Whitecap’s work in FinTech often leads us to conversations about digital transformation in financial sectors, and in recent months there’s been a particular focus on robo advice in mortgages. In terms of technology-based innovation, the mortgage market typically lags other sectors, most notably retail banking, unsecured lending, investments, and insurance, but as with any industry there are always some exceptions and early adopters.
In the intermediary mortgage market, some relatively new firms are embracing technology to create new offerings based firmly on digital systems consumers can interact with. Brands such as Trussle, Habito and Mortgage Gym are becoming well known and are increasingly vocal in their claims of being able to help consumers compare and calculate mortgage rates, whilst helping them find the best deals. These providers are becoming more complex and taking on more tasks that a broker would usually handle. For example, the new portal from Mortgage Gym claims it will complete an application from start to finish in 15 minutes, with minimal human input.
There certainly seems to be an opportunity to provide the consumer with a better experience, and John Ingram of Mortgage Gym recently described the mortgage process as “archaic, inaccurate, time-consuming and ripe for disruption”. More automation in the mortgage advice and application processes could clearly unlock significant efficiencies, with lenders and borrowers benefiting from smoother, faster and and more accurate processing of applications.
How big is the market for robo advice in mortgages?
This is the million dollar question, but potential and reality are two different lenses through which to address it. In terms of potential, the market is significant. Research from the Intermediary Mortgage Lenders Association (IMLA) says that 47 per cent of homebuyers who begin the mortgage application process reach completion and 67 per cent of lenders cite “too much paperwork” as the main source of consumer frustration.
According to the Council of Mortgage Lenders (CML) – In 2016, nearly 700,000 mortgages were completed in the UK, with 65% of these being taken out via a mortgage adviser. So it would be easy to conclude that the robo advice opportunity is a huge one.
What may surprise you is that the number of people who took out a mortgage via a 100% digital process is zero. Despite all the PR headlines about artificial intelligence, robo advice and digital mortgage advisers, it’s not currently possible to complete the mortgage advice process without speaking to a professionally qualified human adviser.
The closest model to a true robo adviser currently appears to be Mortgage Gym, because the website itself is authorised to give advice, which the user will receive before they come into contact with a broker. But they will still need to deal with a human to complete the process.
Some industry commentators feel the term robo advice is in fact quite a new word for something that has been around for some time. Mark Lofthouse, CEO of mortgage sourcing software provider Mortgage Brain, and a long established tech-advocate in the mortgage market, was recently quoted as follows:
“Personally, I’m not a fan of the term ‘robo advice.’ It gives a sinister and dystopian feel to something that in reality is far from a new concept, and at this stage, does nothing more than enable clients to educate themselves using interactive tools to a point where they feel the need for advice.
Insurance comparison websites have been giving out ‘robo advice’ for years. Consumers enter all their information in to a website and a few seconds later the ‘robot’, or actually algorithm, rewards them with some options that meet their needs.
As it stands, though, there is no robo advice software that can lay claim to being the Uber or Airbnb of the mortgage world. This is a technological evolution, not revolution.”
Other individuals in the industry have been quick to point out the shortcomings of tech in advice. Mainly centred around how robots can only be as good as the data they have submitted to them. For example, consumers can wrongly put in data which an automated system will respond to by offering them advice that is not suitable for that individual. The same argument could of course be applied to interviews with human mortgage advisers, who can only give appropriate advice based on accurate information.
Is robo advice a threat or opportunity for mortgage advisers?
Whilst the sector may not fundamentally delivering anything new or ground-breaking at present, robo advice has certainly got the attention of industry players in the intermediary mortgage market.
Perhaps unsurprisingly, many mortgage advisers are sceptical of the technology that has the potential to put them out of a job. The ‘star letter’ of a leading mortgage adviser publication in May 2017 was headed “I bet in five years’ time the whole concept crashes and burns”.
According to research by Legal & General Mortgage Club, more than a third of brokers see the growth of robo advice as a threat to their business. Nearly four out of 10 brokers (38 per cent) see the rise of robo advice as the biggest threat to their business in the next three years.
Others will no doubt see it as a threat but also an opportunity to improve efficiency and profitability.
The current reality of robo advice in mortgages is that it is a hybrid proposition. Customers still have to speak to a qualified mortgage adviser in order to confirm acceptance of the mortgage advice from the digital adviser. This hybrid use of technology and human input may be enhancing the traditional advice process by driving efficiency and profit, but it is not replacing it.
What do the customers want?
There is evidence to support arguments for and against robo advice. Digital calculators and comparison sites are widely used and relied upon in the early stages of mortgage enquiries, but it appears there is some scepticism when it comes to going past simply accessing information to following financial advice/suggestions.
A 2016 Deloitte report found the two most cited reasons against robo advice (by around a third of respondents) are a lack of trust in a digital solution, as well as an unwillingness to pay. This is unsurprising given that these services do not yet exist at any substantial scale. In addition, the unwillingness to pay is also evidenced by the existence of an ‘advice gap’, whereby people are unable to get advice at a price they are willing to pay. Interestingly, Mortgage Gym has recently announced that brokers who become appointed representatives of the firm will not be permitted to charge a fee to clients for their advice.
A significant number of respondents said they would find it easier to speak to an adviser than use a website, implying that building easy-to-use customer interfaces is key to success.
Research conducted by Accenture for the CML found that two-thirds of customers would prefer to speak to an adviser about complex products. Handling more complex borrower requirements has long been a challenge faced by the mortgage sourcing software providers, so it’s no surprise that it will also be an obstacle to robo advice firms.
Hybrid models involving a combination of digital and human adviser are likely to remain prevalent in certain markets (e.g. lending into retirement and lifetime mortgages) because they can ensure safeguards to the suitability of advice.
Interestingly, Deloitte’s research found that demand for robo advice is high among consumers in their early forties, not just millennials and that demand also rises with income.
The robo advice opportunity – today and tomorrow
The immediate opportunity for mortgage advisers is to develop a front end digital offering – something which does not need to involve ground breaking technology. A basic data capture with a polished interface is an intriguing way to get possible customers engaging with mortgage information, without having to speak to someone. This is less about robo advice, more an opportunity for lead generation and value creation. Lenders can capaitalise on these front end benefits too.
Looking further ahead, as consumers get more comfortable submitting and receiving information through a digital interface, we will edge closer to the ability to conduct and advised mortgage transaction fully through a digital platform. If the market is moving in this direction, then in the shorter term, advisers and lenders alike will of course be looking towards increasingly digital propositions.
As our colleagues from the retail banking, unsecured lending, investments, and insurance sectors will be happy to testify, today’s customers want to be more in control of the processes around their finances. So whilst robo advice may be able to genuinely drive profitability, efficiency and value, it may also transpire that a digital solution is what customers actually want.
Julian Wells is a Director of Whitecap Consulting, a strategy and commercial consultancy that works in the financial services and fintech sectors. We help organisations explore and tackle new growth opportunities in the changing digital economy. View our clients.
Useful links:
How far will mortgage robo advice go? – Leah Milner, Mortgage Strategy, 14th September 2016
Will robo advice ever replace mortgage brokers? – Peter Williams, Mortgage Strategy, 10th February 2016
Habito unleashes Digital Mortgage Adviser – Finextra, 12th September 2016
Digital mortgage firm plans network launch with adviser fee ban – Samantha Partington, Mortgage Solutions, 22nd June 2017