Mortgages are probably the biggest chunk of money most of us will ever have to deal with. For individuals and families alike, the decision on a mortgage is often as important, if not more, than the decision on the property it is facilitating. Getting it right or wrong can have huge implications, not only for your home but for your retirement and your inheritance plans.
As digital banking continues to grow, we’re beginning to see what might be termed ‘the second generation’ of digital products. While apps and online banking have been around for over a decade, traditional banking products are now becoming fully digitised. This doesn’t mean the traditional route of a chat with a bank manager or mortgage broker is dead, but it does mean there’s a lot more choice when it comes to deciding who should finance your home.
For many digital advocates, this will come firmly under the umbrella term of ‘democratising’ an industry. I’m not going to charge in with sweeping terms in an attempt to win a game of buzz-word bingo just yet - but I do think that claim has some validity, here’s why:
Digital banking has increased competition by making it easier for new players to enter the market and easier for those looking for a loan (many of them the younger generation of first-time buyers) to check the competition and get a good quote. Traditionally, a mortgage broker would have filled this role and while they may feel the pressure of competition too, they may also find their job easier. However, perhaps the best way to frame this change is in terms of a ‘reverse auction’.
This is something we’re seeing already across the consumer sector. It basically means that rather than a consumer negotiating (bidding) for the best rate, providers will compete (bid) for consumers by offering the most competitive rate. The emphasis-shift empowers the consumer and gets rid of any potential price-fixing. We’ve already seen online platforms shake up the energy sector with such products - putting the pressure for dynamic change firmly on providers. As with political democracy, the people are being pitched to and it is they who will decide.
Digital banking has also revealed the potential for more complex loans. Currently most mortgages are paid back at a fixed interest rate and at fixed intervals lasting for an agreed amount of time - say 30 years. While this is generally seen to benefit both parties there is usually the scope to ‘remortgage’ or to pay back sooner. The scope to employ these variables is massively increased by financial technology.
The loaner will always take on risk and therefore recoup more than the loan via interest, but banks have been known to exploit this. The Bank of England’s interest rate is not always passed on and interest rates can climb well above inflation, especially for those with lower incomes. The result is the debt becomes harder to escape from which is one reason why the adage ‘the poor get poorer while the rich get richer’ still resonates. What could digital banking do? In a nutshell it could provide transparency and make it easier to remortgage, driving down costs and increasing competition but also helping creating access to low rates for people with no credit history.
The key here is the concept of transparency. A core tenet of the digital banking revolution has been better dissemination and use of information. You can now access interest rates, inflation predictions and FX rates on your smartphone. For us uninitiated masses it’s easy to get an idea of how much your money is worth - there’s no need to take the bank manager at his word. This is important because the banks caused the last financial crash: They told us everything was fine while loaning irresponsibly and taking on too much debt. We all learnt a valuable lesson about how hard-won trust is and how information is power. Today, over ten years later, interest rates remain low because of the huge levels of quantitative easing (money printing) that the central banks, like the Bank of England and the Federal Reserve, carried out to help the banks that caused the crash. Now, lots of people think interest rates will rise because we are due a lot of inflation from all the new money. If a mortgage broker or banker says, “your mortgage will be low interest because the last ten years have been low interest,” you know that is a fallacy. The information and competition that digital banking is giving us is putting a premium on honest communication.
So, can we call that democratising? If digital banking just gives consumers more choice, then I would argue it is simply strengthening the market. But if it can do that while educating and informing consumers and businesses alike, breaking knowledge silos and giving us the power of informed decision making that we should all enjoy in a democracy - then maybe the ‘democratising’ tag is apt. In a financial contract, as with a social one, knowledge is power.