Technology review

Tech and thinking about change

Jerry Mulle

MD, Ohpen

In May this year, Elias Ghanem, vice president and global head of Capgemini Research Institute for financial services, said, “Banking is in a state of flux. Some 82 per cent of bankers are struggling to identify new customer segments, and 49 per cent claim they are struggling to deliver personalised content through the right channels. “Consumers today, when they look at banks, see three levels: service, value, emotion. Yet when they go to the bank, 29 per cent report they are not getting service banking; they are not seeming to get this basic thing they want.

“It’s essential for the banks to have a big shift in their mindset.” What a statement. And a true one. The thing is, the banks and building societies wanting to compete in future and appeal to younger generations swayed by a neon bank card already know they need “a big shift in their mindset.” The milliondollar question is around how they can do this.

For institutions trusted with billions of pounds in customer deposits and responsible for supporting access to homeownership for millions of people each year, delivering this is a more complex conundrum.

What Mr Ghanem hit on when speaking in May was the three things that matter to the end customer: service, value, and emotion.

When a start-up considers its business plan, the point of its product or service is paramount. Always, the point is whether it gives customers what they want. Having identified this as the business objective, how that’s delivered becomes a case of making the tech do the work. When a 150-year-old bank still running on code abandoned in the 1970s considers its business plan, it should be just as simple. Does it give customers what they want? Too often that’s a no, but frequently it’s not because of a lack of desire; rather, it’s because of a realisation that the legacy tech that underpins everything means that the core platform and processes cannot deliver what is required – unless the organisation is prepared to invest tens of millions. And even then, they can’t really be sure they will get everything they need. It’s the reason why, historically, the biggest banks and building societies are such a patchwork of technology: the slick front-end interface is a purpose-built shiny veneer designed to make customers think they’re being given what they want.

But this approach does not deliver an improved target operating model or customer experience. At best it is an improved process, but rarely for the borrower – particularly when something goes wrong. The shift in mindset Mr Ghanem refers to hinges on exactly this point. If you start with service, value, and emotion, understanding the scope of what your business needs to do to thrive long-term becomes much simpler. Putting that into practice where legacy tech has historically proven a barrier to growth or expansion can feel daunting, though, especially given recent and notorious examples of migrations from one system to another causing devastation.

There is another way to think about investing in technology to improve your service, however. It’s to recognise that evolution is constant. What the customer wants today is different from what that same customer will want tomorrow. In five years’ time, it will be unrecognisable. Hardly the basis for arguing the return on investment that upgrades would offer.

Some see this as a threat. Those who see it as an opportunity are thinking with a new mindset.

The speed of change enabled by technology’s development has changed the way we need to think about change. We aren’t moving in visible steps in today’s economy; delivering value to customers means constantly evolving service and reacting to customer emotion on a personal level.

This means flexibility becomes fundamental. It means developing the ability to power up one element of service one day and power down if or when demand subsides. The ability to serve a localised demand virtually instantly and turn off the cost to the business when that need ceases. Flexibility isn’t just a nice jargony word for ‘new.’ It’s the definition of how banking must deal with the way people function in today’s world. The answer? Cloud platforms that provide affordable scale, agility, interoperability, robustness, and security to enable lenders to deliver better operating models now and in the future. M I

Environmental data will affect everyone in the value chain

Mark Blackwell

COO, CoreLogic

KYC: know your customer. It’s a fundamental for any business hoping to succeed; it’s also a regulatory requirement and critical anti-moneylaundering and fraud-avoidance tool. But intermediaries, by their very definition, have more than one customer. First and foremost are their clients. Understanding their financial situations, competence, and needs allows you to advise on the most appropriate products or services for them. But there is another customer: the investor. Of course, not all mortgages are funded through securitisation, but as with a lender’s credit committee reviewing risk appetite based on back book exposure, so the saleability of a securitisation rests on the aggregated risk profile of that book. Asset quality is one component. Borrower affordability and creditworthiness are others. A third is emerging as vital for mortgage books to meet investor requirements – climate exposure.

Toward the end of last year, the Financial Conduct Authority (FCA) published two policy statements confirming rules and guidance to promote better climate-related financial disclosures based on the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

The FCA said, “Better corporate disclosures will help inform market pricing and support business, risk, and capital allocation decisions. And improved disclosures to clients and consumers will help them make more informed financial decisions. This, in turn, will strengthen competition in the interests of consumers, protecting them from buying unsuitable products and driving investment toward greener projects and activities.” The new rules are being rolled out in phases, with publicly listed companies among the first required to submit formal TCFD disclosures. From 1 January 2022, larger FCA-regulated asset managers and asset owners – including life insurers and pension providers – have also had to disclose how they take climate-related risks and opportunities into account in managing investments. The rules will apply to smaller firms from 2023.

