The non-major lenders: where to next?

And for the most part, that’s how Australia’s non-majors like to market themselves – that they’re not one of the big four, subtlety tapping into customers’ perceived disquiet with the major banks.

The non-majors have long played the ‘we’re better for service and price’ card in the market. And for the most part that’s true. However, with every lender fighting for their slice of the mortgage pie over the past 12 months and more, and every lender sprouting the ‘price/service’ mantra, in some ways the non-banks’ message has been drowned out in all the noise.

A recent online poll held by theadviser.com.au asked respondents to rate the nonbanks’ performance when compared with the big four. Some 42 per cent agreed the non-majors still ruled the roost for service and price.

However, 36 per cent believed the non-banks were falling behind, while 22 per cent admitted they hadn’t noticed any discernible difference either way.

However, actual loan volumes point to a rosy past 12 months for the non-majors. All posted considerable annual rises, with Macquarie Bank proving to be the standout, growing its loan book to $24 billion by July 2014, a 37.8 per cent rise.

ME Bank also enjoyed a 17.3 per cent increase to $11.4 billion; AMP Bank added 9.1 per cent, to $10.3 billion; and Bendigo & Adelaide Bank rose 8.9 per cent to $42.9 billion. And the broker/non-major relationship still resonates. In The Adviser’s non-major ranking, published in the October issue, just shy of 45 per cent of brokers nominated a non-major as their number one lender.

A TOUGH 12 MONTHS?

With a pricing war underway and the big four aggressively chasing market share, it could be argued it’s been difficult for the non-majors to have their message heard over all the din of the past 12 to 18 months.

“I wouldn’t have called it tough,” ING Direct’s Mark Woolnough says of the previous 12 months.

“For any of the non-majors to really stand out and grow significantly it’s going to come at a cost. They need to have a proposition that is not only equal to the majors but it needs to be ahead of the majors.

“What tends to happen is that a lot of the non-majors are battling against each other and so, in that regard, it’s not just been a challenging 12 months, but it’s been a challenging three years,” Mr Woolnough says.

The non-majors’ battles are often touted as a fight amongst themselves but Citi’s head of broker distribution Aaron Milburn doesn’t buy into that. “I’m more interested in Citi’s performance,” he says.

“I don’t see it as competition with the non-majors. I don’t put a lot of focus on who I’m supposedly competing with. It’s more about our teams here and how we can better service the brokers.”

Mr Milburn also downplays the notion that it’s been a difficult past 12 months in which to spread the word.

“I can’t speak for the other non-majors but I haven’t seen Citi losing any market share,” he says. “We’ve enjoyed a fruitful past 12 months and I certainly haven’t seen my book eroding due to any of the majors’ activity in the marketplace.”

OUTSIDE INFLUENCES

The FBAA’s CEO Peter White agrees the non-majors have been doing a sterling job but admits if there have been challenges they’re not necessarily of their own making.

As an example, Mr White says the big four buying into the aggregators would be making life tough for their smaller cousins.

Smaller lenders often have to drop rates to get noticed and when that happens Mr White says something invariably has to give elsewhere.

“If you’re the cheapest that generally means you’re sacrificing something somewhere else and that’s usually product features; it’s service; it’s customer support,” Mr White says.

“If a lender’s service levels are crap, they’re too hard to deal with; you’re never going to get a loan done. If that’s happening to a loan from the front end, imagine what the after-sales service will be like. A broker puts a client in a loan like that and they’ll hate you for forever and a day.”

Mr White also believes the majors’ mega marketing budgets are possibly swaying customers away from smaller lenders. Increasingly, it’s customers coming to brokers saying they want a specific bank’s product and if there’s little difference in the products on offer they’ll take what they wanted in the first place, says Mr White.

Another problem, argues Firstmac’s managing director Kim Cannon, is when a smaller lender is owned by one of the big four that is effectively pulling the reins.

“It’s often hard to define what exactly a non-major is when the big four have ownership stakes in some,” Mr Cannon says.

“It constrains competition because the major banks retain control and are likely to engage in behaviour that might put themselves at a disadvantage. Traditionally the big four have only competed with each other and the real competition takes place away from their sector of the market.

“But with banks writing such huge volumes of loans in Australia it doesn’t leave truly competitive lenders with much room to move,” Mr Cannon says, before adding that non-majors remain an important lending alternative which, he says, “prevents the big four from running roughshod over the industry”.

TACKLING THE BIG FOUR

Australia’s big four increased their home loan volumes by an average of 6.8 per cent year-on-year to $1,633 billion as of July 2014, and have laid claim – according to APRA data from May – to about 84 per cent of the Australian home loan market. That would qualify the non-majors’ claim to about 13per cent and ‘other’ lenders to the remaining 3 per cent.

This remains the perennial argument surrounding the non-majors – is it even their job to take the fight to the big four? Are they equipped with the resources – the branches, the marketing budget, the back-end staff – to successfully mount a campaign?

Tanya Sale, CEO of Outsource Financial, believes this idea of non-majors ‘taking the fight’ to the big banks is a misplaced one. “I think we [as an industry] need to stop saying that; for me, the wording around that is all wrong. It’s not about ‘fighting’ the majors, it’s about having a point of difference.

