Retreating up the risk curve is no solution to the growth challenge
Abigail Gammie, Managing Director of the Berkeley Research Group
The UK mortgage market is still the sector that holds the greatest return opportunity for retail banks. Competition for customers is in a perpetual state of tension and we have recently seen significant upturns in net value of new lending and the number of customers looking to re-mortgage.
According to latest forecasts, a win of the Brexit “remain” campaign could enable a rate increase as soon as this year (source: Bloomberg). If the rates are to go up this year, smart lenders should be preparing now for the huge spikes in competition.
The tempting strategy when base rates change is to invest every effort into driving acquisition, maximising volume and expanding market share at the cost of all else. Yet targeting growth through the churning of the existing market often results in lenders having to lend more just to stand still, never mind achieve net lending growth. Since the mortgage-lending peak in 2007, banks have been required to advance more and more funds to secure the same level of total net lending growth, but there is hope on the horizon, with net mortgage lending forecast to return to the highest levels since 2008 during 2016, at 3.4% according to EY. If banks deploy the right strategies, they can improve their margins.
It is important to resist these potentially destructive strategies and instead focus on deriving as much value as possible from existing customer bases. It is a simple, though widely disregarded fact that it is much easier, and more efficient, to retain customers rather than acquire new ones. Margins on existing back-book business are usually higher than on new business and there are significant costs involved in acquiring new customers.
When scaling the retention challenge, it is advisable to aim for a better understanding of the existing customer base. Lenders who understand their customers better by examining channels, first time buyers/re-mortgagers, and risk and credit rating loan amounts will inevitably create a more targeted pricing strategy. Loan-To-Value (LTV) is still a major factor for lenders but modern standards have moved beyond this singular metric and lenders will fall behind the competition if they fail to implement a more sophisticated pricing model.
It is also important that lenders clearly understand how customers want to be contacted in terms of content and frequency, making sure a relevant and seamless customer process is in place. Loyalty can be built here through offers on other products or rewards such as retailer discounts. Building a broader relationship that makes the customer feel valued can be as important for creating loyalty as the basic rate being offered.
Implementing a smart approach to managing the intermediaries network can also be crucial especially for smaller lenders. Banks should have a consistent understanding of the geographic market share of particular intermediaries and target incentives accordingly; making sure they have good quality business development managers that are talking to the intermediaries; keeping the institution top of mind; offering some exclusives and retention incentives; and providing access to good quality events that will keep intermediaries coming back.
Taking the portfolio approach to the balance sheet rather than a volume-driven approach is critical for achieving sustained lending growth. Working together, BRG and Nomis Solutions are assisting banks in scaling the retention challenge through big data approaches to portfolio technology. Damian Young, Managing Director of Nomis EMEA argues, “Banks will see significantly stronger long-term growth patterns if they can exercise customer data to its full potential and optimise pricing strategies accordingly. The right partnerships will bring them ahead of the regulatory agenda and allow them to achieve tighter records through a dynamic, data driven portfolio strategy.” Targeting pockets of value rather than volume will always be more sustainable in the long term and will leave both the borrower and the lender in a much stronger position moving forward.
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