Will robo-advice kill the intermediary?

6 January 2017.

Developments in technology continue to shape the different markets in which our clients operate. This article takes a look at how technology is becoming a key focus in the mortgage industry.

Enter the new mortgage market disruptor: robo-advice.

Robo-advisers offer algorithm based financial advice and portfolio management online, with minimal human intervention.  Whilst remote delivery is common across much of the financial services sector, the mortgage industry has taken longer than most to adopt it.  Now though, robo-advice has arrived, bringing market disruption with it.

Robo-advice brands such as Trussle and Habito offer free services online, available 24/7, which turn an application into a recommendation for a lender within about 30 minutes.  An intriguing proposition, but will these brands prove successful?

Critics suggest that robo-advice will have only limited impact.  Choosing a mortgage is surely too big a decision to take without human interaction.  On first inspection, our latest Mortgage Achilles study supports this assertion.  77% of potential first time buyers said that they would want to arrange their mortgage face-to-face.

There is also the issue of awareness. In these early stages we found that just 9% of potential first time buyers had heard of the general concept of robo-advice, whilst even fewer had heard of specific robo-advice brands.

So does this mean mortgage advisers can breathe a sigh of relief?   

Most intermediaries we spoke to don’t appear to feel there is too much at risk.  They don’t expect robo-advice to be successful, and if it is, they expect it to hit direct lending more than intermediaries.

Consumers gave us a slightly different view.  Whilst demand for face-to-face contact remains high and awareness of robo-advice is low, we found that many consumers are at least open to the idea of robo-advice.  16% of potential first-time buyers said they would be willing to use a robo-advice service in the future, and a further 52% said they would possibly use a service like this.

Among current mortgage holders already in the market, there is much more certainty and confidence.  48% say that they would be willing to use a robo-advice service in the future, increasing to 56% among those aged under 35.  So perhaps intermediaries should not feel quite so comfortable.

Further evidence that consumers may be open to this new way of working was shown when we looked at how current mortgage holders who have taken out a mortgage in the last two years arranged it.  The majority of mortgage applications were completed face-to-face.  Compared to 2015 levels, however, we saw a swing towards the internet (+11%) and away from interactive sales.

Whilst this all points towards a striking conclusion, it is important not to lose sight of the context in terms of how consumers expect to use these services.  The feedback suggests it will be an additional source of information, not the main sales channel.

“It gives you an initial assessment and recommends a starting point based on that assessment.  That strikes me as convenient and helpful.” Potential first time buyer

“I would explore all my options so if this were free, I would do this to see what mortgages came up from them.” Potential first time buyer

“I guess maybe it will come up with lenders you wouldn't have thought of and it's a way to look at better deals and what other offers are out there.  Plus it's easy to do at home online.” Current mortgage holder

Many industry experts have endorsed this view, with a feeling that robo-advice should not be viewed as a threat.   Instead, the real challenge for the industry is about how to integrate this technology within the existing human process.

Here at BVA BDRC we will continue to monitor consumer reactions via our Mortgage Achilles study once these brands have had a chance to bed in.  With consumers open to the idea of robo-advice, the real extent of the threat is likely to depend on the results that it can deliver.  Just how good is the technology?   Will it be able to provide competitive mortgage deals to consumers?  Can it overcome some of the criticisms thrown at sourcing systems?  Only time will tell.

 ‘Understanding Markets’ is one of the eight business challenges that we specialise in solving at BVA BDRC.  The markets you work in are constantly evolving – new entrants, new demands from customers, changes in legislation or a product innovation can all result in exciting opportunities but also present challenges.  To find out more about how we can help you, visit our Markets page.

Hear more about the mortgage market in Tony Wornell's blog 'Brexit and the Mortgage Market'.