“If the smaller guys are going to try and take the majors on with rates and pricing then they’ll never win.

“It’s things like service, turnaround times, that’s where you’ve got to hit them. A smaller player tries to take the majors on with rates then they’ll get wiped out in five minutes.

“This idea that the smaller guys, banks like Heritage or Adelaide, taking on the majors simply isn’t going to happen. That said, the bigger players – Macquarie [Bank], ING [Direct], Citi and even AMP [Bank] – they’re the banks that probably have the systems in place to compete more easily.”

Ms Sale says smaller players need to target areas that brokers are concerned about – things like support, turnaround times, technology – and master them absolutely.

She cites Macquarie Bank as a lender which has done just that.

“Macquarie has targeted the areas they want to be best at and they’ve gone out and hired the best people to do it,” says Ms Sale.

“Take their BDMs – they’re excellent, they’re simply not brochure delivery managers. They’re actually going in, sitting down with brokers and saying, ‘What can we do for you?’

“By doing that, they’re embedded into the business, they know about the business, they know what the challenges are, they roll up their sleeves, they get down and dirty and they fight for that broker.

“It’s that sort of service that’s going to be the difference between ‘everyday’ and exceptional. The days of that sort of mediocre service … those days are gone.”

WE’RE NOT THE MAJORS!

Much like Suncorp Bank’s ‘Genuine Alternative’ advertisement, MrCannon agrees with the idea that the non-majors – and to an extent brokers too – should play to the disquiet the wider population often has about the big four banks in this country.

Mr Cannon cites a recent survey that found 62 per cent of Australians don’t trust the majors, more than half want more competition and 86 per cent want more transparency around fees and charges.

“Those figures alone say the banking public is tired of the behaviour of the major banks and that is where smaller institutions can gain their foothold,” says Mr Cannon.

“There is still scope for the non-majors to take competition up to the big banks and success will come from an effective business model that crosses the boundaries of funding, pricing, distribution, which gives customers a good deal and great service. Loyal customers breed loyal customers.”

The FBAA’s Mr White believes it’s not just customers who can have a prickly relationship with the big four, it’s often the broker channel too.

Mr White rates channel conflict as a big issue for brokers who risk losing existing customers who can be tempted away by the majors’ branch staff.

“I think if brokers could possibly sell better and have more sales technique and understand their options in the non-major sector more fully then there’d be less churning of their business,” Mr White says.

“Brokers need to understand there’s far less channel conflict with these non-majors; you just don’t get that with your Citis, ING Directs or Suncorps.”

THREATS, OPPORTUNITIES AND CONSOLIDATION

With the big four continuing to dominate the mortgage lending landscape, Mr Cannon agrees consolidation among the nonmajors is a distinct possibility and it “would be a shame to see the customer faced with a sector dominated by the all-powerful big four while the contenders squabble over what’s left”.

Mr Cannon predicts life is going to get tougher for the nonmajors. He says banking will increasingly go online and this suits the majors with their deep pockets and resources.

“Many of the non-majors have missed the jump in online money management technology investment and they are stuck playing catch-up,” he says. “If they can’t evolve quickly there will be many more mergers and acquisitions, or some may just bow out.”

However, Ms Sale doubts we’ll see any major upheavals anytime soon: “I think if you look at these smaller players they appear to have found their niche, they appear to be very pro table businesses, they’re growing, so I can’t see a radical shift in the lending landscape,” she says.

While Mr White baulks at the idea the non-majors should be ‘niche lenders’ – plenty of smaller lenders have comparable products to match it with the big boys, he says – he can’t see the market consolidating either. Rather, he sees new, boutique lenders entering the market.

“What these smaller players have to do is just keep their presence up,” Mr White says, “be that at industry conferences, aggregator PD days, just constantly be in the face of the brokers all around the country.

“You rely on the broker as your distribution source, you make sure that is right and your service deliveries are right and you write good quality business and you’ll make good money. “You may not be the biggest in terms of volumes but you’ll probably have a very nice pro table business running around,” he says.

IS THERE A NEW LENDER ON THE WAY?

Could it be Coles? Could it come from overseas? Regardless, any new player is certain to rattle the cage like the industry has never seen before…

“I do think there’s a strong risk of overseas players coming in and kicking the shit out of some of these people,” Peter White says of the possibility of a new and innovative lender coming to our shores. The FBAA CEO doesn’t name names but thinks there are lenders – primarily from the US and possibly from Asia – that are eyeing the local market. Mr White says an overseas player offering strong efficiencies and service standards could “make some interesting inroads”.

“There was talk not long ago of a couple of new players coming in and that talk has been going on for some time,” Mr White says, again not naming names. “At some point something will prick their interest, there’ll be an appetite, and if APRA stops being a barrier then I reckon you have a real threat of overseas players coming in.” Mr White believes this is a far likelier scenario than the mooted move by supermarket behemoths Coles and Woolworths to enter the mortgage space.

And ING Direct’s head of third party distribution, Mark Woolnough, agrees conditions are ripe for a new player to come in and massively disrupt the traditional lending model. So, who does he think that could be? “I don’t know,” he says. “It could be any organisation that uses data and technology very, very well.

“I think if you can combine that and make sure the proposition is simple and easily understood by the consumer, by the third party, you’d be on a winner.”