Relationship Pricing

relationship-pricingWe recently surveyed the mortgage rates of every prime lender in Canada. There are more than 400 of them.

Over 60 choose not to advertise their rates online and various others display only posted rates. Most of these lenders subscribe to a practice called “relationship pricing”—where you get mortgage discounts by taking other products from that lender (savings accounts, credit cards, credit lines, car loans, etc.).

It’s a process that requires you to haggle and often buy mediocre financial products just to get a fair mortgage rate.

When it comes to pricing disclosure, people hate opacity. It wastes their time. Modern mortgage consumers are web-driven information assimilators who demand transparency and instant understanding.

They also:

  • have heightened sensitivity to cross-selling techniques
  • are loathe to be manipulated, and
  • crave simplicity (Attention deficit isn’t just for kids. It applies to everyone on the web.)

To that end, it’s surprising that so many lenders believe they can be successful by confusing mortgage shoppers. Do they really think people get turned on by relationship pricing models that require a spreadsheet to determine a mortgage rate?

Lenders with these approaches obviously don’t want to make it about the rate. They want to provide you an “integrated financial experience” and cross-sell your pants off. But few new customers have patience for that.

Most banks and credit unions that overuse the word “relationship” advertise something like: “The more business you do, the better your rates will be!” So the onus is on the customer to give to the lender up front.

It should be the other way around.

Rate-ShoppingIn reality, customers owe lenders very little, besides honesty. So if a lender wants your investments, insurance, non-mortgage loans and savings, it needs to earn that business by conveying compelling value that stands on its own merits. You shouldn’t have to agree to 3-4 non-mortgage products to get a great rate that you can get in minutes by calling a more transparent lender.

Now, if a bank or credit union wants to offer a conspicuously better rate, product or package than the competition, then customers should be willing to hear the relationship spiel.

Barring that, lenders need to advertise fair rates up front, build trust without making the client jump through hoops, and then start pushing relationship benefits. Demanding loyalty before the relationship is formed puts the cart before the horse.

If you’re a lender that refuses to advertise competitive rates, at least market semi-discounted rates that don’t completely insult people (like 3.49% on a 5-year fixed when the market is at 3.09%).

If you’re promoting 5-year rates at 5.24% with competitors at 3.09%, you’re relegating yourself to customers who are non-savvy, Internet-averse or non-prime.

Rob McLister, CMT

  1. Brokers do the same thing! They promote a great rate to drive traffic and then dont disclose the lender and the frills that go along with it. Ive noticed that for brokers advertising on the internet. I dont understand how they can spend the money on the leads and expect to close the business without disclosing the fine print. Doesnt make sence to me.

  2. So i’m the bank, for the $3k-$6k a year I earn off a 1-5 yr mortgage customer I should write a mortgage for the BEST rate?
    You want to know why the banks don’t do it? Simple, it’s not worth it.

  3. I will have a very difficult time listening to CIBC when they go to cross-sell me after closing FirstLine. Hard not to make it about spite.

  4. Hi Tomas,
    Not necessarily the best rate, but a rate that’s fair and at least minimally transparent up front.
    The concern isn’t as much with major banks. RBC, for example, currently advertises 3.69% for a 5-year fixed. That’s not great but at least you’re starting negotiations from a number that’s near the ballpark.
    The focus here is more on lenders (especially credit unions) that solely advertise unrealistic posted rates or don’t list any rates at all. Most people would agree that “Call us for rates” is an outdated sales technique.

  5. Funny, this story follows your story about RBC’s historic 5 year covered bond issue at 1.20%. How many credit unions do you suppose have access to 5 year funding at 1.20%?
    Going to guess very few, with most relying on retail deposits as their primary funding source. So double that cost and then look at the spread left over if they were to offer 3.09% across the board.
    Then tack on 100% deposit insurance costs for most. And after that, profit sharing back to the members.
    Maybe, just maybe, the credit unions know what they are doing according to their business models and balanace sheets. Maybe it’s best to avoid rampant growth at all costs in this rate environment. For smaller FIs without all the tools and access to cheap funds, they need to take their interest rate risk into consideration. Rates (and their shorter term deposit costs) will inevitably climb higher down the road.

  6. That U.S. RBC covered bond is reportedly closer to 1.90%+ when swapped back to Canada. Moreover, in addition to low-cost deposits, many credit unions have funding access through the large centrals and other sources. Their costs are definitely not as favourable as RBC’s, but few lenders’ are.
    The points you make speak to the competitiveness of smaller CUs (or lack thereof) in the “A” mortgage market. Those challenges are partly why CU numbers have gone from 681 in 2001 to 424 in 2011 (outside of Quebec). They’ve often had to merge to survive.
    In any case, most prime borrowers can’t afford to worry about the finances of their local credit union. They’re too busy worrying about their own family’s budget. Qualified borrowers really have two primary needs: the most competitive financing and the least possible hassle. Concealed rates generally serve neither.

