The intelligent revolution

Intelligent Finance’s MD Mark Parker tells FST how it is using technology to offer a better customer experience and capture more of the growing mortgage ‘offset’ market.

The UK mortgage market is in the middle of a quiet revolution – by 2009 it is predicted that nearly a third of the market will be made up of ‘offset’ mortgages. At the forefront of this change is Intelligent Finance, or IF, the direct banking division of HBOS. IF offers a direct banking service through the internet and by phone, and has developed the concept of linked ‘jars’ for customers money. Different product balances are held in discrete accounts, but the balances are linked to produce favourable interest payments. Launched fully in 2000, IF is the market leader in the offset marketplace, and we had the pleasure of speaking with Mark Parker, its MD since early last year.

For those not familiar with the concept of an offset mortgage, it’s a fairly simple concept. If a customer has a debit balance of £100,000 on their mortgage, but a credit balance of say £20,000 in their deposit accounts, the credit balance is ‘offset’ against the debit, and interest is charged on just £80,000 of the outstanding loan. For the customer this reduces debit interest payments and provides a tax efficient way of holding savings.

For the lender the value proposition is two-fold. The innovative product is a selling point in and of itself, and by definition helps the bank cross-sell a diversified range of products – helping drive the long-term lifetime value of the acquisition. But more so, because of the perceived advantages of offsetting, lenders can add a small margin to the interest rates on these products. Although these may just be a fraction of a basis point, it allows the ‘offset’ to pay for itself in many cases.

New technology
Executed correctly offsetting is a compelling offer for both the customer and the bank, and is a great example of how new technology has really enabled innovative new products to gain traction in the markeplace. We start by asking Parker about the technological challenges in getting IF off the ground. Was brand new technology necessary, or was it a case of refining existing systems?

“It was very much a mixture of both,” Parker says. He explains how IF very much used the four banking systems that were in place at the then Halifax, as this was a very strong banking proposition that had been proved over decades. However, when it came to the unique aspects of the offsetting, and the creation of ‘jars’ to house the current account, the savings and the mortgage product, new technology was necessary. “We created an offset algorithm and there are some unique elements of our platform, so it is actually a separate entity that is layered across the four core platforms.” The result, Parker says is that the system now “does stand alone as a banking system in its own right.”

However, because of the nature of the mortgage market in the UK, only around 20 percent of IF’s sales come through the direct web- or phone-based channels. The rest comes through the professional mortgage advisor market. The result is that many of the banks core elements are bespoke B2B banking integration tools. These allow IF to place applications “directly to the search engines and brokers”. More so it gives the bank the ability to track those cases through its systems. “One of the core elements of our strategy is reducing the time to market from when the broker or the customer makes a request for a mortgage,” says Parker, and by integrating its B2B systems into its core it gives it the “ability to make that commitment to the customer”.

So, were these systems in place from the very beginning in 2000, or is this a more recent development, we ask? “The sophistication has developed year on year,” Parker admits. “I think it’s fair to say that when we first launched the focus was very much on the outward looking internet bank for the customer, rather than the B2B tool set – which was fairly basic.” The past six years has seen IF upgrade these interfaces significantly year on year, and this is part of a trend within the UK marketplace that IF is taking a leading role in. “We’re working across the HBOS five mortgage brands to lead the adoption of standards across the whole mortgage marketplace so that we can have a standard interface and standard protocols.”

And what’s prompted this shift in focus towards the intermediary market? Has this been a more successful route to market than the direct channel for example? For Parker there have been two driving forces behind this. First, the UK consumer marketplace is looking more and more to financial advisors for help and support when taking out a mortgage. “Obviously it’s one of the biggest financial commitments a customer makes, so it’s really important that they have the proper advice,” he says. The second driving factor is that IF is using the automation of its B2B toolset to differentiate its overall customer proposition. “The speed with which we’re able to process product applications is important, and we very much see technology as an innovator and a USP for us, so its important we get it right.”

Market growth
Using technology to innovate shiny new products is all well and good, but the proof of the concept is in how the product fares in the marketplace. How, we wonder, is the business doing – have consumers taken up these products or not? Parker is bullish on the offset market. “The offset market now accounts for around 10 percent of the UK residential mortgage market, and according to analysts Data Monitor that’s set to grow to 30 percent by 2009 – we think that’s realistic, and we’re very much using that as a basis for our planning,” he says. And what of IF’s position in that offset market? “IF is very clearly number one in that marketplace, accounting for approximately 18 percent of that market place, according to recent figures from the Council of Mortgage Lenders.”

