Why digital mortgages will overhaul traditional banking models

Digital mortgages are expected to displace today’s traditional mortgages, and this phenomenon will both be an opportunity and a threat to traditional banks. Which side of the ledger banks will find themselves in will depend on how they transition away from their branch-based operations, S&P Global Ratings said in a report.

“By the time today’s traditional mortgages are repaid, the process that created them will almost certainly no longer exist,” S&P said in the report “Future Of Banking: Digital Mortgages Are Game Changers.”

“In their place will be digital services and digital mortgages, which S&P expects will reshape house lending and retail banking to the benefit of borrowers,” it added.

Two key factors

How banks tap into this would depend on two things: how they transition away from branch-based operations, and the quality of the digital platforms and products they offer. “Digital mortgages will be more homogenous, easier to apply for, easier to switch between, and quicker to secure. They will also smooth the way to greater competition and thus introduce uncertainty to banking sector revenue, margins, and spending, which could ultimately weigh on issuers’ creditworthiness,” the report said.

Digitisation of the lending process will unpick mortgage lending’s central role in retail banking and, in turn, the banks’ traditional operating model, it added. The traditional model used home loans both to attract customers and tie them into a relationship with the bank, from which they could be plied with banking and ancillary services such as credit cards, savings products and insurance. At the heart of the old model is the bank branch and the sales people within it.

But with the advent of digital mortgages, both the branch and the branch-based sales people will not have much of a role to play, S&P said. “That means there will be fewer opportunities to cross-sell and up-sell clients. Easier application processes will also mean easier switching for existing borrowers, further loosening the bonds created by mortgage products.”

Initial advantage

On the upside, banks should initially retain an advantage in the new digital marketplace. “The financing of a property purchase is the single most important financial commitment in most peoples’ lives and many borrowers will continue to prefer to deal with trusted, and established financial brands,” S&P said. That advantage isn’t by much, however. For example, in the US, Rocket Mortgage has quickly grown to account for the majority of new mortgage origination. This meant that a capable platform and competitive pricing are more than a match for an established brand, S&P said.

Traditional banks also have some inherent disadvantages, as they may find it challenging to recalibrate operations to digital platforms from branches. Doing so could be expensive as it requires upfront investment in technology and the dismantling of legacy operations, as well as time consuming.

As a first step on that journey, established banks have often unveiled digital mortgage platforms that operate under the same brand, and alongside their branch-based businesses. Banks, however, are unlikely to be able to sustain the extra costs in the longer term.

S&P also noted that many services are still quasi-automated, where banks offer customers an online application process that leads to contact with a bank representative, and often a branch visit.

Leading-edge banks offer automatic document processing aligned with data gathering from tax authorities, credit registries, and other third-party sources. Basic mortgage products will evolve to become more automated, more flexible, and increasingly portable. That could ultimately mean that the adoption of fully digitalized mortgages will barely be noticed, S&P said.