Most traditional lenders in Australia are now operating in the Commercial 3rd Party market, most entering over the last 10 years.
With a traditional model for servicing small business, physical branches, staff and even technology were fixed costs for banks. Taking on brokers as third party agents allows those costs to vary with demand.
But the decision is not all about margin. Obviously service remains critical and while fixed costs come down, brokers are paid via commissions which must be managed (and, as we have seen in public inquiries, must be properly structured.)
However the research shows good broker relationships deliver superior customer satisfaction (EY MFAA report May 2015), commercial clients who have used a broker generally have higher levels of satisfaction with their bank and greater levels of advocacy.
This equates to a significantly lower attrition rate compared with owned channels, again adding to revenue and reducing the costs of customer churn.
Furthermore, and similarly to the mortgage book, as far as ANZ goes, we have not witnessed any heightened risk metric differentials to our broader first-party channels.
BROKER AND BANKER
I often hear people talk about friction in the residential mortgage channel between first and third party. Commercial is a different proposition.
All brokers need good bankers to service their greatest asset....their customer. For a broker with a long-term client relationship there is no incentive to refer a client to a banker they do not trust will service their client professionally and effectively.
Both parties require trust. The two cannot function and thrive without a partnership built on trust. In our and external research there is clear evidence brokers have become the trusted advisor.
Indeed – and again similarly to what happened in the mortgage market – many brokers were formerly relationship managers in banks.
Some of the findings from our research are:
- Brokers recommend bankers based on prior experience;
- Relationships are increasingly broker only, who then interacts with the banker – a challenge for banks as customer engagement is with the broker;
- Some customers who have begun using brokers due to negative experiences with banks;
- Customers are receiving more frequent and personal contact from their brokers; and
- Customers who used to deal with a bank directly now deal with the same bank but through a broker due to better service and deals.
SMALL BUSINESS, BIG OPPORTUNITY
Around a third of all mortgages are now broker originated, according to the Reserve Bank, although some industry data put the figure significantly higher. ANZ data shows 30 per cent of all mortgages written today are for self-employed applicants. It seems clear then the opportunity for brokers to have a commercial needs conversation with their clients is significant.
Most in the industry believe SME lending will follow the path of mortgages when it comes to 3rd Party flow. With 2,000,000 small businesses in Australia and a growth rate of over 300,000 new SME's each year, the size of the opportunity continues to grow.
Digital disruption will undoubtedly impact the emerging model of broker-based distribution. But what I don’t see changing is the preference for genuine interaction rather than just transactions.
For example, the focus on lending, on debt, is flawed. Disruptors entering the market today, rightly, are focusing on the whole relationship, all the transactions and needs, not just borrowing.
This makes sense for brokers too. The evidence from banking is when an institution holds a greater share of a customer’s financial wallet attrition levels are lower, the customer is more engaged and future funding needs are better understood and dealt with more efficiently.
With the rapid growth in the third Party market it is no wonder the regulators have been keen to understand more about the industry.
We welcome the responsible lending review moving into the commercial space. I believe it is an opportunity to demonstrate the value brokers add to customer relationships and further assist the industry to dispel myths about how brokers operate.
Customers are after a valuable, longer term relationships. The regulatory interest is in ensuring that’s what customers achieve, through transparency, appropriate remuneration and customer protections.
Cosi De Angelis is GM Commercial Origination, Australia at ANZ