How digital mortgages will overhaul traditional banking models

Traditional banks will have to overhaul their branch-based models to appeal to modern homebuyers.

Digital mortgages, expected to displace today’s traditional mortgages, will both be an opportunity and a threat to traditional banks–and which side of the ledger they will find themselves in will depend on how they transition away from their branch-based operations, S&P Global Ratings said in a report.

“By the time today's traditional mortgages are repaid, the process that created them will almost certainly no longer exist,” S&P wrote in the report “Future Of Banking: Digital Mortgages Are Game Changers.”

“ In their place will be digital services and digital mortgages, which S&P expects will reshape house lending and retail banking to the benefit of borrowers,” it added.

How banks tap into this would depend on two things: how they transition away from branch-based operations, and the quality of the digital platforms and products they offer.

“Digital mortgages will be more homogenous, easier to apply for, easier to switch between, and quicker to secure. They will also smooth the way to greater competition and thus introduce uncertainty to banking sector revenue, margins, and spending, which could ultimately weigh on issuers' creditworthiness,” the ratings agency said.

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Digitization of the lending process will unpick mortgage lending's central role in retail banking and, in turn, the banks' traditional operating model, it added.

The traditional model used home loans both to attract customers and tie them into a relationship with the bank, from which they could be plied with banking and ancillary services such as credit cards, savings products and insurance. At the heart of the old model is the bank branch and the sales people within it.

But with the advent of digital mortgages, both the branch and the branch-based sales people will not have much of a role to play, S&P said. “That means there will be fewer opportunities to cross-sell and up-sell clients. Easier application processes will also mean easier switching for existing borrowers, further loosening the bonds created by mortgage products.”

On the upside, banks should initially retain an advantage in the new digital marketplace. “The financing of a property purchase is the single most important financial commitment in most peoples' lives and many borrowers will continue to prefer to deal with trusted, and established financial brands,” S&P said.

That advantage isn’t by much, however. For example, in the US, Rocket Mortgage has quickly grown to account for majority of new mortgage origination. This mean that a capable platform and competitive pricing are more than a match for an established brand, S&P said.

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Traditional banks also have some inherent disadvantages, as they may find it challenging to recalibrate operations to digital platforms from branches. Doing so could be expensive as it requires upfront investment in technology and the dismantling of legacy operations, as well as time consuming.

As a first step on that journey, established banks have often unveiled digital mortgage platforms
that operate under the same brand, and alongside their branch-based businesses. These parallel
services obviously come at a cost, which banks are unlikely to be willing to bear over the long term, the report noted.

Also, many services are still quasi-automated, where banks offer customers an online application process that leads to contact with a bank representative, and often a branch visit.

Some banks have reportedly launched specialized digital lending subsidiaries or divisions, possibly in a bid to free new operations from legacy systems and accelerate true digitalization. For example, in May 2022, Commonwealth Bank of Australia unveiled its Unloan unit, which operates separately from both CBA branches and the parent banks' digital platforms.