Life as a small bank is hard. There are endless regulations, compliance costs, capital constraints, loss provisions, technology investments, auditing expenses, overhead costs, etc.
Yet, there are mortgage lenders out there gung-ho about getting bank status.
Being a bank has benefits to a lender, no doubt. One is lower warehousing costs (the cost of holding mortgages until they can be sold off to investors). Another benefit is brand credibility. Another is increased-cross-selling opportunities and product offerings. And there are others.
Probably the most widely-cited benefit, however, is the ability to accept deposits. Deposits are seen as a cheaper source of mortgage funds than securitization and most alternative funding channels. In theory, that allows for a bigger spread (profit) on mortgage lending. Most mortgage lenders would agree that, without deposits, a bank license isn’t worth the hassle.
The challenge, however, is that everyone wants deposits. In fact, the deposit wars are as fierce as the mortgage wars. It’s even making some big banks do the unthinkable: offer competitive savings rates!
The result is twofold:
- Net interest margins will fall
- You’ll now find lenders with established brand names that can’t generate decent deposit growth.
How then, is a new mortgage bank with minimal recognition going to steal deposits from brand giants like ING, and from the Ally‘s of the world, with their monster marketing budgets and 3.30% 5-year GICs?
It’s most likely not going to happen. Most wanna-be-bankers might do better to redeploy their resources and simply partner with existing banks.
Last time I looked Ally is a relatively new startup (sure, born of GMAC, but still). Yes, they may have a big marketing budget, but had no real brand recognition until recently. ING Direct was pioneered in Canada and didn’t always have market share or a big budget, despite a big parent corp (Read the Orange Code).
So, I guess, if they could do it, why can’t someone else? Maybe the wanna-be-bankers will be able to innovate and compete just as hard or harder than the incumbents and carve out a nice niche for themselves. Maybe they won’t have to take market share from ING and from Ally, but from bricks-and-mortar institutions instead!
No doubt a similar amount of pessimism existed amongst the large incumbents when ING first launched, followed by a sense of panic (see: Mbanx) when they realized that people wanted to “save their money”. The big banks were wrong.
Let’s hope the entrepreneurs who are striving to compete, and win, against the incumbents won’t read your post and give up out of frustration. I suspect they’ll just smile and solder on, which is good news for the Canadian consumer. :)
Hey Gord,
Thanks for the note. Counter-points are always appreciated since they are what make a debate.
Anyone who has the massive marketing budget of a GMAC subsidiary can make a dent in market share, but most of these upstarts don’t. Regardless, there is a huge investment that needs to be made to pry dollars from the Big 5 and existing virtual banks.
The main point of this piece was that it’s brutally more difficult to carve out a niche today than it once was. Many upstarts may find that this cost is not worth the benefit, especially when they can “rent” a bank balance sheet instead.
There will always be exceptions though, and the more competition the better…
Cheers,
Rob
Correction/Clarification: Ally has applied for bank status in Canada but is not a bank at this time.
And of course Ally is a trust company not a bank. More specifically it’s Resmor trust
Thanks Rob! It’s true – these are volume businesses and it’s expensive to attract volume, regardless of the business model in the lender space – whether it’s direct to consumer, through the broker channel, retail, or a combination of all of the above.
Keep up the great job on the blog and thanks for fostering a good conversation.
Bank status = more reputable, more variety, more service as there are deposits and etc. I don’t want my mortgage sold off to another lender.
I think most home owners would rather save .10% on their interest rate than deal with a bank. Does it really matter if your mortgage is sold off after it closes? All the big banks sell their mortgages and the customer doesn’t even notice.
Hi Rob, Great topic….
One thing that peaks my curiosity is the argument that lenders are striving for bank status to grow their “B” business. With all the constraints put on the CMB, lenders may be turning to deposit takers to fund their nontraditional market products. Thoughts???
-Scott Findlay
Home Trust and Equitable Trust seem to do pretty well in the B market and they aren’t banks.
Hi Scott,
It’s an interesting question because there are definitely a few lenders “banking” on bank status to build their B business. One good example would be Xceed. There hasn’t been a good securitization method for B paper since ABCP. Access to a strong balance sheet is therefore essential to most alternative-lending models.
The questions then become:
a) Is bank status necessary to execute a B model (Xceed obviously believes it is but not everyone agrees); and,
b) Will the greater expense and regulation of a bank be offset by significantly greater profits?
As things unfold, it’ll be interesting to see what success non-banks have in the B market versus their newly-minted bank competitors.
Cheers,
Rob
Very good post, I got to know a lot about deposits.