With a slowdown in the housing market, calls for changes to commission structures and increasing numbers of brokers vying for similar market share, 2017 has proven to be a year of uncertainty for mortgage brokers. Is it time for a slight change in direction?
If you’re a mortgage broker, you can be forgiven for feeling you’ve become caught up in a perfect storm. The industry has been in the crosshairs of both the Australian Bankers Association, who have been critical of the role of broking, and an Australian Securities and Investments Commission (ASIC) investigation into brokers’ commission structures.
These moves have created negative press around the industry and a call for greater transparency and lower incentives to be paid to brokers. Large investment banks such as UBS have called mortgage broking a relic from boom times.
A dreary start to 2017
The most recent bi-annual MFAA Industry Intelligence Service report highlights only a 0.1 per cent growth in lending for the six months to March 2017 and Australian Bureau of Statistics (ABS) data shows a flattening off in the average value of mortgages written in 2017.
Despite the stricter conditions in recent months, the most recent MFAA report found a 3 per cent growth in brokers. It seems a larger number of brokers are fighting over an ever-shrinking pie, with the looming prospect of lower payoffs.
The shift towards writing SME loans
For years the industry has spoken about broker diversification and although good in theory, brokers have often been limited regarding what else they can offer their clients. That may be all about to change with a trend towards commercial loans starting to appear.
A bright spot in the MFAA report is the increase in the number of brokers writing commercial loans – up 11.5 per cent during the six-month period. Brokers wrote more than $7.9 billion in commercial loans during this period, with much of this funding coming from non-bank lenders. The fast-growing financial technology market is staking its claim in the SME market and filling the funding gaps left by gun-shy banks as a result of the GFC.
Helped by supportive government regulation, the fintech industry has grown from 100 startups in 2014 to 579 providers in July this year. These online lenders match private investor funding with companies seeking finance to grow their business through small business loans, providing healthy returns for investors and more streamlined services for borrowers tired of dealing with bureaucratic banks and over-inflated fees.
Best of all, demand looks likely to continue with most small enterprises feeling a lack of readily available funding is contributing to a restriction on growth for their business. Established SMEs aren’t alone in their quest for funds, with 72 per cent of startups needing extra money to continue their growth.
The early broker gets the worm
The market size of fintech small business loans is still considerably smaller than a mortgage industry that writes over $150 billion of business every year, but it is significant in its rate of growth. What’s most noticeable is the progressive switch away from traditional bank lending and the opportunity that the trend presents to brokers. SME marketplace lending across Australia is projected to grow to $11.4 billion by 2020.
It’s not a stretch to think that business owners will turn to trusted partners for their business loan in the same way a homeowner will turn to a broker for their next home loan.
A hungry borrower looking for a better offer than they can get from a bank and a fintech able to better serve the SME market both point to a perfect scenario provided someone can bring them together. Increasingly mortgage brokers are finding themselves in the situation to make these deals happen.
They often have existing relationships with the two million small business owners in Australia through the preparation of their mortgage documents – relationships that the new fintech companies have yet to establish.
Finding SME clients
So where do you begin? A quick review of your existing client list will soon show up those clients who are small business owners. Do you have current clients in your database who may be interested in small business loans? Start simple with an offer to source vehicle finance or a small loan for a new piece of equipment.
Understanding your client’s industry and business can help you identify what kind of financing they might need. From there, you can pinpoint any potential gaps in cash flow or when large capital sums might be required and identify opportunities to fill gaps. Cash flow gaps are one of the biggest hurdles small businesses face, so finding solutions to the common problems first can help you build confidence as an SME broker.
Overseas markets are already showing how online lenders are disrupting the lending business model and you can be part of the game. Only offering one trick means you’re vulnerable to a market downturn. Adding revenue from small business loans to your arsenal of products not only helps you financially but makes you a valuable asset to your clients.