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Innovation: Traditional property lenders need to adapt, and fast

10 October 2018


Mario Berti is Chief Executive of Octopus Property, which over the last few years has built a reputation as one of the UK’s most highly-regarded specialist property lenders. Earlier this year, Octopus Property reached a major milestone, bypassing £3 billion of lending. A version of this article first appeared in Financial Adviser.

I wanted to talk about customer service and innovation, and how much the two go hand-in-hand. I’m a private investor with a portfolio of buy-to-let homes. But when I approached a high street lender – who I already bank with – for a new loan to buy another property, the service was so bad it was almost funny. Except it wasn’t funny.

Because if a buy-to-let investor like me, with a good track record, gets a terrible service then I have no doubt that this same frustrating experience is being replicated across the country for countless other private investors, professional property investors and property companies that make up the bedrock of the UK market.

A comedy of banking errors

First, my bank was slow to respond to me, then they lost my file half-way through the process, which meant I had to start the application all over again. By the time my buy-to-let loan was approved the whole saga had taken five months, when it should have been completed through an automated process in just a few days. 

To make matters worse, at no point was I able to talk directly to a decision-maker. I was passed around in a way which made it quite clear I was just a number, not a person.  

It seems extraordinary that in a digital, modern era this was my experience. However, if we go back a few years, it’s possible to find out how this state of affairs has come about.

The Global Financial Crisis – ten years on

This September marked a decade since Lehman Brothers collapsed, triggering a chain reaction that led to the Royal Bank of Scotland largely being taken into state hands, HBOS being bought by Lloyds and a clutch of Irish banks going bust.

Not surprisingly, the lending landscape has changed dramatically since those days. By the time Cass Business School published its influential survey on the 2017 UK property lending scene in May, UK banks and building societies accounted for just 45% of total property loans.

The banks who continue to lend now have a whole swathe of problems to contend with:

  • Branch networks no longer serve a useful function. When did you last go into your high street branch and do you think these banks would retain this presence if they hadn’t inherited it? Running a large, complex bank is difficult enough without being saddled by this legacy property.
  • Banks also have to wrestle with legacy infrastructure issues, which are complex and time-consuming to sort out. 
  • UK banks used to have tremendously strong brands, and were renowned for their safe, solid image. All that changed in the aftermath of the Global Financial Crisis, and following the arrival of tech-driven banking start-ups and specialist lenders who put the customer experience at the heart of everything they do. The big banks have been complacent, and the public is unforgiving.
  • Ambitious young people increasingly want to work for start-ups and disruptive companies that are challenging the status quo rather than any business they deem to be 20th century. 

My point is that traditional lenders who have underpinned the property market for decades are going through a bumpy period of adjustment, where the business models are being challenged and they have been forced to adapt at a time when their customer base has grown more cynical and dissatisfied.

Let’s hear it for the disruptors

I am not saying all banks are the same. I recently had a great experience opening an account with digital bank Monzo, which in 2016 set the record for the quickest crowd-funding campaign in history when they raised £1 million in 96 seconds. It didn’t take much longer than that to set up my account! 

Meanwhile, people in some of the world’s least developed countries are able to transfer money between their digital banking accounts without ever setting foot in a branch. It’s only a matter of time before that kind of efficiency becomes the norm in the developed world. 

The digitisation of banking, and the emergence of alternative, non-bank lenders – like Octopus Property – has resulted in an industry with some participants unencumbered by the baggage of property, legacy IT systems and the heavy regulation that banks are quite rightly forced to operate under. While banks have traditionally lent the money raised by customer deposits, we raise money directly from retail and institutional investors. We see this as the future of property lending.

What does the future of lending look like?

Some people question if businesses like ours will ever be large enough to service the biggest customers – will a £100 million loan ever be made by alternative lenders? My answer is, yes, absolutely. It’s only a matter of time and we’re not far away from that now.

We will find larger and larger pools of non-bank capital being created. Property investors and developers fundamentally want two things – they want to know their lender will give them the money they need, quickly, and they want the overall experience to be an enjoyable one. 

On the tenth anniversary of a Global Financial Crisis created by the spread of sub-prime mortgages, and with many of the world’s biggest banks still licking their wounds, prepare yourself for an even bigger revolution in the property lending world over the next decade. The 21st Century belongs to the disruptors.