Is churn a dirty word?

As the government contemplates regulatory reform for the industry, Suncorp's Mark Vilo analyses the issue of churn

I’ve been talking to many brokers recently about how freely the term ‘churn’ is used to describe moving a loan from one lender to another. There are negative connotations around the word, but I don’t believe the way it’s being used accurately reflects what’s really happening.

In the finance lexicon, churn means to “encourage frequent turnover of investments in order to generate commission”.

I don’t think any of us believe that loans are being ‘churned’ solely to fill the pockets of brokers.

As a broker, you have an obligation to ensure that your clients don’t meet the ‘unsuitability test’ when they take out a loan; it must be appropriate at the time they take it out. Any broker worth their salt will already be conducting regular client reviews to ensure their finance arrangement remains appropriate – it’s just good practice.

When the customer wants a change

While the property market has slowed, particularly in NSW, there’s still a strong demand for mortgage finance. Price is one of the primary drivers in selecting a mortgage provider. In fact, this key motivation has risen from 15% to 23% over the past five years.

These days, the customer has multiple ways to engage with the lending market. They can investigate online; talk to a mobile lender, virtual lender or contact centre; walk into a bank; or have a discussion with a broker.

More than half of all home loan customers are choosing the services of a broker. Brokers are experts in their field; they understand the credit process and can choose a lender from a panel that is likely to have an appetite that meets their financial requirements. Plus, they’ll do all the legwork.

So where does churn figure in all this?

As a broker, you are best placed to work with new clients and can help them review their finances. That’s often why they seek you out. You’ll know when they’re coming off a fixed rate.

You’ll have insight into their motivations: to maximise cash flow, create wealth, manage tax, consolidate loans – the list of possible reasons is endless. When they come to you for guidance, given the current market dynamics it is entirely appropriate for you to meet their needs. And it is quite likely that the appropriate solution might be to transition their loan from one lender to another.

Any transaction like this may have traditionally been considered ‘churn’.

Fair remuneration for work done

Brokers are paid a commission by the lender with whom they place the loan, which means that the customer doesn’t pay a fee. This commission ensures that competition remains in the industry as the customer has the freedom to choose whether to go to a direct lender or to a mortgage broker, and the financial impact of their respective service to the customer is the same – zero.

The term [churn] itself implies that customers are being moved between lenders for the financial benefit of the broker

The negative connotations associated with churn are explicitly tied to commission. The term itself implies that customers are being moved between lenders for the financial benefit of the broker.

Whether or not commissions are a good thing is not the subject of this article, but is perhaps an important discussion to have at another time.

Can ‘churn’ be defined?

The life insurance industry has long analysed the motivations, but recognises that business moves for very good reasons. This has resulted in the industry attempting to come up with its own definition of transition business.

CBA has introduced a Credit Assessment Summary asking for information to support a loan lodgement. Recent calls for an industry ‘best interests duty’ as well as a focus on more comprehensive living expenses data to better assess a customer’s true financial position are also up for discussion. The opportunity to provide meaningful information on why a recommendation was made, in the form of more comprehensive data for a new or existing client, can only be a positive step forward.

We believe mortgage brokers provide a balanced and long-term service to customers who need to address their lending needs, and that’s great for everyday Australians.

From time to time, business will transition from one lender to another. That’s not a bad thing if it is in the customer’s best interest. It keeps lenders on their toes and ensures the customer can continue to find the most appropriate deal to meet their needs. So is churn a reality or just a dirty word?

Mark Vilo is the head of bank intermediaries at Suncorp, responsible for driving strategy and creating best practice, and growing relationships with Suncorp’s aggregator and broker partners.