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.

Separating the signal from the noise

2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.

As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.

Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.

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Finance

The UK’s hidden payments crisis: why businesses should rethink their payments strategy

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The UK’s hidden payments crisis: why businesses should rethink their payments strategy 3

By Edwin Abl, Chief Marketing Officer at Modulr.

As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.

A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.

Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.

The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.

Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.

The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).

These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.

The 5 key steps UK businesses can take to drive payment efficiencies

There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:

1 – Locate hidden payment process inefficiencies

Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.

Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.

For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.

2 – Make payments key to stakeholder experience management

Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.

Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.

Edwin Abl

Edwin Abl

Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience

3 – Integrate and automate to support payment innovation

Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.

Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.

Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.

A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.

4 – Bring business leaders together

Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.

5 – Innovate by adding finance and payments to vertical services

Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.

This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.

Moving forward – engaging technology to drive efficiencies

If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.

However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).

By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.

To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.

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