Real estate financing defies the ongoing corona crisis - driven by two giants

In spring/summer 2020, when coronavirus also forced Germany into lockdown, various publications addressed the question of which sectors would be particularly affected by the restrictions (you can find out more about this in our white paper "Impact of coronavirus on financial service providers" ). An interesting observation was made: the real estate sector, and therefore also real estate financing, was relatively unaffected by the negative effects. Industry experts attributed this robustness to special effects. And it was assumed that a slump would be unavoidable, albeit with a delay. The real estate sector was classified as a "second-tier loser"[1].

But now, in early fall 2020, there are still no signs of any significant downturn. In addition to the unbroken demand for attractive living space, this could be due to the fact that real estate financing is already taking place far more digitally than many assume. As a result, the contact restrictions have not had an immediate negative impact on business practices, as is the case, for example, when "physical presence" is a mandatory requirement in order to operate a business. If we look at the question of where "digital real estate financing" is distributed or concentrated, we come across an observation that is at least as noteworthy: the German market is dominated by a duopoly of two giants. We are talking about the two internet platforms Interhyp and Hypoport.

What impact does the increasing popularity of platforms have on the real estate financing market in general and what are the consequences of this duopolization? How should banks as providers of real estate financing deal with these trends? Find out in this article.

1. THE IMPORTANCE OF REAL ESTATE FINANCING PLATFORMS

The triumph of (comparison) platforms in general

The breathtaking speed at which the Internet, e-commerce and digital business in general have developed over the last two decades has quickly made portals indispensable from the end user's perspective. They made the exploding number of offers on the Internet easy to find, transparent and comparable for the end user.

The contribution of platforms becomes clear when the needs of the web customer are reduced to the three fundamental pillars of the customer journey of a purchase process:
"Inform", "Compare" and "Conclude".

Fig. 1: The customer's wish - simply formulated in three steps, source: afb

"Inform": The platforms have revolutionized the information phase. While individual providers limited themselves to describing their products, the platforms quickly recognized that the user is interested in additional content and additional functionalities (e.g. various calculation tools). Furthermore, from the customer's point of view, the individual financial service provider offers less added value in the information phase than a platform because an individual company subjectively promotes its own products in the best possible packaging. "Compare": The advantage of the platform becomes even clearer in the comparison phase. This is the original purpose of platforms. Through clever systematization, they manage to transparently compare the services of different providers in such a way that the user can see the differences straight away. A single provider, on the other hand, offers no added value for the end user at this stage. As a rule, they do not even offer a comparison with other providers. On the contrary, individual providers try to avoid a transparent comparison at all costs. Who wants to voluntarily promote the competition? As "neutral third parties", the platforms were able to satisfy this desire better than the individual financial service providers. "Closing": In addition, platforms were quicker in realizing direct business transactions online, as many financial service providers were simply overwhelmed for technical reasons and due to an already extensive project portfolio. They were already struggling enough with the digitalization of their conventional processes and often had great difficulty integrating a new, completely digital sales channel.

As a result, it was quickly 3:0 in favor of the platforms. Against this backdrop, it is not surprising that users quickly turned to the platforms and often - in line with the platform recommendation - took up offers from other than their "house banks", e.g. the cheapest or presumably fastest.

The triumph of platforms in real estate financing is causing a change of heart

This works particularly well when the end-to-end processes can be implemented easily and without media discontinuity: In addition to obtaining information and making comparisons, users also want to conclude the transaction - and increasingly digitally.

Initially, this was only the case for simple transactions. The well-known example of "books" is exemplary as a pioneer for the purchase and delivery of simple goods on the Internet. For more complex processes and goods with a high purchase value that need to be financed, for example, the first two steps in particular worked, but only a few were able to complete the transaction. Nevertheless, platforms overcame these hurdles before many financial service providers were able to do so themselves. As a result, digitalization was also able to make inroads into the area of real estate financing and greatly challenge the status quo in the real estate business.

In the past, especially in the pre-internet era, it was common for customers to obtain information about mortgage terms in person from their "house bank" advisor. Today, users prefer to find out independently and anonymously which property suits them best and how they can best finance it. It is precisely this customer wish that is satisfied by the comparison platforms (Fig. 1).

It is therefore not particularly surprising that more and more potential customers are turning to such platforms when looking for their own four walls. This is also confirmed by a statement published by Interhyp in March 2020: Real estate financing continues to be in demand despite the corona crisis, after potential customers have informed themselves in advance via digital services and on the Internet[2] - and this despite the fact that real estate financing is the prime example of the fact that the process is much more complex than with an installment loan.

One of Germany's largest price comparison portals, Check24, also reported similar results in April of this year. According to the company, there has been a massive increase in the use of digital mortgage advice from home via screen sharing - an increase of 103% compared to the same week last year[3].

