White labelling -- Your loan, my brand

Until recently, control meant the flexibility to price products to match market conditions. But increasingly it is the relationship between the originator and funder that is now giving white labelling mortgage businesses their edge.

Particularly compelling in these turbulent times is the better market value white labelled books are able to fetch at sale, according to Challenger Mortgage Management’s (Challenger) general manager for distribution, product marketing and commercial lending Steve Weston.

“White labelled loan books are more attractive for takeovers; they have a higher premium because the customer is connected to a larger lender and [are] therefore a safer option,” says Weston.

Sustainable advantage

While indicators such as this point to a bright future for white labelling, the question remains: just how sustainable is the sector in the long-term?

The damaging RAMS Home Loans saga and relentless media negativity surrounding the non-bank industry as a whole has certainly tarnished the sector, at least in the short-term.

The lending landscape has also changed dramatically over the last seven years or so, with the originators’ price advantage having been eroded and in many cases reversed by the banks.

“Looking at the development of white labelling, which first became available in the mid 1990s, it had a competitive edge because white labellers could access funds at prices better than the banks. So initially price was a driving growth of this sector,” says Weston.

“Due to the problems associated with the wholesale markets, some consumers may [now] believe that white labelled products are more expensive, and they may be fractionally so at the moment.”

Pricing issues aside, Weston attributes the growth of white labelling in Australia to date to the ability of originators to offer their clients superior service – both pre- and post-settlement – because of the personal contact ‘factor’.

This, says Weston, is where originators will have an edge – servicing consumers who are fed up with the lack of service from the banks.

Competing with the main players

To create a competitive advantage in a cluttered mortgage market – both over brokers that introduce and the branch networks of the banks – originators first need to identify their point of difference.

The ability to build a brand is one clear differentiator, says First Mac’s head of sales Darren McLeod.

“Having their own brand enables them to build their image and point of difference with customers and hence helps them keep in touch with their clients more easily. Therefore they are more likely to receive referrals from their customer base,” he says.

Flexibility is also a significant factor, says RESIMAC associate director for product and marketing Frank Knez, particularly when it comes to the bottom line.

“Providing the originator the ability to select the appropriate incentive depending on the loan type and/or borrower gives them control over pricing and remuneration and can therefore improve profitability,” he says.

The power to set price is an important benefit of white labelling over mortgage introduction – and an important part of the overall value proposition of while label originators.

But the recent squeeze on liquidity – and respective increase in the cost of funds from wholesale funders that have to be passed on to the borrower – means part of that value proposition has been eroded, says McLeod.

“The credit squeeze has impacted on non-bank lender margins, causing greater disparity between non-bank lenders and the banks. This means white labellers have to trim their own margins to maintain a degree of competitiveness with the majors,” he says.

Tighter times

Given the current market conditions, some are questioning whether the effort, and expense, involved in originating mortgages is worth it – or whether it would simply be easier to introduce mortgages for other lenders. McLeod highlights the problem.

“Negative media reports about funders/non-bank lenders in turn create doubt in the public eye,” he says. “This in turn makes it harder for originators to generate leads and sell products from less traditional funders.”

Weston is more upbeat. When the banks have to put their rates up, he says, the playing field will be level again. In the meantime, Weston says originators are better off focusing on their competitive edge – their service proposition.

“White labelling provides better service, and that’s important to people at the moment. Originators can grow market share by capitalising on the poor service provided by the banks,” says Weston.

“Let the banks get on with what they do,” he adds. “They can move more quickly, so it’s best to concentrate on doing your own thing.”

According to Knez, the current climate presents a good opportunity for originators to provide a consistent and high quality service while maintaining competitiveness in terms of products and pricing.

“A key opportunity that can increase market share [for originators] is to diversify the revenue stream of mortgage originators and managers by offering a total funding solution for both residential and commercial loans,” says Knez.

Broker channel growth

White labelling is also becoming more attractive to organisations that are looking to build brand without having to invest in the administrative infrastructure needed to undertake credit checking, assessment and LMI approval associated with processing loans.

For brokers looking to branch out and develop their own brand to supplement their broking activities, it can also be a powerful business building tool, according to GE Money Third Party Solutions’ managing director Mark Rice.

“White labelling allows brokers to compete with the large mortgage managers – allowing them to set their own margins and decide on their own upfront and trial commissions,” says Rice.

So why have aggregators and the larger brokerages started to focus more on securing white labelling relationships for their members?

Choice Aggregation Services’ managing director Michael Russell says a number of factors are at play.

Choice offers three product lines to members looking to originate: a Choice Home Loans brand, a Three Oceans brand, as well as Choice members’ own branded product. All three lines give members the scope to set their own margins and to decide their own up-front and trail commissions.

“For brokers, it secures further independence through having better and more control over pricing, and also creates peace of mind in terms of future trial commissions,” says Russell.

Making white labelled products available to members not only helps to add value to both the aggregator’s and members’ bottom lines, it also helps to strengthen members’ businesses through diversifying their revenue streams and giving them the tools and resources to better compete with other brokers.

GE Money’s Rice believes brokers that don’t have access to white labelled products will be increasingly disadvantaged in what is fast becoming a cut-throat market.

“Through the combination of increased revenue, flexibility of funding and price, as well as diversifying product offerings, brokers are able to build and sustain a competitive advantage over those brokers that don’t white label,” Rice says.

And although the pricing proposition may have been eroded, Rice says price remains a key competitive factor.

“Like it or not, we are in an environment where borrowers are heavily motivated to buy on price and sometimes offering the cheapest rate – even if it’s a matter of a few dollars – can often be the clincher for winning business,” he says.

But Rice says pricing flexibility can be a double-edged sword and brokers that discount too heavily will find themselves creating more work than the return justifies.

“It is therefore essential that training and support is given to each group [aggregator] and that guidance is available if required as to how to create a sustainable and competitive business through white labelling,” he says.

Asked whether offering white labelling via new aggregator groups would help GE Money grow its business, Rice says the focus is on increasing market share through strengthening existing relationships.

“Key to the growth strategy for both sides of our funding businesses – mortgage management and white labelling – is a focus on quality through partnering with a select number of key groups and driving volume from that select pool.”

For brokers and aggregators who are focusing on white labelling, the signs are positive. The goalposts may have shifted, but white labellers are still very much in the game.

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Commercial gain

White labelling is quickly gathering pace with organisations focused on commercial, rather than residential, lending. My Lender director Peter Mellor shares his insights into the burgeoning sector since accessing commercial funds through Sintex.

What prompted the move into white labelling commercial products?
It was an opportunity to provide service that we can control. From a branding point of view, white labelling commercial products also gives us the opportunity to put our name on the products. Overall, it gives us the ability to control our lending and service.

What percentage of your current business comes from commercial lending?
At the moment it’s around 15 per cent, but it’s definitely growing in our business.

What are the major differences between residential and commercial white labelling?
Unlike other forms of lending, mortgage insurance is not an issue with commercial lending. In general, however, the rules and guidelines are almost the same, but LMI is the one thing you don’t have to worry about.