Afterpay plans to start selling mortgages in 2022 through its recently launched banking app that is targeted at Gen Y women (those born between 1981 and 1996) and Gen Z (those born from 1997).
Afterpay’s mortgages will be funded by Westpac, but even so, it shows the potential of fintech apps to move into the banks’ core territory.
Up, a youth-focused neobank bought by Bendigo and Adelaide Bank in 2021, also plans to start selling home loans through its app in early 2022. Up was launched in 2018 providing digital accounts – and in November it said it had 40,000 customers saving for a home loan.
Up chief executive Xavier Shay says its mortgage product will aim to win over customers by giving them financial tips – such as a nudge to repay their loan faster if it notices they are saving more than thought. “Right now, state of the art is you type some numbers into a calculator or maybe make a spreadsheet, and most people don’t want to be making spreadsheets,” Shay says.
Bendigo-backed Tic:Toc, which will provide technology for Up to approve digital loans, is another example of a fast-growing digital mortgage business – it also relies on Bendigo for funding.
Non-bank lenders such as Nano Digital Home Loans and Athena Home Loans are also eyeing a piece of the action, alongside older businesses such as Loans.com.au, owned by Firstmac.
Athena’s co-founder and chief operating officer, Michael Starkey, says about 45 per cent of Athena’s customers are Gen Y, and its commissioned surveys have shown 74 per cent of millennials are either “somewhat” or “very” favourable towards using a non-bank lender.
With other digital businesses like REA Group’s realestate.com.au also targeting home loans, Starkey argues there’s an opportunity for the business to make finance more “embedded” in the wider process of buying a home.
Nano’s co-founder and chief executive Andrew Walker argues COVID-19 has accelerated the shift to digital applications, arguing digital home loans are “rapidly becoming the norm”.
“If you look at the global data, you’ll see that Australia is far behind the rest of the world, where currently less than 3 to 5 per cent of mortgages are originated digitally, compared to 30 per cent in the US,” Walker says.
“We originally anticipated it to be 3-5 year market shift, but we now believe that it will take place over the next 12 – 18 months.”
Not everyone is convinced that digital home loans are set to take over.
Given the complexity and high stakes of taking out a home loan, mortgage brokers arrange a large share of new loans, and some survey data suggests even young digital-savvy customers still want to deal with a human when taking out a loan.
A 2020 survey by Finder.com suggested more than half of Gen Y and Gen Z still wanted to visit a branch for a mortgage. The surge in house prices in recent years has also made it even harder for many younger customers to break into the property market.
But in any case, there is little doubt that digital home lending is emerging as a key battleground in banking – just as approval processes were a critical issue for lenders in 2021.
At their full-year results, each of the big four banks were busily talking their moves to make mortgage lending more digital and faster, with both Commonwealth Bank and ANZ Bank talking up the prospect of a 10-minute mortgage in 2022. A spokeswoman for CBA, the country’s biggest bank, says the lender will launch its digital loan in the first half of the year.
In the longer term, experts predict even more sweeping changes to mortgage lending from “open banking,” a system that allows consumers to securely share their financial data when applying for a loan.
James Cameron, a partner at AirTree Ventures (which has invested in Athena), says in 10 years’ time taking out a loan could be as simple as answering a few questions on a smartphone: your name, some proof of identity, the amount you want to borrow, and the property’s address.
“I think it will happen slowly, and then it will happen fast,” Cameron says of the disruption in mortgages. “The good banks will be able to keep up with these trends,” he says.
Technology giants such as Apple and Google are also lurking in the background, as they muscle into the payments market through their digital wallet apps.
There is a question mark over how these global behemoths might use their enormous customer reach and huge amounts of customer data to target other parts of the banking business – including lending – in the long term. Afterpay’s future owner, US fintech giant Block, is another example of a foreign tech-based giant that could play a bigger role in the Australian market.
‘I think it will happen slowly, and then it will happen fast.’
James Cameron, AirTree Ventures
The intentions that giants such as Apple have in banking are unclear, but they would be formidable competitors if they sought to gain a bigger slice of the banking market beyond payments.
The government has signalled it wants tech players in banking to be appropriately regulated, with Treasurer Josh Frydenberg couching a late 2021 shake-up in payments regulation as an issue of national sovereignty. “If we do not reform the current framework it will be Silicon Valley that determines the future of our payments system,” Frydenberg said in December.
Even so, it is clear that as digital finance takes off, the banks are only going to face growing competition from technology-based players. And while that could be challenging for bank shareholders, it could be better news for customers.
Ashurst partner Nicholas Mavrakis says that as long as there is a “level playing field” on the regulatory front, the overarching trend of technology-based competitors moving into finance is welcome, and will help make the market more competitive.
“You can’t stop big tech and fintech from coming into the Australian market. It’s exciting, it’s good for competition,” he says.
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