As a former banker, this writer’s thinking was piqued by a recent article on ABC News that stated, “All three (major) lenders . . . reported serious downturns in earnings and each of the three major banks doled out unexpectedly large wads of cash to shareholders, either to distract from the performance or to diminish the pain and keep the share prices elevated”.
It posited the cause as, the rise of mortgage brokers in the home lending market. Around 75% of new loans in Australia are now negotiated through mortgage brokers. Is that similar in NZ? Elsewhere?
The reason for the rise of mortgage brokers? The article suggested that “Where once loyalty, or maybe even apathy, made borrowers hesitant in moving their business across the street, price (the interest rate) now dominates how buyers choose a lender”.
Perhaps if it was only price dominating buyer choice, then more people would shop around. But they aren’t - they’re going to mortgage brokers. Why?
More on mortgage brokers shortly. But first, there’s another important reason why people have moved away from banks.
Banks have become ‘transactional’ rather than ‘relationship’ based, and they’ll never be as good at online transactions as those who have entered the market over the last decade as purely online transaction organisations. Many have very little overhead, virtually no property, few employees and are excellent at providing the fastest, easiest way to do business online – and they are strictly online businesses – price and efficiency are their key underpinnings.
As an example, Transfer Wise (now known as “Wise”) specialise in foreign currency transactions. Once you open an account and type in your details of the transaction, it takes between 3 and 5 seconds to transfer the money to any place in the world, and their commission is cheaper and the exchange rates generally better than the banks.
Boom! Goodbye foreign exchange dealings for the banks which were once a tremendous money earner.
Returning to the point of banks being now ‘transactional’ rather than ‘relationship’ based, if they can’t compete with the newcomers on transactions (lending, foreign exchange etc.), then banks must rely on their customer relationships in the hope that their customers will choose to transact with them.
Do they have relationships with their customers? No! They’ve shown very little loyalty to what was once a huge asset (the good will of long-time customers). Banks have sold off or closed many of their key customer contact and face to face service channels, their branches - probably done to reduce overheads, increase dividends and keep the share prices high. The shareholders (many of whom are themselves excellent transactional bodies and not individual people) are grateful – how long will that last?
Although most of us use online ‘banking’ exclusively, we are still people. Every decision made in life is by a person and people want to know that their transactions are safe and being looked after by another person, “somewhere”.
Social science research shows that people will explain their logic and reason for making major decisions. However, it’s how they ‘feel’ about the facts and logic that sways their decision one way or the other.
In the case of home mortgages, this is particularly so. It’s the biggest financial investment that people make in their lifetime. Yes, they will check the rates and deals online, and yes many will have a good idea of the best deals. But when that final decision comes as to who to borrow from, they want to speak to a person to get confirmation they are making the right choice.
Can they do that at a bank? Unlikely. This writer recently tried to make an appointment with our local branch manager (the only branch of that bank left in a city of 90,000 people) and was told that I’d have to wait two weeks to see him. Where did I go? To our friendly mortgage broker. And yes, I did get the best deal and ‘felt’ good about it because my thinking was confirmed by a real, caring person.
Steven Covey in his seminal management book, 7 Habits of Highly Effective People, introduced ‘trust’, not as a soft social virtue, but as a hard-edged economic driver that can be deposited and withdrawn from one’s emotional bank account. It takes time to build up the trust balance by way of small deposits and this balance is quickly depleted with just one withdrawal, such as treating long-term suppliers, staff, and customers differently. So, when people make consistent deposits, because of the integrity and empathy of the bank - which the banks were once good at – then to paraphrase Covey, “If they are unkind, disrespectful, uncaring and mean, then people withdraw from their account in the Trust Bank immediately”.
The banks no longer have people depositing into their “Trust Bank” - everyone has withdrawn. So too have I.