Predicting the future is always difficult, just ask Ken Olsen the president, chairman and founder of former US corporate behemoth Digital Equipment Corp. When pressed to speculate on the future of computers in 1977 Mr Olsen, someone who built flight simulators for the US Navy and had been at the vanguard of technological change for 20 years at that point, embarrassingly declared ‘there is no reason anyone would want a computer in their home.’ Fair to say he was wide of the mark with that one. However, in fairness to Ken, predicting the future is no cake walk.
Just take a cursory look back at where we were ten years ago and you get a sense of the relative breakneck pace of change at the moment, particularly in tech and financial services. A decade ago we were just discovering what the toxic combination of sub-prime mortgages, credit default swaps and collateralised debt obligations would mean for all of us. Lehman Brothers was still one of the world’s leading banks and if I asked you to name a shadowy character shrouded in secrecy you’d be more likely to say Keyser Soze than Satoshi Nakamoto. Now, depending on who you believe, Bitcoin is poised to take over the world. Ten years ago the first iPhone was launched in the UK, today you’d struggle to find someone without a smart phone permanently attached to them. Meanwhile ‘Uber’ and ‘Whatsapp’ were more likely to be words uttered in a ‘cool’ east London bar rather than ubiquitous apps revolutionising taxis and telecommunications. I’m not sure how many of us saw all of that coming.
Part of running any successful business is understanding how your market and your customers are changing and there is no doubt that in mortgages and lending expectations are rising as customers are demanding more. The threats to market share are real too. In darker moments many lenders fear losing business to fintech challengers on the back of intuitive product design, ease of use, 24/7 accessibility, and faster services. Fintech has already disrupted the industry by leveraging new technology and innovative offerings. Since 2013, funding of fintech start-ups has increased at 41% CAGR with over $40 billion in cumulative investment and consumers are already using fintech’s services in payments and personal lending. Providers like Kabbage lend as much as $100,000 to SMEs within half an hour by assessing the customer’s creditworthiness through an automated algorithm.
Regulatory demands are always a factor driving change too and we have some significant rule changes on the horizon. By Q1 2018, all the top nine banks in the UK have to provide access to banking data via an Application Programming Interface (API) to third parties under the ‘Open Banking’ rules. It means that banks face the risk of being disintermediated by third parties like Google, Amazon, Apple and Facebook who are more mature in offering a customer centric service and are trusted by customer to a greater or lesser degree. Hence lenders of today are now threatened by reduction in barriers to entry in the market and lack of digital capability to fight competition. Add in the demands, threats and opportunities around GDPR and now might be a good time to consider where we are heading and how customers and products fit into that brave new world.
Millennials making the rules?
In lender’s boardrooms up and down the country there is a dawning realisation that to stay relevant they will have to increasingly appeal to a younger, more digitally-savvy demographic. So-called ‘millennials’ hold the key to the future and have higher expectations than the more traditional customers many in the industry have become accustomed to. In fact in some cases they are looked upon as an alien group, misunderstood, patronised and fawned over in equal measure. One thing is clear, they are a complex set of customers that can no longer be ignored. So what is different about this almost mythical ‘millennial?’ On the whole when it comes to financial services younger people expect a slick multi-channel offering and the option to choose which channel to use, even moving between them at different stages of the loan process, as analysed in Target Group’s recent whitepaper, ‘Millennials: Attitudes to the lending market’. Having come of age during the credit crunch many 18-34 year olds are also interested in the stability of the financial services firms they use, as well as the speed and quality of service they receive. It’s notable nonetheless that for one in five a satisfying online experience that effectively services their needs is deemed to be the most significant point of difference.
In the past some big banks have been criticised for the lack of good quality customer service and this is likely to be a key battleground for millennial hearts and minds. That said, new entrants will also face significant challenges. There is pressure to raise enough capital to get a new business off the ground and this may be why we have increasingly seen new financial services firms operating entirely online, such as Atom Bank or mortgage brokers Habito. These new entrants, free of cumbersome legacy technology, have the opportunity to outsource non-core functions, allowing them to focus on what they believe defines the brand. As a result they may be best placed to take advantage of the prevailing millennial mind-set if they can convince customers of their sustainability and longevity.
As you can see, appealing to the next generation of borrowers and maintaining market share is not a simple proposition, especially in a tightly regulated market like financial services. All lenders must get the balance right between online and offline services in order to win favour with younger customers while at the same time ensuring they don’t alienate their traditional, older, customer base or those who prefer the human touch. Across the board lenders need to do more. Presently, too many providers are geared up to service the parents of millennials rather than their children. Indeed many banks are beginning to run focus groups to understand what the new demand is likely to be and rectify this problem sooner rather than later. The time has come when millennials are inheriting or earning money and asserting themselves. If lenders are to market effectively to this age group then they will need to have the tech infrastructure, process and experiences that will allow them to align service and expectation appropriately.
