‘May we live in interesting times’ is an old Chinese proverb. However, I think that I can safely say that many packagers would prefer to live in slightly quieter times – indeed, perhaps even have a dull day now and then. But this is unlikely to happen with the massive changes that we are currently seeing in the market.
Value chain
So let’s start looking at the environment or ‘value chain’ that packagers operate in. Basically in non-techy speak, we have the manufacturers (lender originator), distributors (packager) and service providers (broker). These three ‘organisms’ have lived in mutually beneficial harmony for several years now but things are changing.
As the market becomes more competitive, lenders are being put under increasing pressure to cut costs and offer the most competitive products possible. This collective ‘tightening of the belt’ has been passed on to mortgage packagers who have seen their returns increasingly squeezed.
At the same time as this is occurring, brokers are increasingly demanding improved service levels for their clients – and quite rightly so. It is no longer simply a matter of choosing a packager on price. Brokers demand consistently high standards and a service that caters to all their needs.
These market forces have forced packagers to react in a variety of ways. Certain organisations have ‘scaled up their activity’ or collaborated with other organisations in order to create an impression of size. In the packaging world, small really can be big.
Other organisations have done what the Americans call ‘working smart’ and looked internally to discover how they can better service their customer by improving awareness or sales techniques. Service standards are important to most brokers and a packager who provides consistently good service has an advantage over his competitors.
‘Free everything’
To cope with this intense competition, some new entrants to the market have adopted the ‘free everything’ promotional strategy. In simple terms this is offering a core service with possibly increased commission, promises of added value services or sometimes just ‘marketing gimmicks’. This practice is frowned on by more established members of the packaging community as they feel these new entrants are not paying sufficient attention to service standards or basic business processes.
Another argument against this business strategy is that ultimately it will not pay off in the long term as the cost base rises at a rate faster than the advantages that the extra business brings. It can also lead to plummeting service standards as a relatively small company struggles to keep up with the huge influx of business.
The strategies employed by packagers to compete for business are often good news for lenders in the short-term. However, in the medium to long-term, lenders also need to be mindful of who their customers are and realise that in the world of ‘free everything’ they are likely to see their margins squeeze further to fund the origination and onward distribution of the loans.
Despite these coping mechanisms, the outlook for the market could seem a little bleak especially if you look to America. The US market has lost a great deal of reliance on brokers and, with the rise of technology in the UK, there are signs that our market could suffer the same fate.
But I am beginning to sound like Fraser from Dad’s Army – ‘We’re doomed!’ But this is not the case.
Time and intelligence
Packagers, despite these changes in the market, still fulfil the basic needs they were built to satisfy: time saving and market intelligence.
Packagers provide significant time savings by processing the sourced loans from application to completion. These added hours to the day can be used to service other clients and source and convert further business. Time is of the essence for many small brokers so this service is essential.
In addition, packagers have the insight into the non-conforming market which few IFAs, unless they are specialists, possess. Rather than an IFA spending several days fruitlessly searching for a lender that will take their client (peculiarities and all), they can speak to a packager who knows the best home for this deal. They may even be able to offer the consumer an exclusive deal that their buying power has secured.
So essentially, despite certain problems, we believe that while there is still a demand in the market for this service, packagers will thrive. Admittedly, there’s likely to be consolidation but packagers who embrace the needs of their customers and provide a solution to them that gives them the competitive advantage in their market will succeed and develop
This really is a dynamic time for the packager distributor – the added value they bring to brokers will prove invaluable going forward, by adding extra time resource to brokers at a time when their focus has to be in so many areas.