Fig. 2: Percentage increase in digital advice in the area of Construction Financing, source: Check24

2. ROUGH CLASSIFICATION OF REAL ESTATE FINANCING PLATFORMS

Generalists

Generalists include so-called general portals that compare products from a large number of different product groups, including Check24, Verivox, Vergleich.de etc. They often started out simply comparing simple goods, such as washing machines or computer hardware. Building on their technological expertise and knowledge of digital business models, they have continued to develop their services and now also offer a portal service in complex areas such as real estate financing.

(Real estate) specialists

Others, on the other hand, entered the race with a focus on the topic of "real estate financing". These "specialists" have immediately focused on the elaborate digital mapping of the complex field of real estate acquisition. These include Dr. Klein, Baufi24, ImmoScout24, ImmoWelt and others. The focus was initially on the property before financing was added.

Duopoly in the area of digital platforms for real estate financing

It is striking that two particularly strong players have developed in the partner and broker business and have almost unnoticed duopolized the market with their rapid growth rates: Munich-based Interhyp with the eHyp platform of its subsidiary ProHyp - and Hypoport from Berlin, with the Europace platform and other offerings for the savings banks and cooperative financial groups, among others. Both focus on financing, e.g. with the claim: "We connect wishes with banks."[4]

3. RISE OF TWO GIANTS: INTERHYP AND HYPOPORT

Every third real estate mortgage is provided by Interhyp or Hypoport

Fig. 4 shows what the current situation looks like in figures. If the sum of the duo's new business market shares in the first quarter of this year is calculated (around 10 percent for the eHyp platform and 24.7 percent for the Europace platform), this results in around 35 percent coverage of the overall market. If the pure platform business is viewed in isolation, i.e. without the "direct business" of banks and financial service providers, the share of Interhyp and Hypoport is significantly higher[5].

Fig. 3: Market share of (B2B) platforms in new real estate financing business in percent, source: finanz-szene[6]

This shows that more than a third of all mortgages concluded in Germany were recently brokered via either Interhyp or Hypoport. We attempt to provide a possible explanation for this phenomenon by briefly presenting them below:

Interhyp

Interhyp AG was founded in Munich in 1999 and is today the largest broker of residential Construction Financing in Germany. The company's core business consists of comparing and brokering mortgage offers for the construction of new or the purchase of existing properties as well as follow-up mortgages, ranging from traditional annuity loans to subsidized residential Riester loans.[7] Interhyp's business model focuses on offering system-supported comparisons of terms and conditions on the market as well as advice and the selection of suitable mortgages.[8] Interhyp does not grant loans itself.

Interhyp does not grant loans itself, but brokers offers from banks, savings banks, building societies and insurance companies. With the brands Interhyp, which is aimed directly at the end customer, and Prohyp, which is aimed at individual brokers and institutional partners, the Interhyp Group brokered mortgages with a total volume of EUR 24.5 billion in the 2019 financial year.[9]

In 2008, Interhyp was acquired by the Dutch banking and insurance group ING Direct. Since then, Interhyp has gradually expanded the number of its lenders to over 400 today.[10] Under the leadership of ING Direct, the local presence continues to grow and today has around 1,600 employees at over 110 locations nationwide.

Hypoport

Hypoport SE is a network of technology companies for the credit, real estate and insurance industries. The company is divided into four segments: Private Clients, Credit Platform, Real Estate Platform and Insurance Platform.

The central marketplace of the credit platform is Europace. In 2007, the real estate financing platform for Volksbanken and Raiffeisenbanken Genopace was also founded, which enables banks to broker their own product range as well as third-party products via a central marketplace.[11] Shortly afterwards, in 2009, another comparison platform was founded (FINMAS), this time for the savings banks and in cooperation with the East German Savings Banks Association (OSV). FINMAS now has 277 contractual partners and Genopace has 345[12].

4. CONSEQUENCES FOR THE REAL ESTATE FINANCING MARKET

(1) Overview

For the following analysis, we will look at the aspects of digitalization itself and the development of the duopoly from the customer perspective and the perspective of banks/financial service providers.

Fig. 4: Impact of the proliferation of platforms and concentration effects from the customer and provider perspective, source: afb

(2) Customer perspective: Even more power for König Kunde, which is gladly accepted

(a) Increase in the importance of platforms per se

The effects on customers can be summarized in a formula that is as well-known as it is highly topical: "The customer is king." Kings are happy to have more power. Applied to real estate financing customers, this means that the greater the variety of offers and sales channels, the better. King customers are happy to integrate new opportunities into their (digital) customer journey. The following applies: If a potential customer takes too long at one step of the digital customer journey or does not receive the expected customer experience there, they will look for a better customer experience elsewhere (e.g. on another website). After all, on the web, the better is always just a click away from the good.

The popularity of platforms and other digital channels in the search for optimal real estate financing is demonstrated by the results of a representative survey conducted in Germany in April of this year by search engine experience service provider Yext:[13] According to the results, 26 percent of German consumers search online for banks, bank advisors or bank branches every few days. When searching, users move across the entire online ecosystem: they use search engines (68 percent), the websites of house banks (48 percent) and comparison portals (45 percent).

