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Understanding customer needs, offering appropriate mortgages, and making the loan process as seamless as possible are priorities.
However, the current mortgage process and legacy systems make the buyer think twice before they proceed to fulfill their dream. Stiff competition, changing customer requirements, margin pressures, increased operational costs, and regulatory frameworks are challenging how the mortgage industry currently operates. This has opened the door to the digitalization of various banking processes, especially in the mortgage application function, with open banking available both as a service and as a platform.
Open banking can be the solution to the current mortgage industry challenges as it provides lenders with a unique opportunity to make better mortgage lending decisions. We discuss the impact of open banking on mortgages and how it can help lenders reduce the lengthy and time-consuming process and enhance the customer experience.
CHANGING THE MORTGAGE GAME: A KEY IMPERATIVE
Home buying is a cumbersome process (see Figure 1), starting from customer savings for equity up to loan disbursement.
Broadly, the process can be categorized into three stages:
Figure 1: The traditional mortgage process
When it comes to experience, customers are often uncertain, especially about the approval turnaround time, the information on required documents, the stage at which the application is held by the lender, and the time taken for property registration. Moreover, lenders' loan decisions depend on the documents submitted by the customer. These documents come in various formats and irregular shapes and forms, posing a challenge for automated loan approvals
Robotic process automation (RPA), artificial intelligence (AI), and machine learning (ML) techniques have helped lenders meet customers’ needs and improve operational efficiency to a certain extent. Although interventions like online broker consultation and e-signatures have facilitated remote interviews and contactless paperwork for the mortgage industry during the COVID-19 pandemic, they have not had a greater impact on operations per se. Delays due to technology understanding, compliance requirements, and the lack of use cases are some of the common reasons for the slow adoption rate.
Although pandemic-induced lockdowns forced the mortgage industry to integrate more technology into their businesses and gain some pace, the outcome was not as significant as expected. The benefits derived through automation in the mortgage and lending sector have been slower compared to the other sectors in the banking and financial services industry. By embracing open banking solutions, industry players can address these challenges and offer a seamless experience to customers.
Open banking platforms use both conventional and unconventional data sources with the help of blockchain and application programming interfaces (APIs) to build more robust customer financial avenues.
For instance, open banking in mortgages harnesses unconventional data sources for a holistic assessment of customer creditworthiness. Lenders can use consumer information such as mobile usage, social data, utility payment, e-commerce transactions, and conventional credit repository reports to predict customers' creditworthiness (see Figure 2). This helps understand customer behaviors and preferences, which is the key to improving customer experience.
Figure 2: Integration channels for open banking in mortgage
CHALLENGES IN ADOPTING OPEN BANKING
Despite technology redefining multiple aspects of the core banking sector, most mortgage lenders still use legacy platforms.
Outdated systems pose a considerable challenge for any modernization and system integration initiative. Enhancing the legacy platforms is a complex and lengthy task as it requires harnessing the synergy of the mortgage ecosystem. Ecosystem players such as real estate, title companies, appraisers and valuers, credit bureaus, realtors, insurance, and employment verification companies should be integrated or virtualized with numerous APIs. Additionally, integrating with regulation, security, and fraud prevention will have to be factored in with evolving cybersecurity trends. However, the biggest challenge for data holders would be the complexity and uncertainty of rules, followed by huge investments and longer payback periods.
Open banking has opened the door to a world of opportunities for financial services industry players by fast tracking digitalization.
In addition, the adoption of open banking helps with income verification, know your customer (KYC) confirmation, and customer onboarding. This can be further extended by enabling the APIs to help with verifying employment, title details, appraisal details, and credit history – resulting in quick and accurate credit decisions. Most importantly, open banking can eliminate the dependence on customers for documents and clarifications, paving the way for a seamless decision-making process and strengthening risk management practices by creating greater visibility of credit risks. In our view, open banking adoption will reduce the number of steps in the mortgage process to just four – property search and finalize, consent, settlement, and possession – a massive reduction in the effort that will result in better customer experience and speedy turnarounds.
KEY CONSIDERATIONS FOR SUCCESSFUL OPEN BANKING ADOPTION
The success of open banking implementation lies within a robust data management framework.
Data holders will need to invest heavily in collating and storing the data, making it easily available to lenders and recipients. Lenders can be the primary data holders or use it as a service from a third-party service provider. In the latter option, APIs are foundational to integrating and building data platforms and improving digital capabilities. Data recipients need to connect to different API sources while collecting data from any data holder, making it readily available for the lenders. The faster and more reliable these APIs deliver the data, the better the user experience. For this, the APIs related to all banking segments like retail, corporate, and wealth and products such as banking, loans, insurance, and investments need to be extended to the entire mortgage and housing ecosystem.
We recommend super apps to act as a one-stop solution for property search, home insurance, title verification, valuation companies, credit repositories, mortgages, and mortgage insurance. These super apps can cater to the broader ecosystem by integrating an end-to-end value chain into the home buying process. However, building and implementing the new technology required to comply with data holder obligations would be crucial. Data recipients also need to keep upgrading and building their platforms – an ongoing developmental activity for data holders, recipients, and lenders.
Data integration or virtualization, big data, and analytics form the key pillars of open mortgage technology. That said, integrating chatbots, voice-to-text or -data, and vice versa would be the key to driving an enriched customer experience. Customer voice translation to datasets can provide meaningful insights for decision-making that would also help offset the language barriers across the globe.
REVOLUTIONIZING THE MORTGAGE SECTOR
Open banking is poised to become the most important lever in customer experience transformation.
The impact of open banking in mortgages will pave the way for its adoption across different areas of the financial services industry. It can drive strategic advancements in the existing banking ecosystems, helping lenders position themselves in the market better. Open banking in mortgage will also help reduce costs and open up avenues for new revenue streams. Banks must embrace open banking in their mortgage operations to keep pace with competitors and ever-changing customer needs.