These rules are designed to change corporate and commercial behaviour in order to reduce carbon emissions and meet the UK’s legally binding net-zero targets. Changing the rules means changing what banks can lend against and what third-party investors will fund.

The buy-to-let sector is where this is becoming most obvious on the front line, underpinned by incoming regulation requiring minimum energy efficiency thresholds on new and subsequently existing assured shorthold tenancy agreements.

Though government has stated it wants existing residential property, be it privately owned or rented, to be Energy Performance Certificate (EPC) band C or above by 2028, TCFD may accelerate the need for this shift.

Obviously, enforcing EPC minimumband thresholds is possible only when a property is bought and sold under existing regulation – something bound to slow energy efficiency improvements across the UK’s housing market. But regulations can and do change.

We are all aware of how front-andcentre environmental, social, and governance (ESG) responsibilities have become across commercial activity in all sectors. The next stage will be more granular application of this awareness – turning nice-to-have into need-to-have. Lenders and their intermediaries have a real opportunity here.

There is already a filter that exists by virtue of there being an adviser in the transaction chain. Unsuitable borrowers, those who simply cannot afford to buy and those whose credit record makes them too big a risk for any lender to approve finance for, are all filtered out before the application ever begins. The broker’s judgement is part of the value intermediaries offer lenders.

There’s also a filter on the security front, though it’s less restrictive now. All brokers know a flat above a curry house, fish and chip shop, or late-night drinking establishment is going to limit mortgage options for a prospective borrower. Ditto Japanese knotweed, bamboo, subsidence, etc, etc. Now, climate-related risk is baked in to criteria for the biggest lenders in the residential mortgage market. It will only become more important – a sort of climate credit rating for a home.

As it stands, the EPC is probably the best tool for assessing that climate risk, along with mapping of flood plains and areas where ground movement is more frequent.

Energy efficiency will have an increasing impact on asset values in the future, while properties located in areas with greater exposure to more extreme heat and precipitation are likely to become higher risk for underwriters.

Understanding what data is available and how quickly it will appear in the process will enable intermediaries to add real value in this regard to their respective clients and lenders. Brokers will act as the frontline filter when it comes to this evolving criterion. Understanding that early could prove a real competitive advantage. M I

Sometimes, clouds are green

Steve Carruthers

head of business development, IRESS

All B2B industries can fall into the echo-chamber trap, and it’s worth remembering that from time to time. Rather than focus my column this month on why our service makes your lives so much easier and more efficient – it does! – I will instead consider how everyone’s increasing proclivity to host their IT infrastructure in the cloud offers real opportunities to deliver greener practices. Of course, cloud operations offer a lot more than better environmental practices. But my focus here is on something that many running businesses have not really appreciated. For a lot of the population, understanding exactly how technology influences their lives and how it will influence the lives of their children in the future boils down to smart phones getting smarter and cars driving themselves. Ultimately, the way we interact with technology as consumers will be the defining feature of that understanding. Remembering that this user interface is just the very tiniest tip of the iceberg, however, reveals the vastness of how technology is shaping everything we do and how we do it, and the opportunities to achieve something a little more profound with it.

Most people know about the cloud in the sense that they know it means storing data in a big, slightly fluffy, conceptual way so that you can access it from anywhere through the internet. An awful lot of people know this is “green” in the sense that it wipes out the need for banks of servers based in offices, pumping out heat and often necessitating an energy-guzzling cooling system (often known as a desk fan). Using less energy is the neatest way “Total investment in global data centre infrastructure more than doubled in 2021 to £44billion, with the number of data centre transactions rising 64% from 69 in 2020 to 113 in 2021”

to cut carbon emissions. But this data is still stored somewhere physical, safeguarded by cloud providers in huge data centres around the world. The amount of energy required to power and cool each data centre is enormous – so, maybe not so green? At first it might appear counterintuitive, but it makes sense environmentally. And it’s why total investment in global data centre infrastructure more than doubled in 2021 to £44billion, with the number of data centre transactions rising 64 per cent from 69 in 2020 to 113 in 2021, according to a report from global law firm DLA Piper. The firm said already this year, to 7 June 2022, a further 41 transactions have gone through, setting the pace for investment to double this year again.

The big players, known as hyperscalers, include Amazon Web Services, Facebook, Google, and Microsoft, and they are investing billions in ever-bigger data centres.

