KEY POINTS

  • Mortgages are one of retail banks’ most profitable products. In the UK, they make up nearly 60% of total profits, according to some estimates. And retail banks are one of the largest providers of mortgages — in the US, they accounted for $236 billion of mortgage originations in Q4 2016.
  • But mortgages are also inherently complex. Beyond the bank and the consumer, the mortgage loan process depends on estate agents, settlement and conveyance professionals, inspectors, and appraisers. Mortgages are also regulated, which makes it difficult for incumbents to innovate and digitize the lending process.
  • Incumbents' failure to adapt to an increasingly digital landscape has affected borrowers at every stage of the mortgage-purchasing journey. Major consumer pain points include a lack of understanding of mortgages, inconvenient access channels, and difficulty switching providers.
  • Ignoring these pain points is no longer an option for slow-moving incumbents. The rise of alternative, digital-only mortgage firms has already dented the market share of the the top three US providers. Incumbents are therefore under increasing pressure to make mortgages more attractive.
  • Fintech startups have detected an opportunity in incumbents’ slowness to innovate mortgages. But to achieve their aim of improving mortgages for consumers, these startups often need to collaborate with incumbents, which can provide the resources and licenses necessary to operate in the mortgage space. This is creating opportunities for legacy players.
  • However, these partnerships also carry a disintermediation risk, which has prompted some incumbents to launch in-house modernization efforts. While this strategy has its advantages, there are several pitfalls incumbents must consider to ensure their projects add value for consumers.
  • Still, incumbents and startups must overcome several hurdles before they can overhaul the mortgage loan process. These include setting new standards and improving communication across all parties involved in the lending process.

Introduction

Residential mortgages are loans used to finance — usually part of — the purchase of a property. Most buyers take up to 30 years to repay these high-volume loans, which are issued directly from providers like banks, credit unions, and building societies, or through mortgage brokers, who act as intermediaries on behalf of the purchaser. In the US, congressional agencies like Freddie Mac and Fannie Mae, which fund mortgages for lenders, [...]