New opportunities for loan origination
In a landscape of regulatory change and increasing competitive pressures, mortgage, asset and commercial loan originators face significant challenges. However, they also have opportunities to grow. With tightening credit restrictions, borrowers are finding it harder to secure capital – and at the same time, they demand more choice than their incumbent bank can provide.
Macquarie’s insight paper, Thriving in Change, shared four universal truths affecting most businesses. These same trends are playing out for brokers, who are also best placed to support business owners in funding their growth strategy. Here’s our predictions on what that might mean within the next few years.
1. New competitors are emerging… everywhere
Brokers traditionally compete with a bank’s direct channel. But now they’re also dealing with increasing tech platforms (such as aggregators, direct or peer to peer lenders and crowdsourcing), as well as brokers moving between the siloes of mortgage, asset finance, and more complex commercial loans.
David Gandolfo, Director of Quantum Business Finance and President of CAFBA, warns that mixing income streams without adequate education “can be a dangerous thing.”
“In the face of declining trail commissions there is pressure on residential brokers to move into commercial spaces and diversify their income,” he notes. “But they may lack the financial expertise to put together a more complex deal.”
Brian Steele, Macquarie Business Banking’s Head of Commercial Origination, says he expects tech platforms to play an increasingly competitive role. “Inefficient markets are ripe for disruption – and that describes the current broking experience, whether it’s insurance or finance,” he says, noting the legacy systems of large incumbent providers have held back innovation.
Steele suggests brokers see those platforms as an opportunity to meet compliance imperatives at scale – and this is something Gandolfo’s firm is already embracing.
“We see fintech as complementing our service. For example, we’ll use a fintech facility to cover the cash flow gap for a deposit on an asset finance facility, or perhaps to resolve a business’s short term tax arrangement,” says Gandolfo.
2. Customers need your services more than ever
Analysts are predicting a potential ‘credit crunch’ for consumers and small business lending, with “a sharp reduction in credit availability.” Stamford Capital’s survey of commercial lenders also indicated 40% expect the major banks to tighten their credit criteria further for construction and development lending – but other sources of capital such as non-bank funding are expected to fill that gap.
This makes the role of originators increasingly important, with so many new ways to structure a viable deal.
“A lot of business owners are frustrated that they can’t get the facilities they had in the past, and that’s an opportunity for broking firms,” says Gandolfo. He is seeing new lenders emerge in specialist asset classes, such as cloud-based assets or solar equipment, because these don’t always meet a simplified lending assessment approach.
“For some transactions you still need a full finance assessment and common-sense decisions, and that’s where Macquarie stands out,” he comments.
Steele also says brokers can provide the online, self-service experience customers now expect. “We still see a lot of paper forms in commercial finance. Smart brokers give their clients access to a secure portal where they can see their limits and exposures – and to do this well you need all your data online and real-time.”
3. A new age of compliance will create momentum to scale
With changes to responsible consumer lending tests, it will be essential to securely share data between lenders and brokers. “To invest in that level of process and compliance, you will need to be a certain size. And that means we can expect to see further consolidation in the market,” says Steele. He notes that valuations for firms with the right systems in place are up to eight times trailing income – compared with two times for a standalone residential broker’s book.
Gandolfo does not believe the same FOFA (Future of Financial Advice) protections will (or should) apply to the commercial space. “It’s not relevant. Businesses are not wage earners on a fixed income with regular expenses, they are on a growth trajectory and need to be assessed differently.”
4. Expect increasing diversity and job automation
So what might a typical broker business look like in five years? It will be larger (no more one- or two-man bands), working across different lines to meet broader client needs. The application process for simpler mortgages might be fulfilled by automated chatbots (just as we’ll see with personal insurance lines), while professionally-qualified brokers will put together more complex commercial deals.
“Gender and age diversity is an issue for the industry, given the legacy of commercial brokers coming from banking,” says Gandolfo, adding CAFBA is proactively supporting women into leadership roles with scholarships.
And as many banks continue to depend on brokers for client relationship nurturing and compliance, they will play an increasingly important role in ensuring their customers are placed with the right product and structure – and have a better experience at every step of the way.