A former founder of a direct digital home loan fintech, Clint Howen (pictured above left), has questioned the viability of the direct home loan channel, as lenders employ controversial tactics to win over the dwindling direct market.
The comments come after Unloan, the direct mortgage arm of Commonwealth Bank (CBA), launched a new referral program offering 0.33% commission to professionals like accountants and lawyers for referring clients who settle mortgages.
Notably, this commission scheme excludes brokers.
The move has sparked criticism from the mortgage industry, with FBAA managing director Peter White (pictured above right) calling out the “grubby” practice of introducer referrals, which was heavily denounced during the Hayne Royal Commission over conflict-of-interest concerns.
But while direct lenders target rate-sensitive consumers through heavy marketing, Howen said “brokers have the antidote” through sound advice, which holds “much greater value” in the long run.
“As brokers, we understand this,” said Howen, director of WealthX.
“It's crucial not to step over dollars to pick up cents, and brokers play a significant role in educating clients that lower interest rates don't always mean a better outcome; it's just one piece of the story.”
What is Unloan’s referral program?
Currently being piloted, Unloan’s referral program is open to accountants, conveyancers, financial planners, lawyers, and real estate agents who have an active ABN and are registered for GST.
Approved professionals receive a unique tracking link to share with clients. If a client uses the link to apply for and successfully settle a mortgage with Unloan, the introducer earns a 0.33% commission on the loan amount.
For example, if a real estate agent refers a client to Unloan and the client’s $1 million mortgage settles, the agent earns $3,300 commission.
On its website, Unloan urged referrers to not provide the customer with any financial advice, as “it’s up to customer to make their own decisions”.
But White said that a referrer having such a financial incentive to promote an individual bank is “not in the best interests of the borrower, but only in the best interests of the referrer”.
“It may be the worst deal for the customer,” he said. “Not only that, but a referrer could have arrangements with several banks and engage in mortgage churn, as with no clawbacks there is an incentive to make even more money.”
“While mortgage brokers do the right thing, act in the best interests of consumers and are subject to unfair clawbacks, referrers can basically do what they want and laugh all the way to the bank, so to speak.”
While that may sound concerning for brokers and borrowers alike, Howen, who is also a broker, said it’s a signal that the mortgage broker best interest duty model is working.
“It’s obvious that they are trying to reduce the cost of acquisition, or they have already exhausted the growth of the current segment of customers,” he said. “This highlights how small the segment really is and is another confirming data point for brokers.”
The problems with the direct market channel
While some might dismiss Howen's comments as a broker’s response to facing competition from direct lenders, his firsthand experience with the "numerous drawbacks" of the direct digital channel gives him a unique perspective on the issue.
In 2018, Howen launched a daring experiment: to determine how willing borrowers were to complete a loan application without broker interaction.
The fintech platform, Hero Broker, hit the market promising that consumers could “be their own broker” through giving them “good, unbiased access” to loan products.
While Hero Broker started strongly generating over $2 billion in loan applications, key insights emerged.
Although you can generate early business through effective public relations and marketing, Howen said the segment for the direct channel is highly price-sensitive.
“To provide appealing products with low rates, strict product policies are necessary and It's worth noting that many negative reviews for competitively priced direct channels often arise from the large number of applicants they reject,” Howen said.
Another drawback, according to Howen, is the increased churn.
“Customers attracted by low rates and only low rates are likely to switch if you don't maintain the cheapest rate in the market,” he said.
“In essence, the process often involves substantial spending on marketing, rejecting a considerable number of potential clients due to policy constraints (resulting in wasted opportunities), and potentially losing settled clients quickly if your rates aren't consistently the most competitive.”
While you can check out Hero Broker’s full insights here, overall, Howen found clients overwhelmingly preferred speaking to a real person before proceeding with a loan.
Howen said this should be seen as a “huge win” for the broker channel.
“The test – if clients, when presented with suitable options and incentives like cashbacks, would proceed with a loan application without a broker’s assistance – resulted in a hard ‘no’.”
Who is the direct channel targeting?
For Aussies, interest rates are almost a part of our DNA; it’s reported on about as much as cricket or the weather.
When it comes to marketing these offers, especially within the online advertising space, Howen said lenders need to lead with a highly attractive rate to gain interest.
“The term is often referred to as ‘rate baiting’,” Howen said.
With a heavy influx of advertising from the direct channel hitting the screens of potential leads across Australia, it begs the question: who are these ads targeting?
Howen said if you were to look up any Barefoot Investor Facebook group, that would give you an idea of the segment.
“It’s the self-driven, savvy homeowner who is highly rate-sensitive and wants to manage the whole process themselves,” he said. “This segment is actually much smaller than many believe it to be, with the mass majority opting for advice over DIY.”
What does Unloan have to say?
For its part, Unloan sees itself as just a digital home loan that can keep prices low by offering a “simple, digital experience” that reaches its customers through “cost-effective channels”, according to Unloan CEO Dan Oertli.
“If partners want to tell people about Unloan by sending them a link to our digital application, we’re happy to pay a referral fee if we enter into a loan agreement,” Oerti said.
In an interview with Australian Broker, Oertli defended the program against the conflict-of-interest concerns that plagued its predecessors.
“All referral partners are vetted,” Oertli said. “We understand the previous issues relating to introducer programs and we have designed ours with them in mind.”
However, he stopped short of dampening the ire of the third-party channel.
Oertli said the commissions paid are “significantly lower” than traditional broker commissions for a reason.
“… This allows us to offer lower interest rates to our customers,” he said. “We remain open to exploring all cost-effective channels to make people aware of Unloan.”
The future of the direct channel: Brokers need not worry
With broker market share growing to a clear majority in the years since the introduction of best interest duty (from around 55% in 2018 to 71.5% in 2023), the piece of the overall pie is already dwindling for the direct channel.
And while banks threw their retention teams and cashback offers at the market during 2022-23, the mortgage wars are over and banks are now scaling back on risk.
“It’s really hard to see a referral system work when their current product knocks back the majority of potential customers,” said Howen. “You really need a large suite of products to support customers to be a trusted referrer, something brokers have a huge advantage in.”
Yet Howen still believes there is space for the direct channel – but only for niche products targeting niche segments.
“Although it looks intimidating seeing Unloan and Athena advertising everywhere, their models aren't proving profitable, and market breakthroughs and positive reviews aren't evident,” Howen said.
“Considering Unloan's $5 billion and Athena's $2.6 billion in settled loans, these figures would likely represent poor outcomes relative to marketing dollars spent.
“In contrast, I see good ground being made from good digital processes coupled with existing broker channels.”
As for the direct digital channel’s target customer, they are left with a choice:
As Unloan states on its referral program website, “relationships are everything. We know customers would like to use a lender recommended by a professional they know and trust.”
What do you think about Unloan’s new referral program? Comment below.
