This week, three out of the four major banks increased 5 year fixed rates by a significant amount (around 0.80% p.a.) without any warning. The banks used to give mortgage brokers and branch staff a few weeks’ notice before they increased fixed rates. This allowed us time to let clients know and give them the option of paying a fee to “lock in” the lower fixed rate before it increased. However, this caused the banks problems. They became inundated with thousands of people wanting to get in before the fixed rates rose. This spike in (application) volume caused them lots of problems in the form of errors and long delays. The system would get clogged and it would take many weeks for processing times to return to normal.
About 5 years ago, the banks developed a solution to this problem. The solution was to stop giving anyone any notice. How “customer focused” is that? Bad luck if your application is only a few days away from settlement – because you’ll end up being surprised by a higher rate for the next 5 years. Few industries would get away with this sort of behaviour because competition would keep them in check.
For contrast consider McDonald’s response to consumers wanting more choice. You can now design your own burger at McDonald’s and the number of menu items has increased by over 70% in less than 10 years. This has forced McDonald’s to master the art of mass customisation. Henry Ford mastered the art of mass production in the early 1900’s. Mass customisation is the new challenge for most industries and business. That is, give customers more choice and control without increasing the cost of delivery.
The banking industry gets away with a lot of poor service. If you operate a restaurant and serve a few bad meals or have poor service, customers will vote with their feet and your business will probably die a slow (or fast) death. Not so in the banking industry. The industry is congested by hundreds of policies and processes that are “bank focused”, not “customer focused”. The role of a good mortgage broker is to battle the banks bureaucracy day-in, day-out – so you don’t have to. That’s probably why more borrowers are choosing to use a mortgage broker (around 54% of new loans are established by brokers).
The major banks have a powerful oligopoly and massive scale which produces big, fat profit margins. Too powerful and too profitable so there’s no incentive for innovation and improvement. Our only hope for change is through the adoption of technology (FinTech) in the hope that it will reduce some of the barriers to competition and force the banks to pick up their game. Until then, spare a thought for our small team of brokers that work tirelessly behind the scenes completing seemingly easy tasks that are made extremely difficult by the bureaucratical banks.
Sidebar: I’m not reading too much into the recent fixed rate rises. I think the market is a bit over-exuberant. Bonds have been sold off around the world and the US equities market has risen by 5.7% since November 4. This suggests “the market” is taking the view that the US economy is going to grow significantly. I can’t help thinking that the market’s getting a little bit too over-optimistic about Trump’s possible positive impact on the US economy. If I’m right, things will quieten down and interest rate expectations will likely subside. The US Federal Reserve meets next week and there’s a reasonable chance that it will increase rates (currently 0.50%). If it does, it will be interesting to see how the market reacts. Click here to view what the “market” think is going to happen to rates in Australia. Be warned that market sentiment can change quickly and irrationally.
