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Branches Vs Brokers – How Brokers Create a Competitive Edge

By August 1, 2018 Blog No Comments

The bottom line is that if there were no mortgage brokers, there would be no way to challenge the banking sector and smaller lenders would have little chance to succeed in the market.

The DAE (Deloitte Access Economics) released their The Value of Mortgage Brokering report in July, which accentuated the affect that brokers have on competition in the lending industry and how it is valuable to lenders, consumers, and the economy.

According to the DAE report, brokers allocated 28 per cent of their loan deals to smaller lenders over the big four banks and their known affiliates. The reported also included the information that brokers completed 55.7 per cent of the mortgages during the September quarter. If you consider loans lodged with banks besides the big four, not including affiliates, the figures come out to 49.3 per cent of mortgage loans were sent to these lending institutions.

Deloitte referred to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, outlining that brokers have enhanced the market share for small lenders by 1.55 per cent and that banks would need to establish 118 new branches to create an equivalent in that market share.

This discovery of the DAE report comes at a convenient time given that Bankwest recently decided to close 29 of its branches. Rowen Muchenberg, Bankwest’s managing director, they knew they couldn’t compete with the major banks.

Bankwest has decided to focus on digital channels and broker relationships. Munchenberg said, “Many people still value face-to-face interactions, but customers increasingly expect seamless self-service options that allow them to do their banking when and where they choose.”

According to Mr Munchenberg, there is been an uptake of 88 per cent in consumers preferring banking and financial app transactions over face-to-face in-branch solutions in just the past three years. This factor plays a key role in their decision to adopt such technologies and steer clear of building more branches. This will allow them to compete in this climate.

Broker Avenue Vs Branch Avenue Costs

In light of this topic, let’s discuss how much it costs to open and operate a branch.

The PC (Productivity Commission) draft mentions seeking out evidence related to the comparative costs of doling out home loans via the broker channel versus the propriety channel (banks). However, they could not gather enough evidence from third-party channels and lenders while they were compiling the report.

The PC did comment, “Whether brokers are an efficient, lower-cost distribution channel for lenders depends in large part on the way lender branch costs are apportioned between different activities. That the providers of half of Australia’s home loans were unable to give evidence on how they assess the costs and benefits of using brokers rather than branches to source home loans is surprising.”

Peter White, the executive director of the FBAA (Finance Brokers Association of Australia), chimed in and proposed that the cost of using a broker is about half of the cost of using proprietary channels. He said, “The use of brokers evolved from a clear recognition that the value of using a broker was more attractive than branches and staff.”

Mr White feels the propagation of brokers has happened due to the benefits of the ever-expanding broker network that product issuers know is a cheaper and more effective distribution model than branches that require staff. That’s why the broker channel continues to flourish.

The DAE’s report states that while “transaction costs are higher in the broker channel due to commission payments” and that “processing costs are similar for both brokering and banks direct channels”, lenders can make “significant savings” via the third-party option.

The report also stated that the costs of mortgage distribution through branches encourages higher infrastructure expenses and overhead, which may make up 40 to 60 per cent of their operating expenses.

Some costs included with branches are property leases and rentals, marketing and advertising costs, computer equipment, electricity, computer software, staffing, and training and compliance expenses. The third-party channel consumes most of the financial responsibility, according to the DAE’s report about compliance costs.

Costs related to training and staff compliance can become substantial on a per loan criterion. “Aggregators train and mentor their mortgage brokers and enforce compliance”, according to the report.

Brokers’ Wider Distribution Approach

The Deloitte report stated that mortgage brokers offer lenders with a “distribution channel that complements existing branch networks or stands in for them where none exist.” Three ways this happens includes the following.

Lender Segments – Since brokers are the primary distribution network for small lenders (including non-ADIs and banks), these lenders are able to do business with more clients beyond the big four banks. Otherwise, they would incur the expenses related to opening new branches to distribute their products outside of the local market or withdraw from the market.

Broader Consumer Reach – The geographic reach of brokers expands the market more efficiently than direct lenders.

Market Sensing – Where lenders have a physical presence, they have brokers from which to get feedback for making future decisions related to what produces and services they will offer. According to the DAE report, these non-bank lenders value the feedback they get from brokers and consider then a reliable resource regarding which customers need their help and what solutions they can offer them.

In the summary of the Deloitte report, they included comments from Michael Trencher, the head of broker distribution at Heritage Bank.

Mr Trencher stated, “The key benefits of the mortgage broker channel (to lenders) are scale, distribution, broadening service and providing access to other areas of key banking services.”

With this new information from the DAE report, you could say any pursuit to sabotage the existing broker channel would create a net loss for every stakeholder. However, the evidence clearly reflects that the average loan client would suffer the biggest loss.

Limited choices in home lending and mortgages would adversely affect consumers who are struggling to decipher the complicated world of the mortgage industry. With more choices, they avoid higher operating costs, higher pricing and fees, and more lenders that can help more consumers.

First Choice Mortgage Brokers are a Sydney Mortgage Broker operating under the Australian Credit Licence Number: 382370