Fig. 5: Results of the study on online search behavior among banks and insurance companies, source: YEXT

(b) Duopolization

The tendency for platforms to become increasingly important on the path to real estate is therefore a very positive effect for the end customer. But what is the additional effect of the observation that the balance of power is becoming increasingly concentrated on two platforms? This duopolization or such concentration effects do not bother the customer for the time being. On the one hand, this fact remains unnoticed by customers for a long time due to the complex market structures. On the other hand, customers radically focus on the added value that the platform offers them. What happens behind the scenes is of secondary importance for the time being. Supremacy - as can be seen with Google, Amazon, Facebook and the like - is accepted as long as the customer is offered added value. The fact that these dominant positions also generate negative effects (e.g. through working conditions at Amazon or data scandals at Facebook) does not bother customers as long as the utility value is high.

It therefore remains the case that platforms are something positive for the customer and duopolization does not change this.

(3) Perspective of financial service providers: Existing question of fate intensifies into an acute danger

(a) Increasing importance of the platforms themselves

To begin with, the increase in importance of platforms is not as clearly positive for financial service providers as it is for end customers. The possibility of joining a platform offers financial service providers many advantages. These are obvious and are often of a short-term nature (e.g. speed, low investment). However, they are accompanied by many disadvantages. These, on the other hand, are often of a long-term, strategic nature and only become apparent at second glance.

For this reason, financial service providers are currently faced with an important question: should they join a platform or should they invest in their own digital application channels in order to digitally attract customers for real estate financing?

The Regensburg-based institute ibi research examined the financial service provider perspective in its study "Comparison portals in financial services - status quo, business models and future implications for competition."[14] According to its findings, many of the financial service providers surveyed recognize a certain dichotomy when it comes to comparison portals. On the one hand, they are well aware of the importance of online platforms as a sales channel. Other advantages include the wide (digital) reach and the strengthening of their own omni-channel presence or market awareness. According to the study results, the disadvantages are seen in the following four points:

• Risk of loss of customer contact,
• Reduced opportunities to acquire new customers,
• competition between own products and the products of comparison portals and
• requirements for the design and pricing of their own products on the comparison portal.

In theory, financial service providers have always had this choice. But in practice, this was not the case for many financial service providers (especially the smaller ones) for a long time. Digitalization involves many steps, some of which are complex. Individual solutions were/are expensive and risky. Smaller financial service providers in particular could not afford this or take the associated risks. These institutions really only had one alternative: if they wanted to acquire customers digitally, they had to join a platform.

But that has changed. All the IT modules on the market are now available for setting up high-end digital application channels. The afb business case "Digital real estate financing" serves as an example here. This allows the many steps of real estate financing to be offered at the level desired by the customer (convenient, without media discontinuity, fast).

The possibility of choice now actually presents a large number of financial service providers with the question of fate: platform or own digital application route?

For the sake of completeness, it should be noted at this point that platform providers also offer their members digital application routes, which they then operate in their name ("white labeling"). However, this variant does not change the essence of the question. The platform provider then takes on the role of an IT service provider.

(b) Duopolization

What becomes of this fateful question if we add the additional aspect that a duopolization is underway on the platform side?

The concentration of power always brings with it the risk of market manipulation and that the stronger players can enforce the rules against a wide range of weaker players. This mechanism also applies to real estate financing. From the perspective of financial service providers, the concentration of power on two platforms means that the negative consequences of joining a platform are amplified. The risks of being reduced to a mere settlement bank and placing all customer trust in the hands of a platform acting as a gatekeeper become even more significant. If the platform not only has control over the touchpoints that are existentially important for the financial service provider, but also has a great deal of power at each one, the risk of conditions being dictated can increase dramatically.

In contrast to the customer side, duopolization does have an effect on financial service providers. It reinforces the need to take their fate into their own hands. Conversely, it can be said that anyone who fails to act now or sets the wrong course is putting everything at risk.

Which path is the right one for financial service providers needs to be analyzed individually. You will soon find an analysis here on Finance Business Next.

(4) Summary

The effects of the increasing importance of platforms in the first step and the effects of the duopolization trend in the second step were examined from the perspective of end customers and financial service providers respectively. To summarize, it can be said that

From the customer's perspective, the triumphant advance of platforms is an expansion of their options, which they are happy to accept. The trend towards duopolization has no impact on customers for the time being; they usually don't even notice it.

From the perspective of financial service providers, the advance of the platforms means that financial service providers have to think carefully about whether to join a platform or invest in their own digital application channels. The effect of duopolization is intensifying. Anyone who is inactive will certainly be out.

5 CONCLUSION

The two trends in digital real estate financing (increasing importance of platforms and duopolization) are creating exciting effects, especially from the perspective of financial service providers. To put it bluntly, they are faced with the following situation: should they give up decades of customer trust on the cheap and depend on the ranking of the respective comparison portals or can they counter the duopolized status quo themselves?

But there is also good news: financial service providers who want to pursue their own path of digital customer acquisition now not only have the opportunity. They also still have good cards in their hand: if you consider the results from Fig. 5, it becomes clear 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 illustrates 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.