Real estate financiers at a crossroads: platform vs. digital application route

Traditional real estate financiers are currently in a fateful decision-making situation. They have to decide how they want to meet the growing interest of customers in processing their real estate financing completely digitally. Put simply, the question is: should you join a digital platform (alone) or (additionally or alternatively) set up your own digital application process?

Those who put off the decision are taking a big risk. The following effects need to be considered: Firstly, the popularity of digital (brokerage) platforms continues to grow unabated. However, this not only brings advantages for banks, but also significant disadvantages, as customers become more price-sensitive and are perhaps referred to providers who promise a fast "time-to-credit". In addition, strong concentration effects can be observed on the platform side. The two platforms Interhyp and Hypoport are increasingly pushing the market into a duopoly structure. The threat of a concentration of power among the digital players makes this issue even more explosive. But there are alternatives! IT solutions have been available on the market for a number of years that enable even smaller real estate financiers to tap into the increasingly popular channel of digital real estate financing within an attractive time and cost framework.

How should banks/financial service providers decide in this situation? Below you will find a compact analysis and decision-making aid.

DIGITAL REAL ESTATE FINANCING ON THE WAY TO BECOMING A DUOPOLY - HOW IT GOT THIS FAR

Digital real estate financing focuses on Interhyp and Hypoport

It has long been apparent that it is becoming increasingly popular to process real estate financing via platforms. But did you know that this popularity is concentrated on two platforms in particular? One in three digital mortgages is now arranged via one of the two platforms Hypoport and Interhyp.

As this concentration effect plays an important role in deciding which route to take, we will explain how this has come about.

The banking world waited a long time to digitize

It's no secret that traditional banks and financial service providers have promoted the digitalization of their customers (right up to "Industry 4.0"), but have generally been rather cautious with their own activities and now need to "gain ground" - especially before the big tech giants ("GAFA") come up with the idea of redefining financial services, implementing what Bill Gates postulated back in 1994: "Banking is necessary - banks are not."

Almost a decade ago, as the wave of digitalization grew and accelerated, many large consulting firms produced industry checks. The banking and insurance sector quickly became a popular target of every study. Many digitalization opportunities, e.g. due to changes in customer behaviour on the one hand and little movement on the part of traditional players on the other, created an immense need to catch up.

But it wasn't that simple. There was a lot of clearing out to be done, and there were tangible hurdles to overcome:

• Regulations
• mindset
• Encrusted structures
• Outdated IT systems
• Short-sightedness/ignorance at management level, in line with Bill Gates' second thesis from 1994: "The Internet is just hype."

Complexity of processes - in addition to regulation - is a proven barrier to market entry in all sectors, especially for companies that are "outside the industry". However, this also means that players in their traditional market tend to be lulled into a false sense of security for too long. In the digital age in particular, prolonged hesitation or ignorance is punished with a rude awakening. This has also happened to traditional banks in the previously lucrative business area of real estate financing. While other business areas such as payments and account management have already been conquered by digital platforms, this did not seem to be the case with real estate financing for a long time. Relying on the complexity of real estate financing processes on the one hand and the emotionality and dependence of customers on personal advice on the other, there was little concern that this business area would ever be dominated by digital platforms.

Complexity of real estate financing caused a reform backlog in the development of proprietary solutions

From a digitalization perspective, real estate financing is a complex business area compared to other financial services (such as an instalment loan). Potential buyers have the same expectations of the "shopping experience" with digital real estate financing as they are already used to from the digital purchase of consumer goods.

The motto is KISS: Keep it simple and smart. This implies the following requirements

• convenient access to all financing options via all devices;
• experimental, even playful identification of the right offer;
• immediate help in the digital purchasing process if required;
• no spatial or media breaks, e.g. when submitting documents;
• no waiting times, e.g. for decisions or approvals.

The list of requirements from prospective buyers poses major challenges for providers of digital real estate financing. Particularly in the case of real estate financing, the individual points can involve complex and extensive processes.

They represent hurdles for digitalization that need to be overcome. A high conversion rate can only be achieved by offering an outstanding customer experience throughout the entire process. For a long time, however, most traditional providers were far from being able to master the above-mentioned steps with their IT.

Unnoticed, exactly what everyone (the studies mentioned above) had warned about was happening: seemingly far away from the "homey" business of real estate financing, companies were rolling up the business from the other side. Hypoport was founded in 1999, the same year that Interhyp was launched. The platforms started with the customer and initially solved the simplest steps: Informing and comparing. But gradually they also focused on the "closing" step (see our article "Real estate financing defies the ongoing coronavirus crisis - driven by two giants"). This has given a major boost to the popularity of platforms on the customer side. The anonymity of digital real estate financing meets the customer's desire to initially match property and financing independently - instead of revealing themselves to an advisor (who may not have sufficient financing skills).