So, bearing all that in mind what will getting a mortgage be like in 2030? How will the services offered and the way they are delivered to borrowers change with the advent and implementation of new technology? Well the basic requirement of a mortgage won’t change. In 2030 people will still need, and want, a mortgage to buy a home. Accurate information allied with slick and quick processes will differentiate as well as the usual battle ground of product pricing. However, at Target Group we are increasingly involved in conversations about ways that data analytics and technological innovation is likely to change the experience of obtaining a mortgage in the future. At the moment we see three key advances in technology that may revolutionise the way borrowers apply and are assessed for a mortgage.
Blockchain is the buzz word of the moment among tech and financial services innovators. To the uninitiated though, it is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. Therefore by design, blockchains are inherently resistant to modification of the data. As a result it serves as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Many believe it will fundamentally change the lending experience in the next decade. Today, lending typically is a paper-intensive process with a long lifecycle from origination to funding. Blockchain offers a disruptive platform that ensures transparency and security via its algorithm that has the ability to record and distribute transactions in real time. The net result will be to speed up the accuracy of decision making and encourage transparency, accountability and therefore trust. Three prized commodities in financial services that are in short supply at the moment.
We’ve seen in our recent research  that, despite the move towards digital communication and automation, consumers of the future will still want to interact with humans, particularly when things go wrong or there are more complex discussions to be had. This is where a number of technological advances are likely become commonplace in the future. We have all heard of the potential benefits of augmented reality (AR) supporting surgeons perform operations remotely or allowing customers to see real time how a new three piece suite looks in their living room – this technology is fast becoming mainstream and presents a number of opportunities for the financial services market.
The ability to speak to mortgage advisers virtually already exists with technology such as video conferencing, but AR will bring a new dimension to this. The use of this technology will allow a ‘virtual adviser’ to sit next to the client and engage with them throughout the mortgage process, whether it’s walking them through a quote or helping to complete documents, the experience will be no different to visiting the adviser’s or lender’s branch but driven from the comfort of their lounge. We are already seeing ‘virtual video walkthroughs’ on estate agents websites, but these are more and more going to be delivered through augmented reality where a customer can visit, walkthrough and experience a number of properties without ever leaving their front room. They will be able to wander around the house at their time of choosing, without the need to be accompanied. Indeed, there’s the potential to visit a potential holiday property overseas without ever leaving home. Clearly this won’t replace the need to visit and get the confirmation that the property is right for them, but will make the shortlisting process much swifter and more efficient. We could easily see this technology being used to serve up location based mortgage information to consumers. As they drive around a neighbourhood, AR will overlay properties for sale through their phones or headsets and allow users to interact, pulling down details of the property, information on the street and serve up a real time mortgage quote based on their circumstances.
As margins in the lending and mortgage market become tighter, both new entrants and existing lenders are increasingly looking towards technology tools to maintain their competitive edge and simplify the lending process. There are a number of ways that this is happening and this progress will only accelerate over the coming years, automation is certainly one. There are few mortgage lenders that do not have some form of automation within their existing mortgage processes – whether it be data entry, automated valuations, simplified underwriting or processing of simple lender requests, automation has meant that firms can speed up responses, reduce costs and ultimately provide a better 24/7 service for customers. In the future we’ll see this move to automation continue at a pace. With the onset of machine learning, we’ll see more and more lenders using this processing power to customise products and services to the individual needs of each client. We could well see clients having an individual mortgage and rate tailored based on their specific circumstances. The ability to manage and analyse billions of sets of different data points and extrapolate a personalised risk profile at the touch of the button will become the norm and increasingly borrowers will expect lenders to understand their own circumstances. Younger consumers are more willing to share personal data in exchange for personalised benefits in the form of offers, reduced interest rates, recognition and other rewards. These types of tailored products and services will need to become standard procedure.
As the maxim goes ‘the best way to predict the future is to create it.’ Ten years is an epoch in the evolution of tech at the moment and with the pace of change to date there is no reason to think we won’t look back on 2017 in 2030 and wonder how we ever managed without the new technology of the era. The challenge for lenders is ensuring they evolve too, take advantage of the major opportunities afforded and stay relevant. There are plenty of nimble providers waiting in the wings who will capitalise if they don’t.
 Target Group: Millennials: Attitudes to the lending market White Paper (2017)