Although still in its infancy, robo-advice has the potential to radically change the finance industry. Independent advice is costly and mainly used by wealthier individuals, but the advent of robo-advice means mortgage advice is becoming open to the masses, which could seriously change the buying habits of large swathes of potential customers.
The most recent entrant to this market is Habito, who recently introduced the world’s first 'digital mortgage adviser' using a sourcing system with access to hundreds of products.
The arrival of this first artificially intelligent (AI) mortgage service offers an important innovation at a time where the market is experiencing a new wave of customers after simple and quick processes.
So customers with on-demand access to mortgage advice – no fees charged – can only be a good thing for the industry. Right?
Well yes. Parts of the mortgage application process are ripe for automation and robo-services could definitely be the answer for many customers. Especially as it seeks to solve the ‘advice gap’ by making processes faster and less complex.
With robo-advice, customers will have the ability to discuss their mortgage requirements from any device, thanks to its super smart AI and an algorithm which combines the key elements of a borrower’s financial lifestyle with real-time mortgage rates to produce an indicative monthly payment.
This means they do not have to worry about the business of arranging a face-to-face appointment – giving customers back something people can never get enough of – time.
However, past the initial 'decision in principle' stage, manual underwriting by lenders is still common and the complexity of many cases means that full end-to-end automation is unlikely for all cases.
Some robo-advisers suggest that by automating the advice they give they do not need to charge fees, only relying on the commission from the lender to fund the service. A possible snag here is the fact not all traditional mortgage brokers charge for their services either – instead, many simply rely on commission from the lender.
One just has to look to London & Country Mortgages, the biggest fee-free mortgage broker in the UK which boasts a multi-million-pound turnover. Given that fee-free automated and traditional services are both available, it will be interesting to see if there are any noticeable differences in the take up of robo-advice by different generations.
Then there are the robo-advice sceptics, who argue the whole process is a fad. But their argument could be shut down by anyone who points to the fact the Financial Conduct Authority (FCA) recently established a robo-advice unit. With a budget of £500,000 for its first year, the unit aims to provide individual feedback for innovative firms seeking authorisation. It is a clear sign that the authorities believe this ‘fad’ will stick around for some time to come.
Does this mean a trip to the job centre for mortgage brokers?
Not yet. The process is still far from fully automated and there is still a lot of human judgement involved. And this is where the opportunity lies for brokers. If they can get in on the act in its infancy, they can ensure their jobs are future proofed. After all, it is the brokers that train the machines at PropTech company Trussle – one of the biggest users and advocates of robo-advisers, showing the need for both body and bot.
What does the future hold?
Quite often, it pays to look to other industries to see how similar technologies have worked or failed. But in the case of AI powered bots, it is still too early to tell. This is because the trend is simply too new, meaning a comparison on whether human or robo-advisers produce a better RoI is not quite measurable – yet.
Another concern is that companies that are providing the robo-advice AI will not be the ones providing the financial product at the end of it. A recent discussion paper published by the European Banking Authority highlighted the problem that if something did go wrong, it would not be immediately clear as to who would be responsible. Would you blame the bank whose product you bought or the AI that told you to buy it?
The UK Financial Services Panel pointed out how regulatory scrutiny and assessment of risk was essential for robo-advice services. The potential for systemic mis-selling and another blow to the finance sector could occur if tools are not developed properly and/or are not monitored rigorously.
No one wants to see a repeat of the endowment mortgage mis-selling scandal. In addition to this, new European data laws to be announced in May this year will mean robo-advice services will have to be very clear with clients about how their information and data is being used.
Will algorithms help improve customer satisfaction?
As much as the robo-adviser needs neither remuneration, reward or lunch breaks – will the service on offer be truly beneficial for the consumer? Have these companies actually asked their customers if this is what they wanted?
It is safe to say millennials are the target market here. But, surely they are already cash-strapped by student loans and rising house prices to be the ones using it just yet.
Although robo-advice does offer customers many benefits such as providing an on-demand service, I do wonder how many buyers would be happy to make the biggest purchasing decision of their lives sitting alone at a laptop in a café, or while making their routine commute into work? This is particularly true when considering the complexity that is part and parcel of getting a mortgage. Just think of the endless phone calls with banking officials, trips to get documents signed and back and forth with solicitors.
The emergence of robo-advice in the mortgage sector will certainly shake up the industry and move it forward in what will ultimately become a more AI-driven world. But will the use of 'bots boost mortgage approvals, guiding buyers from the very start of the journey to the moment they slide their key in the door? Perhaps. But not for a long time.
What is for certain, is that now is the time for lenders to capitalise on what is a very exciting development in the mortgage space. They must see it as an opportunity rather than a threat. Rather than adopting a ‘human vs robot’ mentality, lenders should look at how they can collaborate with and make smart algorithms work for them.
If handled right, the result could be mortgage utopia – robots tackling the ‘heavy lifting’ and ‘process heavy’ part of the mortgage journey, while lenders reap the reward, pocketing a hefty saving along the way.
Mark Lusted is managing director at Dock9, a digital design agency
Key points
Habito has recently introduced the world’s first Digital Mortgage Adviser.
The process is still far from fully automated and there is still a lot of human judgement involved.
The emergence of robo-advice in the mortgage sector will certainly shake up the industry.
