It’s time to reimagine home financing
It fascinates me to see how South African home buyers have little loyalty to their current banks when taking up new loans; it hovers around the 20% mark. I’m not surprised; when you are able to shop around for the best deal, money talks.
Is this a missed opportunity for the traditional banking sector? I think so. Home loans have been reduced to a commodity service where the lowest rate usually wins. However, this is likely to change in the future:
- Alternative financing is on the rise in other parts of the world, with startups such as FlyHomes, Knock, Opendoor, Homelight, National Family Mortgage and Ribbon offering new paths to home ownership that bypass the traditional mortgage market. These companies give home buyers or sellers an advantage with the ability to request instant offers or make cash offers. The focus is shifted to the consumer experience that provides unique products not offered by traditional banks.
- Additionally, financial institutions are slowly adopting open banking, which allows for a more streamlined and efficient process for individuals to securely share their financial data with third parties, using APIs (Application Programming Interfaces). This increases competition in the lending market and allows for the development of innovative new services and products by fintech companies and other non-traditional lenders.
In South Africa, there are limited options for buyers to apply for home finance, either approaching one of the major banks directly or opting for a bond originator to assist with the application. With only two direct bond origination interfaces available to the banks, this forces developers to work through 3rd parties to do any bond applications. Needless to say that this limits creativity in the industry and have created an unhealthy duopoly in the market. Adding more fuel to the fire, only three main bond originators are effectively controlling the market for the past 20 odd years (all other bond originators are aggregators earning a smaller commission share).
As a result there is little innovation in the bond origination space from a consumer perspective, apart from the ability to automate parts of the process. These bond originator interfaces apply with the banks and receive a lending rate and amount in return which consumers can accept or reject. There is no interaction with the bank via the intermediary bank switches to create and push more personalized loan or related products to consumers. The bond originator receives just over 1% of the home loan value in return.
While these interfaces work well, the technology landscape is advancing at a considerable rate, with easier and more cost effect ways to build platforms and it seems that banks have resorted to ‘if it ain’t broke, don’t fix it’. There is a big opportunity to reduce the complexity and costs of enabling interactions between consumers and banks.
The opportunity for banks right now
The traditional banking sector needs to recognize the benefits of open banking and create a set of open banking APIs that provide interaction with their home loan products. The home loan pre-approval and application process can be simplified with no need for consumers to go through the painful process of submitting paperwork. Open banking already provides direct access to bank accounts, providing an opportunity for fraudulent and incorrect applications to be eliminated.
Banks such as Nedbank have already begun this process, with Vehicle Asset Finance and other open APIs available that now empower Fintechs. It is now time to empower Proptech companies in a similar way with open Mortgage APIs.
Simplified direct-to-consumer interfaces is the way to go and provides an opportunity for banks to reduce overhead costs and empower tech companies to build lightweight, value-driven interfaces that puts more focus on the consumer experience.
This will result in many added benefits, such as increased transparency and quicker processing. It will result in reduced overheads for banks, and in the current red ocean market this is critical to enable sustainable home loan divisions.
I’m excited about the potential impact this can have on the real estate industry, enabling quicker pre-approvals and home loan applications that ultimately enables a more pleasant home buying journey for consumers. We all know financing is one of real estate’s biggest pain points. We’d love to implement these direct-to-consumer interfaces for our real estate clients.
It’s time to reimagine home financing. The question is, who will be the first traditional bank to break the mold and provide home loan-specific APIs to unlock a whole new marketplace?
