Non-banks have displaced traditional banks as leaders in the US mortgage lending market, spurring M&A activity and a strategic focus on customer experience.
Originations once drove the mortgage business process outsourcing (BPO) market, but more recently, with a decline in origination volumes, loan servicing activities are the primary source of the segment’s steady 6-10% growth rate, according to Everest Group. Loan servicing, with a growth of about 9-12%, is now being preferred by lenders to boost profitability because servicing offers a higher revenue per loan serviced. As of 2018, more than 50% of the FTEs in mortgage BPO were engaged in servicing-related activities.
In the U.S. mortgage lending market (the world’s largest geography for mortgages), lenders attribute the slump in origination volumes to higher interest rates and intensifying competition, particularly from non-banks, which command 51% of the market and have displaced traditional banks (40%) as leaders in the mortgage lending space. At a time when traditional lenders were focusing on providing a service channel to customers, non-banks focused on the entire customer journey, identified the pain points and designed experiences to address those challenges. As a result, non-banks gained market share despite offering higher or comparable rates. Today, banking institutions of all types rank customer experience—and not just customer service—as the top business priority for maintaining or improving competitiveness.
These forces—lower origination volumes, eroding profitability, the need for operational efficiency, and the drive for differentiation through customer experience strategies—are fueling numerous mergers and acquisitions (M&As) among mortgage lenders and consolidation among service and technology providers as well.
Other recent shifts in the mortgage BPO market include the following:
These results and other findings are explored in a recently published Everest Group report: “Mortgage BPO Annual Report 2019: Reducing Margins, Rise of Non-Banks, and Declining Volumes—The Triad Shaping the Mortgage Industry?” The report covers key trends in the industry such as interest rate changes, merger and acquisition activities, changing market dynamics with non-banks, and increasing focus on customer experience.
“The steady global growth rate of the mortgage BPO market belies the significant upheaval occurring in the mortgage industry, where non-banks are taking the lead from traditional banks and origination margins and volumes are eroding,” said Manu Aggarwal, practice director, Business Process Services, at Everest Group. “As the focus of lenders shifts to customer experience and efficiency gains in an effort to squeeze better margins, technology adoption in the mortgage segment, which is currently quite low, will surge and become a key lever in future outsourcing deals.”
Everest Group is a consulting and research firm focused on strategic IT, business services, engineering services, and sourcing. We are trusted advisors to senior executives of leading enterprises, providers, and investors. Our firm helps clients improve operational and financial performance through a hands-on process that supports them in making well-informed decisions that deliver high-impact results and achieve sustained value. Our insight and guidance empowers clients to improve organizational efficiency, effectiveness, agility and responsiveness. What sets Everest Group apart is the integration of deep sourcing knowledge, problem-solving skills and original research. Details and in-depth content are available at http://www.everestgrp.com.
Mortgage lenders are also contending with everything from price wars to additional rules from a new federal agency, the Consumer Financial Protection Bureau, that imposes penalties for failing to follow regulatory requirements, according to Anupam Jain, practice director at Everest Group, a Dallas-based consulting and research firm. “Mortgage outsourcing aims to help banks and mortgage companies succeed in this more competitive landscape so as to maintain the lowest cost per loan, handle more loan cases, and maintain a loyal customer base,” says Jain, who is located in India.