For many providers, platforms were initially the only way to do business digitally

The rapid triumph of platforms accelerated a rethink. "Overnight", so to speak, many real estate financiers realized that digital real estate financing could not be ignored (after all). Many wanted to jump on the bandwagon of digital real estate financing. If they wanted to "join in", they realized that the platforms had a huge, for most of them unassailable lead when it came to acquiring digital customers. The expectations that end customers had of digital real estate financing were so high that they could soon usually only be met by the platforms. For many financial service providers, the only option if they wanted to participate was to join a platform.

Smaller real estate financiers in particular effectively had no other choice. The necessary investments in IT and consulting to meet the high expectations of end customers for digital real estate financing were long out of reach for them. However, this has changed. There are now appropriate IT solutions on the market. Financial service providers are thus able to efficiently and modularly set up their own digital application routes. This is illustrated in the following chapter using afb's digital real estate financing.

2. DIGITAL REAL ESTATE FINANCING FROM AFB

Digital real estate financing with its own digital application route

With afb's solution, real estate financiers can offer a fully digitized process from offer calculation, application entry and submission by the customer and the application decision or processing on the part of the financial service provider to contract activation and processing, including digital identification and signature.

Five pillars of end-to-end digitalization

The following five components are essential for successful end-to-end digitalization:

(1) User-friendly online loan calculator, with which all financing options can be intuitively run through without having to have any prior financial knowledge - clarification of equity to be contributed and access to possible funding options included.

(2) Personal support in the digital purchasing process, in which the customer can immediately access video calls, chat bots or co-browsing if required. The transition to the physical world ("cross channel") must also always be possible, e.g. in the form of an appointment with the bank's advisor - who may already be familiar.

(3) Upload portal as an efficiency lever through which the customer can conveniently submit the documents required for the contract and through which the loan officer is supported in "thorough" application processing - also with regard to missing documents and reminders ("alerts") automatically sent to the customer or the loan officer.

(4) Legally valid electronic signature, which saves a trip to the branch or makes it possible to conclude the contract only after the family council has met - from the comfort of your sofa at home.

(5) Transparent document portal, the bank's digital credit file, which serves as a mailbox for customers to communicate with their bank and creates transparency about their documents and contracts as a digital filing system in the sense of an application tool and contract folder.

Offering the service of platforms themselves with new additional services

A major advantage of platforms is that they offer the end user additional services that go far beyond the core service. These services are often an important reason why interested parties visit portals - currently, for example, the property valuation, determined from sales of comparable properties in the vicinity, and in future perhaps the digital networking of all parties involved in the process.

Financial service providers can also differentiate themselves with individual additional options such as installment breaks, insurance services or simply speed and availability.

In the low-interest phase, customers often even accept a slightly more expensive construction loan if the provider approves it immediately, as this enables them to give a property seller a quick commitment and thus acquire their dream property.

This is possible with afb for all application and product variants:

• Buy
• Build
• Modernize
• follow-up financing
• State subsidies

afb-CMS as the backbone of the digital application process for real estate financing

Real estate financing is one of many module groups in the afb-CMS. The afb-CMS is completely web-based and features the latest service-oriented technology. Among its many advantages, the omni- and cross-channel approach should be emphasized: Customer, intermediary, sales staff, bank advisor and clerk work with a common solution that offers the different user groups maximum user experience and allows switching between channels when processing the financing. If necessary, it can also be used in different currencies, languages and with multi-client capability, within a group or as a white label solution.

3. STRATEGIC ACTION ALTERNATIVES

Overview

Which path should a financial services provider take today if it wants to participate in the increasing demand for digital real estate financing? In view of the fact that powerful IT "construction kits" (including the corresponding consulting modules) exist on the market, the following key directions can be identified for financial service providers.

In principle, there are two paths (A/B), each with two variants: If one chooses the path of joining a platform (A), then there is still the option of whether it should be a general comparison platform (1) or a platform specializing in real estate (2).

If you go down path (B), you build up your own digital application route (3) and possibly develop this further into new business models and become a platform yourself (4).

For the sake of completeness, it should be mentioned that banks can also obtain IT solutions from the platforms in order to set up their own digital application channels. In this case, the platforms act as IT service providers and the issues should be treated in the same way as options (3) and (4) - and not discussed here as a separate option.