  7. I’d never call a lender that doesn’t display their rates. You know they’re just going to play games and try to get you into the branch.

  8. Not all customers are equal. Some are worth more than others.
    The way to figure out who’s who is to meet them and pitch them.
    Posting a ‘fair’ rate is the worst way to maximize lender profits.
    I suppose from your perspective what you’re after makes sense. However, it’s not sensible from the lender’s side of the table.

  9. Hi Tomas,
    There are lots of profitable lenders that post non-exorbitant rates. They don’t have to be the lowest rates to be fair. The discretionary pricing model you reference has indeed maximized profits in the past, but the future is not the past.
    Note that most successful lenders with discretionary models still post “special offer” rates. At least those serve as a starting point. The comments made here are primarily targeted at lenders with zero pricing transparency.
    In any case, call us crazy but we believe that what’s bad for the customer is ultimately bad for the lender…and not the way to maximize profit in the net generation.
    BMO is one example of a major lender that’s starting to “get it.” There are many others in the market and many others to follow.

  10. “…lots of profitable lenders”
    This blog has frequently made the gross mis-comparison between mono-lines and banks.
    There’s restaurants and food trucks, the Hilton and Howard Johnson. On the lender side i’ll shoot for the high side.
    What do you think of the proposition where a lender ties up 300k-500k to a mortgagee for 5 yrs for a mere 10k-20k? What’s the point? Is a lender not better off lending to Suncor, Honda or similar?

  11. If you’re talking about relationship pricing, you’re overwhelmingly talking about C.U.’s since that is and has always been their business model. Rob, to call it an outdated sales technique is ignorant.
    All Credit Unions answer to their members and not their faceless shareholders. Having an engaging relationship with members is all what C.U.’s are about and it is what their members continue to demand.
    Is your local C.U. going to quote the best or lowest rate to a non-member off the street? Probably not. To a long time member with shares, utilizing multiple products with the credit union, definitely!
    Any smaller business who wishes to compete with billion dollar multinationals solely based on price will lose every single time.

  12. Tomas,
    Not sure where you’re seeing the mis-comparison but if it’s related to the “profitable lenders” comment, no such comparison was being made.
    Mortgage profitability in the future will not be what it was in the past. But that’s a separate discussion. The message here is that consumers will demand (and deserve) more pricing transparency going forward.

  13. Hi Banker,
    It seems a very interesting nerve has been hit.
    Unfortunately you’ve taken that “outdated sales technique” comment out of context. It referred to a specific strategy whereby a lender posts no rates or high posted rates and then expects a well-qualified borrower to call them for pricing. That specific statement was not a comment about relationship lending in general.
    Second – and this point keeps getting overlooked – lenders don’t have to advertise the “best or lowest rate” as you put it. Nor do they have to advertise 2.99% on a 5-year fixed like Community Savings Credit Union for example. The point is that today’s “A”-credit borrowers want to know that a lender is in the ballpark before jumping through hoops for a quote.

  14. “To a long time member with shares, utilizing multiple products with the credit union, definitely!”
    Good luck attracting high-value customers with that game plan. Who wants to be force fed second-rate financial products to qualify for a higher mortgage rate?

  15. I thought rising rates are good for credit unions because they can raise deposit rates slower than they raise mortgage rates.

  16. Rob, the site you host is a remarkable service. I’d like to acknowledge how beneficial it’s been to my own research and thank you for the effort you put into it.
    Banker, you on the other hand make comments that are continually inappropriate. It appears that whenever someone doesn’t agree with you they are labelled ignorant. You need to venture outside the ivory tower and into polite society.

  17. Today almost everyone knows what a good rate is. Google “best mortgage rates” and 4 or 5 rate comparison sites appear. That makes it way harder for lender salespeople to finagle customers into mediocre rates. IMO, it also makes lenders that don’t post rates look suspicious.

  18. Ron, I appreciate your critique but my experiences in banking management will often have me defending the opposing view of the subjects discussed here.
    It is never said enough but Rob and his tireless efforts are truly commendable. The education, positive impact to people’s lives, careers and valuable information shared on this forum are second to none. Informed contributors of this site provide balance and insight however curt or disagreeable those opinions may sometimes appear.

