Banking on the non banks - The Adviser (18 Jan, 2012)
Still smarting from the battering they received post-GFC, the non-bank sector now has several opportunities to claw back market share - provided the individual lenders and their brokers are onboard.
When the global financial crisis (GFC) decimated the lending industry, no area was hit harder than the non-bank sector.
The cost of funds, as well as the post-GFC financial landscape's lending restrictions, put a substantial strain on the sector, with borrowers moving to the perceived safety of the major banks in the wake of the crisis.
Many non-bank lenders were forced to shut up shop.
Offering a competitive alternative to the banks became incredibly hard and the non-bank sector lost more than 30 per cent of its market share.
In 2011, with the introduction of NCCP compliance requirements, the abolition of exit fees and a bitter price war in which the major banks quickly became highly competitive on price, the non-bank sector found itself facing even more challenges.
Those who hung in there, however, have come out stronger for it.
The sector now has a clearer focus on meeting its customers' needs by offering, among other things, a broader range of products.
The need to take control
However, while there may have been changes to the structure and approach of the non banks, confidence in the sector is yet to return and it currently enjoys just a fraction of the market share it had prior to the GFC.
A few commentators even question the need for a non-bank lender sector.
Ranjit Thambyrajah, managing director of Acuity Funding, is not one of them, although he is under no illusions about the challenges non banks face.
"I expect non-bank lenders to slowly and steadily grow their market share," he says. "However, it won't be done at the speed it was occurring at prior to the GFC as funding is very hard to secure and in many instances the funding being secured is done through the majors.
"Currently, the banks seem to have the upper hand; however, they generally operate on a top heavy cost base and this allows the possibility for smart, well-managed mortgage houses to step in."
But investor behaviour is changing, and the non-bank sector could benefit as a result.
"When the GFC reared its ugly head, the government only guaranteed deposits held in banks, so all the investment money that supplied the commercial non-bank sector took flight and investors put their funds in the banks," says John Macalyk, managing director of AAA Commercial Mortgages.
"With interest paid on bank deposits diminishing, the share market now very volatile and the property market stagnant, investors are putting their money back into commercial mortgages, mortgage trusts and non-bank lenders for more consistent and better returns."
However, according to Frank Paratore, general manager of aggregation group Ballast Finance, the non banks need to take things into their own hands rather than rely on changes in the marketplace to secure a brighter future for them.
"You can't continue to do the same thing day in day out and expect to get different results; the non banks need to do things unconventionally," Mr Paratore says.
"The non banks can't offer up products similar to those of the banks with the only lure being they are a little bit cheaper. It's not going to work - brokers are still going to favour the banks.
"(The non banks) need to show a much greater appetite, whether it be in buying, product innovation or the way they do things," he says.
In the near future
The GFC left fewer players operating within the non-bank sector; those that stuck with it now have the task of reclaiming market share through being able to offer a genuine alternative to the majors.
It's not just about price either; to strengthen their position in the coming months, the non banks need to concentrate on upping their service offering, says Peter Bromley, head of LJ Hooker Financial Services.
"The non banks have to make sure they are not just competing on price; we have to be competitive in all areas of the service proposition," he says.
"From a consumer's perspective, yes, it is important to have a competitive rate, but it is also important to provide excellent service up to and beyond settlement.
"From their perspective, brokers still want to get deals approved quickly so it is important that we provide our brokers with quick turnaround times. That has to be a key part of a non bank's service proposition."
Challenges notwithstanding, Greg Mitchell, general manager of Homeloans, expects to see non banks grow their share of the mortgage market in the next few years.
"The major banks have aggressively priced their products and services to 'buy' market share," Mr Mitchell says. "However, their ability to maintain this 'war' is not sustainable."
Cathy Dimarchos, general manager of commercial lender Sintex, also believes the way the banks have gone about securing market share is not sustainable and that this represents an opportunity for the non banks.
"Whilst the banks, from a retail perspective, have gained market share, this has placed strains on them internally," Ms Dimarchos says.
"They need to review the way in which their business models have been balanced of late and this will (lead to) some changes taking place in the next 12 months."
Homeloans' Greg Mitchell says he has even heard talk of at least one major planning to remove its current business-generating incentives.
As these added incentives are removed, it will allow the non banks to compete against a background of level, consistent pricing, he says: "Therefore, no channel conflict and excellent servicing."
Ms Dimarchos adds that she expects to see the non-bank sector grow as deposit funds will need to be increased to offset the (banks') retail mortgages.
"Securitisation and other wholesale ventures create an alternative revenue stream for the banks, with fewer overheads and in many respects less risk," she says.
"Given those factors, the non banks will without doubt see slow and steady growth over the next few years."
In a sense, the future of the non-bank sector is in the hands of brokers. Unable to fund major marketing campaigns and without an extensive branch network, they rely heavily on the broker channel to promote their products - and therefore to help them grow market share.
While consumers have steadily become more aware of the non banks' existence, there has been next to no marketing of the sector as a whole, says Ms Dimarchos, resulting in many borrowers querying the non banks' security and stability.
A lack of information continues to leave the sector misunderstood, she says.
If non banks are to improve their presence and how they are perceived within the market, there is a genuine need for education, adds Mr Thambyrajah.
"We have to educate the public in becoming more savvy when it comes to deciding about the product that best suits them," he says.