So, if IF can retain this market share it is on track to account for around 5 percent of the total market by 2009. Not bad for a bank that only started business in 2000. Are customers actually taking full advantage of the products though, or are they just choosing IF mortgages because of their competitive rates? “A significant proportion of our customers who take offset mortgages, use the full offset facility,” says Parker. He does concede that many of these offset against their deposit savings accounts, rather than switching their full checking facility as well. “There is an apathy in the marketplace of moving current accounts – I have a team that do nothing but contact customers and talk to them about the benefits of offsetting. We’re seeing 50 percent plus in terms of performance of that team in terms of customers that are moving other savings or other current accounts and realizing the benefit of offsetting.” Although this, he says, is still a gradual process.

Security
An issue that can hold back direct banks that operate primarily over the internet is that of security – there is still perhaps a lack of consumer confidence and fear of ID fraud, especially given cases like the Nordea phising problem that came to light last year. How much does Parker think security worries impact his business? “In terms of security and banking platforms, the days of the platforms not being secure are gone,” he says. “The biggest risk now is to the customer themselves, in terms of phishing attacks and so on.” As part of the HBOS group this is an issue that IF is active in trying to combat. “We try to educate our customers at every opportunity to be aware of the scams that go on,” Parker explains, “and at the end of the day all we can do is educate our customers there.”

In terms of its own security Parker explains there are rigorous defenses in place. “Very seldom do we find a threat something that hasn’t been trapped by our own firewall or security platforms.” Like many bank’s IF and HBOS are confident enough to give an online guarantee that it will cover any customer losses due to fraud.

That said, Parker isn’t complacent about the technological challenges behind incurring networks are secure. “I would never rest on my laurels when it comes to security. I think generally across any banking and banking platforms, security is going to be number one priority for now and forever more.” As hackers become far more savvy and sophisticated Parker explains that the bank is always running to stand still in terms of protecting customer data. “We can never do enough to improve our platforms – we’re constantly doing system software upgrades, and we spend millions a year maintaining and upgrading our security platforms.”

Future initiatives
Away from this constant investment in security upgrades, what else does Parker have planned in 2007 in terms of new technology? One big area the bank has been working on is automating the document- and work-flow across its operations. “We now have full imaging capability on all incoming information throughout our business,” he says. And this automation of some of the back office functions is a key area for Parker. “The key focus for me is how do I take away all the non value adding activities from a customer facing business? We want to be there purely to add value to the customer’s experience.”

This means a focus on really automating as much as possible to improve the speed of processing customer requests. For example, Parker is looking to further improve the integration of systems with the financial advisor community. “We’re looking at areas such as how do we automate valuation? How can we put tools in place to speed up the risk assessment process?” Clearly though, Parker admits, there is a trade off between speed and risk, and this is an equation that the bank can’t afford to get wrong. Much of their efforts are currently therefore on automating front end processes to get the customer information into the precision lending tools that currently sit in the back office as quickly as possible.

To achieve this an initial risk assessment is made, and the results of that assessment determines whether the underwriting is done automatically or through the human team. So, is it a case of automating low risk customers assessment, while keeping the human underwriting side involved on the more high risk cases? “Not necessarily high risk”, says Parker, “but the non-standard applications. For example someone who wants to borrow over a million pounds will have to go to an underwriter, they’re not necessarily high risk, it’s just the amount they’re borrowing. I think we’re some way from replacing the human underwriter. You almost get into artificial intelligence because there’s a lot of judgement and experience in those individuals.”

While artificial intelligence sounds exciting, this isn’t going to be an area that Parker is concentrating on in the near future. Instead IF is looking to lend to good risk customers, and is putting its effort into a smoother customer proposition in terms of service. One route to do this is through utilising the new technology that we all use to communicate with nowadays. “I do think we’re going to see more use of the mobile telephone or PDA,” he argues. “Five or six years ago this technology was going to be the answer to everybody’s dream, but I do think now we’re seeing it really being adopted in the financial world. As technology becomes more sophisticated we can use it to keep customers in touch with regards to say, their mortgage application – regular text, regular information.” For Parker this is about using the mediums its customers use, “generally in banking we do a lot in terms of our internet propositions, but there are many more media out there.”

On this note we wrap up with a final question – is internet banking still the future of financial services, or is it now the present? There’s no doubt in Parker’s mind that it’s the latter. While he doesn’t think the more traditional branch banking is going anywhere, he describes internet account access as “complementary” to these traditional forms. “I’d describe myself as fairly typical of our internet savvy and mature customer base, and I hardly ever go to the branch anymore. Other than to pay in some cheques every now and then, I do all my banking online,” he says. “And as we see the younger, computer literate customers coming through, all they want to do is bank online. So the easier and the better we make that, it will just grow in strength.”