Will niche lenders lose market share from Open Banking innovations?

Newsdesk
13 Nov 2018

While Open Banking initiatives are expected to transform the UK mortgage market, a new report suggests that challenger brands may lose market share from the resulting data revolution.

 

The UK’s largest mortgage lenders will regain the market share that they lost to challenger brands in the coming years, thanks to data analysis techniques from Open Banking, a new paper predicts.

KPMG’s report entitled Buyer’s Market: The Future of Mortgages, suggests that challenger and specialist lenders saw their share of the UK mortgage market grow from 12% in 2016 to 16% in 2018, but they believe that the big lenders will stage a fight back and “increasingly threaten newer players” in the coming years.

More sophisticated data analysis techniques that have emerged as companies have started Open Banking projects, will increasingly allow established lenders to extend their mainstream products to niche customers, according to the report.

The availability of more granular customer data will allow larger banks to use smart algorithms to “serve a whole of market at an acceptable level of risk,” the paper suggests, adding that these techniques, combined with access to cheaper funding through banking deposits, will give the large banks the upper hand.

In a media statement, accompanying the report, Chris Monaghan, partner in KPMG’s Financial Services Advisory practice, said: “We are now noticing that the mortgages market landscape is changing in favour of both established large lenders and their customers.

“Behind this shift is a blend of favourable regulation, specifically the Second Payment Services Directive (PSD2) and Open Banking, innovation and demographic trends.”

This view is not universally accepted, however. Industry veterans with experience of working for both lenders and brokers, say that this prediction may be a little simplistic.

Jazz Jhumat, a financial adviser at Danestone Mortgages and Financial Services, has previously worked for both high street and specialist lenders.

In an interview for Open Banking Expo, she acknowledged that larger lenders may sweep up some business through more sophisticated algorithms but says that high street banks will find it difficult to match the bespoke underwriting techniques of niche players on a large scale.

She explained: “In my view, the high street banks will see some form of increase, but specialists cater for the complex, the unusual and the adverse, which the high street still won’t touch, regardless of any wider availability of data from Open Banking.”

The KPMG report suggests that the largest lenders may solve this problem by simply snapping up smaller lenders.

It states: “We anticipate that as well as taking advantage of Open Banking, the big lenders will also partner with – or buy – smaller and more agile competitors.”