Price competition in the mortgage market has been intensifying continuously for many years. Several factors are driving up the pressure, including new providers entering the market (e.g. insurers) and comparison sites disrupting the industry and fueling price competition (e.g. Moneypark). The increase in eMortgages is also enabling banks previously limited to specific regions to sell their mortgages throughout all of Switzerland. Gross margins have been steadily declining (with only minor rises in interest income each year), although it hasn’t been visible on the income statements of many cantonal and regional banks as significant growth in mortgages has masked this development. However, in their 2018 semi-annual reports, numerous cantonal/regional banks noted that revenues from interest are now declining.
How should an established player react to these changes? Looking at other types of business, such as the telecommunications or airline industries, the answer seems obvious: Strengthen benefit perception and reduce comparability with competitors. In the mortgage sector, the following aspects provide promising solutions:
- Product and price differentiation and margin expansion through needs-based packages: Although important, financing is only one part of a good mortgage package. Attractively priced core service can be expanded upon with complementary products that meet customers’ needs, such as flexibility and security modules. These kinds of extensions can be sold as add-ons during a comprehensive advisory process and typically increase the margin on new business by around eight to ten basis points
- Dynamic pricing and interest optimization (similar to the airline industry): Dynamic price management enables optimal fine-tuning of target margins on the basis of demand elasticities, competition data, and internal cost information
- Cross-selling and active churn management: Banks possess valuable data but don’t make use of it. Analyzing data with the help of machine learning and AI can detect customers likely to churn at an early stage and target them with specific offers (important for mortgages that are about to expire). Moreover, potential clients that may be interested in a mortgage can be identified
- Optimization of the personality-match between advisor and client: Mortgages are a commodity. In the end, the offers and pricing of various providers tend to be very similar. Oftentimes, the personal fit between the client advisor and the client can be decisive. Our project experience shows that a great personality-match decreases price sensitivity while increasing margins (without having to increase prices). Hamburger Sparkasse and Frankfurter Sparkasse recognized this potential and established professional matching techniques with great success.
As well as implementing these immediate marketing and sales measures, initiatives to reverse declining margins should also take the opportunity to deepen and intensify existing customer relationships. Aligning sales and pricing with the customer relationship is an effective solution to counteract the increasing price pressure. To do this, the airline industry uses frequent-flyer programs such as Miles & More; the telecommunications industry develops modular bundle offerings consisting of modules for TV, landline, cellphone, and internet; while the elevator industry works with long-term maintenance and service contracts. In the banking sector, customer relationships can be improved using “home-bank programs,” i.e. models that reward customers who use several products from the same bank. This concept is particularly suitable for “full-range providers,” such as the big, cantonal, and regional banks that have the entire spectrum of financial products at their disposal.