As more of Generation Y enters prime home-buying age, it is
sparking a new wave of fintech competition in the most lucrative business in
Australian banking: mortgages.
For years, banking giants have warned of the threat from
technology-based rivals, and much of this has initially focused on payments and
consumer credit, such as Afterpay, or Apple’s digital wallet.
Now, banks are gearing up for a digital battle in the $1.9
trillion home loan market, as new players eye off tech-savvy younger customers
seeking to buy a home.
It is a fight the biggest players can’t ignore. Mortgages dominate
the big four banks’ loan portfolios, generating industry-wide profits estimated
at $20 billion a year by Evans and Partners analyst Matthew Wilson.
The challenge for banks is that younger clients, such as 31
year-old Anthony Lieu, are increasingly open to doing all of their banking
online, giving fintechs an opening.
Lieu, head of marketing at an online law firm, took out a
mortgage digitally from an established bank when buying his first home in
Rosebery, Sydney. But he said he’d be very open to using a fintech “disrupter”
for any future mortgages, and all else being equal, he’d probably lean towards
a fintech over a bank.
“I work at an online law firm, so I’m pretty comfortable
dealing with service providers online,” he says. “I think fintechs are more
focused on the client experience. They’re a bit more agile and responsive to
the needs of what clients are looking for, and now they’re targeting a market
where people are a bit more savvy online.”
His attitude reflects a wider trend that has been
accelerated by the COVID-19 pandemic: younger customers are embracing digital
finance, whether it is in payments, investing apps, or cryptocurrencies.
Upcoming moves from Afterpay and the neobank Up into home
loans show how new players that started in areas such as payments are
attempting to pick off younger home buyers, albeit with backing from
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,”
“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
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
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
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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