General consideration

If we disregard the two respective sub-variants of the two strategic directions, the trade-offs can be outlined as follows: If you choose path 1 (or 2) and join a platform as a financial services provider (A), you gain quick access to an attractive market as a key advantage: you reach customers to whom you would otherwise not have had access. However, this comes at a price: providers are reduced to the level of the interest rate and the willingness to take risks when deciding on a loan - and now also to the "speed of approval". As a result, you also lose customers who would "normally" have opted for your "own" bank.

If you lose direct customer access, as this is controlled by portals, brokers and other partners or influenced by more or less good services, you also lose further advisory and cross-selling potential: Former advisory banks mutate into interchangeable processing banks - with corresponding consequences for earnings and employees.

Conversely, with options 3 and 4, a financial services provider retains the reins as a provider and benefits from customer access (possibly built up over decades). However, it must accept the time and financial expense of implementing the project itself (B).

The following is a detailed comparison of the two major approaches, whereby alternatives 1 and 2 on the one hand and 3 and 4 on the other are summarized in a simplified form.

4. SYSTEMATIC COMPARISON OF THE TWO STRATEGIC ALTERNATIVES

Fig. 3: Systematic comparison of the two strategic directions, source: afb.

Costs
The costs of participating in a platform are negligible compared to in-house IT projects. As a rule, there are transaction-based or no fees for participating in a platform; the main costs only arise if the project is successful. The platform then receives a brokerage fee, but this is offset by the value of the brokered transaction. There are certainly exceptions here, e.g. when it comes to the cost of special features and customizations (if they can be implemented). On the other hand, setting up your own digital application process costs money. Even if many modules are already available, they have to be adapted to the customer, etc. In terms of costs, the advantages are therefore clearly on the side of the platform.

Time
Anyone who has ever had a website created knows that even such simple "IT projects" can quickly take several months. It is true that a digital application process like afb's can be implemented in just a few months. But here too, connecting to the platform has considerable advantages: Access to the attractive market is immediate once "connected" to the platform.

Interest rate sensitivity
The trade-off here is that the platform wants to serve the customer's wishes as well as possible, even at the expense of the individual members if necessary. You are listed on the platform in a comparably pre-sorted manner according to interest rates. In addition to the economic disadvantages of ruinous competition, the entire brand experience of a financial service provider is reduced to a number on platforms. Brand trust that has been built up over decades may be lost here. This is a major advantage that speaks in favor of building your own digital application route.

Brand
The reduction of the perception of financial service providers to the interest rate shows the connection between the decision and the brand phenomenon at a sensitive point. But the effect on the brand is far more complex. For example, it is important to be able to offer innovative, digital options, particularly with regard to young target groups, as this makes an important contribution to brand building.

Cross-selling
If a financial services provider forgoes its own digital application route and joins platforms, the financial services provider deprives itself of important cross-selling opportunities, as direct customer access is usually lost. The platform has control over this. This point becomes very clear when it comes to follow-up financing. Studies show that even customers who are loyal to their "house bank" will decide on financing based on price and therefore often take out a loan with a financial service provider other than their own bank (YouGov study: "Customer Journey - Real Estate Financing", 2015).

Customer access
In times of total customer centricity, customer access is a key aspect to consider. By connecting to platforms, customer access is handed over to third parties at low cost. This is a very risky point that can hardly be reversed.

Strategic dependency
Dependence on platforms is one of the biggest negative effects. This applies to a greater extent when concentration effects take place. In this situation, the stronger player will successively exploit its dominant position. This tendency can be observed with numerous Amazon retailers, for example. If you don't keep up, you will quickly be left with nothing.

Visibility
This depends on how big the financial services provider is and how big the digital community is. Building up your own visibility is laborious and expensive. The platform could have advantages here.

It should also be added that the two approaches were largely considered in isolation for the sake of simplification. In practice, however, it is conceivable to follow several paths at the same time. It is also possible to merge both paths in individual process steps. The general and special comparison portals offer interested parties every opportunity to obtain complete information about and compare Real Estate Finance.

5 CONCLUSION

To put it bluntly, financial service providers are faced with the following situation: should they give up decades of customer trust cheaply and depend on the ranking of the respective comparison portals or can they themselves counter the duopolized status quo?

The disadvantages that financial service providers face when connecting to the platforms are considerable. The fact that it is possible to build up digital application routes on a modular and therefore gradual basis means that there is a real alternative for a wide range of financial service providers. Financial service providers who want to pursue their own path of digital customer acquisition therefore have "good cards": studies show (see our other article "Real estate financing despite the ongoing corona crisis - driven by two giants") that the website of the house bank is still perceived by users as a more important source of information than that of a comparison portal. This points to the trust that customers (still) place in banks. This can be "saved for the future" by being able to efficiently set up your own digital application channels.