Just as banks are starting to become comfortable with fintech startups as potential innovation partners rather than disruptors, a new breed of fintechs are targeting retail banks primary cash cow, mortgages.
Even though there is a fintech for every aspect of a bank, few have posed a substantial threat to the core business model of banking. Much of the focus has been directed at transactional revenues, unbundling of traditional banks and targeting the underbanked for financial inclusion. P2P-lenders were initially set to compete with banks, but have proven to act as a supplement to traditional bank loans. Even comparison sites such as now discontinued Google Mortgage and Moneysupermarket has acted as an extension to the mortgage process as we know it.
This has led to a sense of comfort among incumbents, as the challengers have been primarily focusing on around the fringes of the banks business models. However, this is starting to change, as an increasing amount of non-bank challengers are taking on mortgages.
Moneysupermarket has already a strong position in the price comparison segment with up to 16 million yearly visitors and is now moving deeper into mortgage territory with Podium, a newly announced Joint venture that aims to digitize and streamline the mortgage broker service.
Even though this reduces friction in markets where loan origination and mortgage applications are time-consuming and riddled with paperwork, the mortgage provider will still be a traditional bank. For incumbents, this has acted as a comforting fact when analyzing the potential threat from fintechs. While nimble startups may excel at both delivering a smooth customer experience as well as lower operating cost, they will have difficulty competing with the banks on providing loans at competitive rates, due to the lack of a banking license.
However, a new breed of non-bank lenders are challenging this established truths by offering mortgages at rates below traditional banks, without having a banking license. Instead of collaborating with banks and providing a superior loan origination experience, they are bypassing the banks completely by setting up dedicated mortgage funds, largely funded by pension funds and insurers.
In the Netherlands, challengers like Munt and Dynamic Capital have managed to obtain close to 20 percent of all new mortgages and has gained a market share of approximately 10 percent of the total mortgage market.
These types of challenger have also emerged in other European countries such as Ireland and the UK, where an increasing share of the mortgage market is served by foreign institutional capital backed non-bank lenders.
Closer to home, a trio of Swedish startups are attacking the mortgage market head-on with Stabello which is backed by Avanza, Hypoteket from Schibsted, and Enkla which launched earlier this year, which aims to manage 100 billion SEK within 18 months after launch. As a reference, they received 2 billion SEK during their first 24 hours of operation. Enkla promises to offer mortgages at a 0.95% fixed mortgage rate for three years. The average mortgage rate from major banks in Sweden is 1,6% according to Di Digital.
According to an interview with Breakit.se, this is made possible by several factors. Enkla operates through a fully automated process and only accepts refinancing of existing loans in order to cherry-pick customers that have already passed a credit scoring by incumbents. Furthermore, in a low-interest environment, capital is almost free, and mortgage-backed securities are attractive for long-term institutional investors.
In fact, all of the Swedish challengers are relying on financing from institutional investors through mortgage-backed securities rather than covered bonds, which make up the incumbent source of external capital. While the cost of capital through Residential Mortgage-Backed Securities enables may be competitive in a low-interest scenario, it remains to see if it is sustainable in the long run. Experts are a bit skeptical and somewhat divided on the realism of Enklas growth projections.
While a lot of the focus on fintech has been centered on the technology, it is those who manage to challenge the business model of an existing industry that tends to shake things up among incumbents. The jury is still out on whether these players will pose a significant threat to the banks in the long run, but I for one will pay close attention to this development.