After an embarrassing moment for Facebook back in 2010 when it was discovered its data centres were run on coal-fired power-station energy, there’s now a solid commitment to situating centres in locations where they can be powered by renewables – wind, solar, hydropower – and cooled more environmentally efficiently. A report commissioned by Amazon Web Services published last year claims that businesses in Europe can reduce their energy use by nearly 80 per cent and carbon emissions by 96 per cent by storing data in the cloud rather than operating their own data centres.

According to the AWS report, a one-megawatt corporate data centre is capable of reducing emissions by about 1,079 metric tons of carbon dioxide a year – equal to offsetting the electricity emissions of 50 households a year or taking 500 cars off the roads.

While hyperscale data centres – scale referring to volume of data as opposed to geographical footprint – use considerable amounts of energy, by aggregating many inefficient office-based servers, there is a significant energy saving overall. It also solves the conundrum of having an office in the middle of the city where direct access to renewable energy sources is limited while knowing your data storage is running on green.

Working out how to support the UK’s housing market is a huge priority, given it’s responsible for the largest slice of Britain’s carbon emissions after the energy sector. Green mortgages to incentivise energy efficiency improvements are a step in the right direction, but have further to evolve to drive meaningful change at scale.

The mortgage market, meanwhile, sits behind our housing market, servicing it almost invisibly.

I couldn’t tell you whether emissions generated by the mortgage sector, banks, building societies, mortgage advisers, and all the fintechs knocking around are factored into domestic housing’s contributions.

I don’t need to tell you that being an environmentally conscientious business is no longer just a nice-tohave; it’s necessary – and becoming more so.

But I can tell you that there is more than one way to make a difference and tick your TCFD (Taskforce on Climate-related Financial Disclosure) box while you’re at it. Switch to the cloud.

And the best part is, it will save you time and money to boot. M I

Now is the time to take stock of your tech situation

Neal Jannels

MD, One Mortgage System (OMS)

As the summer finally arrives, we’re seeing a healthy level of activity across the housing and mortgage market. However, when compared to the same period in 2020 and 2021, tackling these ‘healthy levels’ could seem like a walk in the park for advisers who have consistently faced an avalanche of enquiries for an array of property purchases.

Not that this lull in activity comes as any great surprise. Previous levels were unsustainable and driven by extenuating circumstance that were not going to last forever. This was evident in recent figures from UK Finance that showed that the number of people moving house dropped 42 per cent when compared to Q1 2021, with the number of first-time buyers down by 12 per cent.

To maintain some perspective, these numbers remain slightly above the pre-pandemic levels of 2019, and changes in people’s requirements when it comes location, space – inside and outside – and general lifestyle choices around their homes continue to drive demand throughout the property market. This is so even though challenges remain evident for many existing and potential homeowners.

The trade body research also included a focus on the potential impact of the cost-of-living challenge. This found that the average mortgaged household will see a three per cent reduction in its disposable income after mortgage, credit commitments, and living costs. However, the costof-living squeeze is projected to be felt most acutely in lower-income brackets, which have around half the spare income of those in higher brackets even before cost-of-living pressures are factored in.

So what does this all mean for advisers?

There are many different ways to look at this. It could be that some intermediary firms will be afforded a little more time to take a short step back to evaluate the quality and extent of the business written over the past two years.

When business is flooding through the doors, there is little time to step outside your bubble and realise where the efficiencies and inefficiencies lie throughout the entire advice process and how this could be improved. This means now could be the ideal time to embark on a tech stock-taking to assess what has, and what hasn’t, worked from a tech perspective. This can help weed out any tech tools that are not adding value and allow you to focus on maximising your time, energy, and resources on the ones that actually are.

There may also be tech holes that firms need to fill. If so, speak to an array of tech providers to see what solutions they already have in place, what they are working on, the timescales involved, and whether any upgrades are included in their current pricing structure. Of course, these represent only a sample of the kinds of questions to ask. As important is to get to know the people behind the tech, their expertise/backgrounds, and the type of ongoing support you will receive along the way.

In addition, and as previously alluded to in the UK Finance data, the squeeze on personal finances is likely to lead to many borrowers seeking alternative forms of lending, a trend which should allow advisers to identify opportunities in a number of different product sectors. An example is the second-charge marketplace, as activity levels continue to grow amongst prime borrowers.

This was evident in the latest iteration of Evolution Money’s quarterly data tracker, which highlighted an increase in both volume and value for prime borrowers accessing secondcharge mortgages. Looking at its total lending data for the last three months, up until the end of May 2022, the product split by volume of mortgages was 69 per cent debt consolidation/31 per cent prime, and by value 60 per cent debt consolidation/40 per cent prime. This is compared to the previous period when both the volume and value of lending to debt consolidation borrowers was higher.

