Technology review

Open banking a work in progress

Steve Carruthers

head of business development, Iress

The phrase “less is more” became synonymous with the early twentieth-century Bauhaus architect and designer Mies van der Rohe. In three words he encapsulated the central ethic of modernism – the idea that true beauty is what remains when every unnecessary adornment has been stripped away.

This sentiment holds good today in many walks of life, and yet in the world of technology, it is rarely uttered. The most seismic change in our generation has been the dawn and evolution of the internet. It has fundamentally and irreversibly changed our lives – and it’s always about more.

The majority would argue this technology revolution has improved our lives – and it undeniably has. But nearly all of us would also admit that’s not all there is to it. The proliferation of information facilitated by the web, social media, cloud computing, and, imminently, the metaverse is incomprehensible to the human brain. While computers haven’t got to the stage of harvesting humans to power their inorganic world (yet), I am not kidding when I talk about this. Technology is so often hailed as the answer to everything.

If it’s hard to get – tech’ll fix it. If it’s impossible to understand – tech’ll translate it. If it takes too long – tech’ll speed it up.

Technology will do all of these things, and they are, more often than not, to our benefit.

But van der Rohe had a point when he said less is more. The advantage of more information should be that it makes us better-equipped to make informed and therefore responsible decisions. But there comes a point when it is impossible to judge rationally based on all the facts – there is too much information, there are too many facts, and there is not enough knowledge to interpret it all sensibly. Sometimes I wonder just how much data there is in the world now and what proportion of it is actually used. Which brings me to mortgage lending. In our own world, the mortgage market, open banking has been heralded by many as the ultimate solution to all problems financial. The answer to the ultimate question of life, the universe, and everything is 42, if you will. I’m not such a Luddite that I would argue open banking hasn’t improved things for both customers and businesses in the years since it first came in. It has.

Savings habits facilitated by apps connecting via API to customer current accounts and credit cards to allow spending round-ups to be swept into an investment or savings account are a wonder. Linking cloud accounting software to your business banking and pulling in tax calculations has probably averted several hundred thousand heart attacks.

But open banking is not a panacea. How we use information is the defining factor in whether its use is a help or hindrance.

When it comes to assessing borrowers’ affordability, I am wary of blindly believing that total visibility of a person’s finances is actually terribly helpful. For lenders it means vastly more information to consider – information that, once received, they must consider. For borrowers it means absolutely no room for imperfect financial behaviour or complex income.

Anyone who’s had emotional, familial, social, educational, romantic, or health ups and downs in their lives will tell you that it affects financial behaviour. But so does experience. Sometimes the past isn’t a reliable guide to the future. So said someone wise, anyway.

Predictive behavioural analytics notwithstanding, I still question whether data crunching can always rival human judgement when it comes to nuance and individuals.

For lenders, the degree to which underwriting integrates and relies on open banking frameworks and the 360-degree visibility of a customer’s financial circumstances will be a pressing consideration.

As with all decisions, I would tend toward the idea that the answer depends. The aggregation of big data to inform analytics that can then be applied to average customer types is usually helpful. Assessing one person’s data – or one data point from a median behavioural point of view – is probably less helpful.

This is especially true for anyone whose risk presents as even a moderate outlier. Lenders understand the right questions to ask when determining whether a borrower is a reliable prospect. Introducing vastly more information into this assessment might sound like it will help deliver better lending decisions and therefore consumer outcomes. But in fact, it might just muddy the waters and leave lenders at a loss as to how to make a sensible and responsible judgement that results in the borrower being approved, the home being bought, and – 99.9 times out of 100 – the loan being repaid.

Open banking is clearly not a panacea, but very much a work in progress. It needs to enable lending – not prevent it – and part of that is lenders knowing what issues and bits of the mortgage process it fixes for them. Discovering more about individuals at face value must be a good thing, but it depends on what you find out, and then what you decide to do (if anything) about it. Is the mortgage process ready for much more complexity? For many lenders, there are more pressing issues to address. M I

The world is turning –businesses must turn with it

Jerry Mulle

MD, Ohpen

The financial services sector has long been criticised for being behind the curve when it comes to technology adoption and reducing friction in customers’ buying process. That’s a fair charge if we’re talking about incumbent businesses that have an incredibly tough job working out how to adapt themselves to take advantage of the opportunities on offer in the digital world.

It’s also fair to acknowledge that in a highly regulated market, developing technology that not only offers improved customer service and higher conversion rates but also satisfies constantly shifting compliance requirements is not an easy feat. We’re getting there, however. The environment in which financial services has the space and freedom to embrace what technology can do for its business is finally here.

On the agenda for many lenders is how exactly that can be done. The range of approaches is extensive. Lenders of all shapes and sizes that have grown out of amalgamation, rescue, takeover, and mergers are dealing with incredibly complicated systems, data stored in thousands of different iterations and formats, and the very real terror that transporting customer data from legacy systems to technology that makes sense today will result in loss of critical material. From origination to systems of record – everything is under the microscope, and for many, the picture is not a pleasant one.