"This will mean we, as brokers, will need to become more professional and to view our profession as a highly skilled industry.
"It will require us to upskill ourselves in the range of products available to clients and to get out of that comfort zone in which we use only known products and service providers."
Some brokers may view taking on another product as a hurdle, but they need to consider that stepping outside their current boundaries will not only create opportunities but also provide solutions that may be better suited to their client, adds Ms Dimarchos.
"If the non banks forged a campaign to create market awareness as a whole, this would certainly enlighten consumers about who we are and what we offer, but more importantly, that we stand to ensure the industry remains consumer-focused," she says.
Frank Paratore agrees that a consolidated branding effort is needed, but adds that for the non-bank sector to become better known within the marketplace, non-bank lenders must do everything in their power to help brokers promote their brand.
"Given that there are only minor variations between bank products, why would a broker recommend a non-bank product?" asks Mr Paratore.
"From a broker's perspective, they have to try to sell a different product that is linked to a brand which is not well known.
"At the end of the day, we can't direct our brokers ... so the non banks need to band together to promote their wares in the industry, whether it be through publicity or through BDMs," he says.
Importance of non-bank business
An industry without competition - without a range of products from a range of lenders - would effectively render a broker's services redundant.
This is why it is so important for brokers to promote non-bank products as a genuine alternative to those of the banks, and particularly those of the majors.
"Competition is the life blood of our profession and critical to our survival," says Ranjit Thambyrajah.
"It is every broker's responsibility to nurture competition as it is good for the consumer, and what is good for the consumer will always be good for the industry," he says.
While awareness might be limited, consumer sentiment towards the non-bank sector is, however, favourable, says Homeloans' Greg Mitchell.
"Homeloans conducts regular consumer research and our most recent survey found that more than 70 per cent of borrowers are open to considering alternatives to traditional lenders," he says.
"Additionally, a survey recently conducted of more than 300 brokers indicated that 28 per cent believe recommending a big four bank reflects negatively on their business.
"These figures speak for themselves and confirm that a non-bank solution is an essential tool in a broker's armoury."
The tougher lending policies introduced and enforced in the wake of the GFC also left the non-bank sector more than willing to pick up the business from which the major lenders have retreated.
According to Tim Brown, CEO of Vow Financial, the non-bank sector has now become a great source from which brokers can source products - especially if their client falls outside 'mainstream' lending requirements.
The non banks' generally superior service offering supports them in this area, he adds.
The commissions that can be earned from recommending a non-bank product should also not be disregarded, says Mr Thambyrajah.
"Non-bank commissions compare very well to those of the majors; they are on par, if not better than the major banks and often do not attract any clawbacks," he says.
Non-bank lenders are often willing to offer higher commissions because they value the contribution brokers provide in the distribution process, adds Allan Savins, CEO of RESIMAC.
Clients are also less likely to be cross-marketed to in the non-bank sector, increasing the likelihood they will remain a broker's client for life.
What the non banks do best
The banks have a powerful and longstanding presence within the mortgage marketplace, having developed a solid reputation for providing well-known quality products. This has made it hard for the non-banks to compete.
However, what the non banks have been able to do successfully is present themselves as highly focused on providing service that goes above and beyond the rest of the market.
Brokers who have used non-bank products over the years attest to the stability of non-bank services, as well as their transparency and better turnaround times, says Ms Dimarchos.
And with non banks having to work harder for their business, their appetite for risk is often greater than that of their counterparts.
Non-bank lender Sintex, for example, will accept a 75 per cent LVR for a commercial loan whereas most major banks will only go up to 65 per cent.
In order to secure a greater volume of business, the non-bank sector is also generally more willing to think laterally and offer tailored solutions to borrowers who fail to meet the banks' lending requirements.
For example, being flexible in the credit assessment process has allowed the non-bank sector to drive most of the market's product innovation and to be at the forefront in developing new product features and facilities.
Sintex uses its commercial loan products to establish a point of difference in the marketplace, says general manager Cathy Dimarchos.
"Consumers are provided with the option of long-term loans and flexible features with redraws or no ongoing fees while the banks, on the other hand, charge bill facilities with rollovers, ongoing fees and reviews at their discretion," she says.
Ms Dimarchos adds that another area in which the non banks differ from bank lenders, and one in which they get particularly creative, is fixing a loan against assets.
"One of the biggest benefits that comes with dealing with the non-bank sector is that they do not interlock a consumer's assets, something brokers overlook when deciding between a bank or non-bank product for their client," she says.
"This is something in which consumers get 'entombed' without realising when they borrow from the banks.
"The non banks in general will secure a loan against a specific asset, keeping things separated, which allows clients to have options.
Being able to provide a quick approval by giving brokers access to credit staff as well as support through a dedicated BDM is generally another big plus for the non-bank sector.
That said, while the non banks pride themselves on being driven by flexibility and innovation, Mr Paratore does not believe that what the sector currently has to offer is adequate to lure customers away from the banks.
"I don't believe the non-bank core products are different enough from what is available from a bank," he says. "Their products are too similar to those of the banks - apart from a slight tweak here or there to LVRs.
"I believe having a diverse range of products is an area in which the non banks could set themselves apart and increase their market share."
They have very considerable strengths, but the non banks now also have their work cut out.