One of the reasons put forward for the greater use of second-charge mortgages by prime borrowers was the rise in first-charge mortgage product pricing and interest rates in general, with existing borrowers not willing to remortgage into poorerpriced options. And this is difficult to argue with. Second-charge is a sector that has progressed greatly from a tech standpoint, and this continues to be evident in ongoing conversations we are having with a raft of second-charge specialists and lenders with a second-charge arm that want to integrate with OMS.

However, this is not the only sector to come under greater intermediary scrutiny. Many proactive advisers are using this time to explore opportunities across the lending spectrum, and a key component within this is employing the support of technology to help them do just that. Which takes me back to those all-important questions and how vital it is that the answers match the firm’s outlook and key business requirements as we move ahead. M I

Let experts help with the heavy lifting

Tim Hague

director Sagis

While we all know the mortgage market in the UK is unique in many of its dynamics, it bears many similarities to the oil and gas markets and, when you think about it, the way big tech has evolved.

Stripped right back, oil companies drill for oil, rigs extract it from wells, pipes transport it back to refineries on shore, tankers and freight transport it where it needs to go, and some of it ends up in garage forecourt tanks where it’s pumped through smaller pipes and into our cars to make us go.

The mortgage market’s commodity is money. But the wells and pipework function in the same way. Deposits in the bank or building society are called up through a maze of integrated (and often cobbled-together) tech systems before making their way into businesses and customers’ pockets via the pipes that connect lenders to valuers, conveyancers, and mortgage brokers. The system has grown organically, and resembles an errant vine untended – but one that nevertheless produces fruit.

Demand for mortgage finance filters the other way through this complex machinery: from broker and sourcing systems, though networks and clubs, finally arriving on the underwriter’s desk. And that’s just the vertical network – there’s each sub-sector with multilateral relationships and pipework that builds further complexity into the machine. When you think about the market in this way, as complex and interconnected as neural pathways, it puts the task of upgrading legacy technology into stark relief. Where on earth do you start? If you break one bit to replace the lead piping with steel, the pressures change and blow a hole in another bit farther along the pipe.

It’s the enormity of knowing you have to invest and upgrade in newer, faster, slicker technology and systems or admit you’re on a slow descent to extinction. Eventually, your systems simply won’t work. The neural pathways have changed, and you are no longer connected. I sound like I’m painting a very gloomy picture. But it’s not all bad news. The thing we tend to forget is that we don’t all have to be experts in everything. Smaller lenders and building societies in particular are more vulnerable to thinking they do need to be experts in everything. Without the luxury of thousands of staff and the machinery of a huge bank in which the IT department is (one hopes) rather slicker than Steve downstairs who knows about computers, small teams learn to muck in.

This makes the argument for outsourcing much more compelling for smaller lenders struggling to know what they should do about tech. You will know where your senior team’s strengths lie, and assessing your resources will give you a clear picture of where you need outside support. In my experience, this comes in two distinct forms: You need the person who speaks mortgages and tech to speak to the mortgage people, and you need the person who speaks tech, who also speaks to the guy who speaks mortgages and tech.

Sounds complicated, but it’s not. The problems often arise when people who speak mortgages speak to people who speak tech. It’s two countries divided by a common language, and after a lot of time, pain, and money, you realise you didn’t know what you wanted, and they didn’t know what you needed. It’s for exactly this reason that I’ve teamed up with Coeus Consulting, an internationally recognised independent IT advisory firm focused on helping business and procurement leaders deliver strategic change.

Many tech firms have brilliant solutions. But understanding which pieces you need and in what order you need to deploy them is about understanding your challenges and opportunities before you select solutions. That’s not who Coeus are, and they really showed that during this year’s annual Building Societies Association conference in Liverpool. “It was a good opportunity to meet, listen, and reflect on what is really challenging lenders in the mutual sector,” said director Rob Walker following the two-day event.

“My conclusion is that building societies are in a unique place in time and need a unique response. The pandemic has left many with bolstered reserves and a renewed vigour for their social purpose and commercial missions. But our new market of rising rates and stretched borrowers is changing what we will need from our operational systems and processes. We will need to develop new product propositions and customer experiences quickly if we are to meet the rising risk challenges head-on.”

He is spot-on. This unique moment is not an opportunity merely to lift and shift existing legacy technology and legacy process issues onto another platform. If you truly understand what your business needs in terms of operational excellence, there is a fighting chance you will make the kind of targeted change you really need. There are many solutions around, some of which you may not have encountered before. Advice is key to finding and examining them all. “It’s why we believe it is imperative to know what problem you are trying to fix before you start,” Walker said. That’s exactly what I’ve been saying – and exactly why I believe Sagis and Coeus will make a great team. M I