We have reached an inflection point. But not understanding precisely what problems you are trying to fix (and in what order) can be expensive and instil fear in even the most visionary CIOs. This can often result in sticking with what you know – meaning either doing nothing (not an option for most) or adopting the approach of a decade ago and building bespoke systems to suit specific needs.

Time and again, those who have done this (or brought in source code to manage for themselves) end up returning to market because they cannot adopt and adapt later on down the line. It is the surest way to spend millions, if not billions, on a system that will be out of date a week after it launches.

Technology is no longer just a quicker, cheaper, and more efficient way of improving processes within a business. Decisions about how businesses use digital services belong in the boardroom. Solutions offer more than just lift-and-shift; they offer ways of delivering interoperable, scalable, robust platforms at prices that confound old business-model thinking. Many businesses recognise this; fewer are confident about what this really means in practice.

The key characteristic of technology today is that it changes constantly – every second of every day it develops exponentially and organically. And that change is driven by market forces and customer choices, not just by programmers.

What businesses need from their tech systems today is not just a solution to a specific problem they have right now. The problem facing all businesses – whether in financial services or elsewhere – is choosing a platform that will be able to deal with the problems they will have tomorrow and next week and next year.

Lenders are only too aware of the challenges change brings. And change is particularly unpredictable right now. To many lenders, the very first signs of borrower distress, such as requests to move direct debits, are already visible. What we will need from systems to facilitate quick, safe, scalable product propositions for managing issues like arrears was on few people’s radar twelve months ago. Indeed, the recent quick burst of rate rises has tested old product launch-and-withdrawal processes almost to the breaking point – processes that had not been used for almost a decade.

Equally, the buy-to-let market offers a great example of lenders’ need for flexible, scalable systems. In June, the government unveiled plans to reform the private rented sector, with several proposals surfacing, including scrapping fixed-term tenancies and replacing them with periodic agreements, and further regulatory changes removing section 21, thus banning no-fault evictions. Corporation tax is currently 19 per cent, but is slated to rise to 25 per cent next year, affecting portfolio lending through limited companies. Some of these changes are still under consideration, meaning they may or may not happen at all – and if they do, they could be in a completely different format.

The message is clear. Lenders who want to stay relevant and competitive must be able to flex not only their product design but also their credit assessment process and underwriting systems so that they can be accurate about risk and opportunity as those change daily.

The reality is that failure to move away from legacy technology and onto cloud-based SaaS systems is building another, more malign risk into your business model. The world is turning. Businesses must turn with it. M I

Don’t delay investment decisions

Tim Hague

MD, Sagis

As we head into the second half of 2022, many people are questioning what the future holds not just for the housing market, but the country and economy as a whole. As such, it can be difficult to know what to do next – whether you’re advising clients on what mortgage to choose, running a lending business, or the new chancellor of the Exchequer. In more ordinary conditions – even those we saw after the global financial crisis – the path was clearer.

Given where we are today, it’s not unreasonable for boards to question whether the traditional items on the corporate agenda are fit for the shortterm future we are now facing. Many will be thinking – in the face of uncertainty, when no course of action is obviously the right one – that they should wait, especially when it comes to the usual priorities facing a business looking for growth and increased profitability focus on strategic investment. The rising cost of capital, the weight of wage pressure, higher national insurance contributions for employers, and the prospect of a six-percentage-point rise in corporation tax next year are all weighing on the minds of company CFOs.

In this time of uncertainty, however, waiting is going to be more harmful than taking decisions today – however nerve-wracking.

The key to getting this right is to remember that a decision made today can be replaced by a different decision made six months from now.

I hear those whose immediate reaction to this will be, “Not after you’ve invested £10million in that first decision.”

Let me encourage you to reassess your definition of decision. In the past, strategic decisions made by lenders aiming to improve distribution, revenue, and profitability would have brought in more people. If the decision didn’t deliver good results within a pre-agreed timeframe, those people would go. It was a flexible decision that cost money but didn’t force you to nail your colours to a mast for the next 10 years.

When it comes to investing in your offering or service in today’s market, hiring more people is just part of the equation. Just as key are the skillsets of those people and the technology systems they have available to do the jobs expected of them.

This is where finance directors start to get nervous. Wholesale redesign of lender platforms – and, indeed, savings platforms – can be expensive. It is also fraught with risk. And traditionally it has come with the caveat that you must decide what you want to buy before you know how it will perform.

This challenge is compounded by the current uncertainty in the direction the market will take.

When the certainty you have is uncertainty, what is the solution? Adaptability. In systems terms that translates into flexibility, optionality, and configurability.

So often I work with lenders whose senior people succumb to the clever, slick marketing thrown their way, selling them out-of-the-box tech to make one aspect of their service top-of-the-range. They soon realise that one out-of-the-box solution doesn’t improve their overall offering. Then you get into, “We can hack this, hack that, come up with a workaround and deliver you your own bespoke system that is just right for your needs.”

And then the BoE rate goes from 1.25 per cent to 3.5 per cent in less than a year, and unemployment goes up because higher inflation, higher taxation, and profit squeeze fuelled by energy and wage inflation pressures force companies to streamline, and mortgage arrears start to tick up.

Now, in under 12 months, your needs are no longer being met. More importantly, neither are the needs of your customers.

This is what is paralysing investment and progress. Worse, it’s hampering future resilience and growth prospects – but that won’t become so abruptly clear until it’s too late to do anything much about it.

To understand what piece of your mortgage proposition needs changing, you must be agile in thought and solutions. Fortunately, those solutions are there, usually powered by the cloud and delivered in such a way that certain aspects can be switched on and off as needed – whether that is scaling up arrears management, if that becomes a priority, or smoothing the pace and ease of refinance, which is going to be critical for borrowers over the coming year. SaaS cloud-native solutions align lenders’ success with the tech provider’s remuneration – but today, there is also the important operational consideration that lenders need to acknowledge the risks of going early with the advantage of going early. Resources for implementing change are scarce, and there’s a recognition that many people need to effect change and any delay will only increase the costs of the solution and/ or run the risk of scuppering delivery completely because suppliers won’t have the delivery bandwidth.

Far from riding out the coming ups and downs, doing nothing is your enemy when times are set for so much change. Don’t delay decisions; change the decisions you have in front of you, and change the basis/parameters on which you make decisions. M I

Affordable tech and the importance of shopping around

Neal Jannels

MD, One Mortgage System (OMS)

The word affordable has always been defined by attitude and circumstance, whether from a personal or business perspective. It’s also something that is coming under an ever-greater spotlight as basic day-to-day costs continue to rise across the board.

Affordability is also a hot topic in the current mortgage market following confirmation from the Bank of England’s Financial Policy Committee that it will withdraw its affordability test recommendation from 1 August 2022. Introduced in 2014, the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. The bank’s other recommendation, the loan-to-income (LTI) ‘flow limit,’ which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios of or greater than 4.5.

These recommendations were introduced to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness that could in turn amplify an economic downturn and so increase financial stability risks. The full impact of this move remains to be seen, although there is nothing to suggest that this will result in lenders blurring responsible lending boundaries, especially in the current economic climate.

Turning our attention to the issue of affordability and technology, I was recently reading about Londonbased Raylo raising £6.5m for its tech subscription payment platform. Essentially, this provides a platform for consumers to lease new and refurbished devices like phones and laptops from the company, paying a monthly fee for the length of the contract. Customers can then either renew their subscription, apply for an upgrade, or return the hardware.

The subscription model is an interesting one, and we’ve already seen the value of this from a host of streaming services and in areas such as leasing or PCP, which have transformed the way people approach car ownership over the years. It’s fair to say that alternative payment methods for expensive products and services have become more appealing for many people in recent times, although there’s also the argument that splitting costs into multiple payments can result in consumers taking on extra debt without realising the true cost of their purchases.

Focusing on this from a business standpoint, when it comes to affordable tech that is cost-effective and fit for purpose, shopping around and undertaking a stringent testing/trial period are essential to ensuring that firms are getting sufficient bang for their buck. So, with technology playing a more prominent role in the advice process than ever before – a highly positive trend for intermediary businesses and their clients – it was somewhat surprising to read that 79 per cent of brokers admitted that they did not try different affordability platforms before choosing the one they currently use.

The research into the changing affordability landscape, commissioned by Mortgage Broker Tools (MBT), found that while 70 per cent of brokers said they use an affordability platform as part of the research process on at least-two thirds of their cases, only one in five reported shopping around for the best platform. As highlighted in the commentary around the research, whilst it was encouraging to see that so many brokers use technology to assist their affordability research, it was concerning to see such a large number of brokers settling for the first platform they tried.

It’s fully apparent that time constraints continue to test all brokers in an ever-changing product environment and amidst elevated levels of client engagement, especially from a remortgage perspective. This emphasises the importance of maximising efficiencies where possible at every step of the advice process and beyond.

A strong tech partnership should include in-depth onboarding as well as ongoing support. Firms also need to know what they are actually paying for and be clear on the capacities of a system and how it matches their business requirements from the onset. We have spoken to many firms that have been swayed by multiple features that may sound great in theory but that they either struggle to implement or use initially and then never touch again.

This emphasises how important it is for all firms to take their time shopping around to source the right tech partner and integrate solutions that are aligned with individual business models and practices throughout the length and breadth of the relationship. This will really pay dividends over the short, medium, and longer term. M I