  19. It’s simple to see what works. Refer to the Bank of Canada tables on who’s holding Canada’s 1.2 trillion mortgages.
    Discretionary pricing works.
    If i have my RRSPs, trading account, etc. with a bank i want a better rate then a schmuck with only a mortgage. Reasonable right?
    Does this sound like the broker conundrum of marginal brokers being able to access good rates because of aggregating their volume?

  20. Tomas,
    You’re a bright commentator so I’m inclined to think you are at least partly kidding with that comment.
    In the event you’re serious, it would be grave mistake to underestimate mortgage consumers going forward. In the past, most were indeed price takers (we’re running a story today that confirms that).
    Today, qualified borrowers are far savvier than they’ve ever been and they will not be dictated unreasonable prices. Internet resources (including traditional media, rate comparison sites and blogs) and intensified competition (from lenders and brokers alike) have put the ball in consumers’ court. There is no turning back the clock on this phenomenon and lenders who don’t respect it will suffer.
    The power of consumers will be validated in time by (among other things) noticeably lower margins and significant disintermediation.

  21. What you’re say is “possible” if non-banks increased their funding sources.
    Their reliance on finite CMBs and MBS means the vast majority of folks will end up at the bank’s doorstep. And while there, they will take whatever is offered.
    All the alternatives out there will end up like ING or are too small to make any impact.
    That’s why banks are and should be core holdings.

  22. “Any smaller business who wishes to compete with billion dollar multinationals solely based on price will lose every single time.”
    This is exactly what lenders like Industrial Alliance do. They compete solely on price and they don’t lose “every single time.” Quite the opposite. They do good business despite having no complimentary products, no relationships with customers and horrible mortgage terms, in my opinion.

  23. Who cares how many products you have with your bank? I bet I can negotiate the same rate as you even though with no other products. A monkey can get a good rate nowdays.

  24. It’s called repricing risk. Say you lend money to your buddy at 3% today, locked in for 5 years. In turn, you borrow with short term funding at 1.30%. Nice profit for now, but as short term rates rise over the next 5 years, you’ll eventually be upside down on your little venture.
    This is what credit unions tend to do. There is no appetite from investors to lock their $$ in for 5 years at rates barely above inflation. So they are all sticking their cash in short term GICs or high yield savings accounts. Eventually, these rates will rise and the 3% mortgages being booked today will become unprofitable. Even tighter when you tack on operating costs to your funding cost.

  25. I think to be a good mortgage professional you have to be as transparent as possible so your clients don’t feel like they are getting taken for a ride. Always be honest and present all options on the table.

  26. @Tomas: “they will take whatever is offered.”
    Sorry, is that cockiness or naivete on your part. I’m not sure which.
    I find your lecture about capital markets disingenuous at best. You omit the fact that banks like BMO, RBC, TD actively buy mortgages from non-bank lenders. You also “overlook” deposit taking credit unions. Don’t kid yourself. There will be sufficient funding to go around for A-credit business.
    Small lenders in big numbers can easily make a large dent in the bank oligopoly. We just have to hope Ottawa doesn’t handicap securitization and insurance programs any more than it already has.

  27. Relationship banking for many of us is (or has gone) the way of relationship gas stations. We loved having our oil checked, and our windshields cleaned, while filling up, but as pricing dropped, we, as consumers chose price over “relationships” (back when we actually knew our “pumper”). With relationship banking for many years, I could call up and speak to an individual who knew my history, and gave me credit (or lack of it) because of our dealings. Some of it was pricing, but a lot was just handling on-going issues in a timely manner. No longer for most of us because of ?, systems do not allow branch decision making; constant changing personnel prevents building relationships and…etc. but it is hard to tell if it is the chicken or the egg. Is it the lender’s ( or most businesses) that have cut costs on service for profit or survival, or is it the (non loyal) consumers who have cut pricing for services, and therefore are to blame for the lack of service, with lower pricing? Regardless, the rare “relationship” banking is being replaced by bundling products to grab hold and (attempt to) lock in “relationships. Often even these bundling relationships can become bungling relationships, some of which are illegal.These “relationships” tend to survive on non transparency so that Bill doesnt know what suzie got, for the same circumstances.

  28. First off, I want to say thanks to Rob for expressing his view on an interesting topic.
    As I work for a small local CU in BC, I disagree with your point of view this time.
    For once I am agreeing with “banker in ivory tower”,however I do not think you are ignorant.
    There are so many advantages to pursue relationship pricing, not only from a CU perspective, but also from the member and the local community perspective.
    Not only do we negotiate competitive rates, but we give patronage dividends/rebates for the business our members have with us. What does this mean? We give back to our members, based on the interest they either earn or pay, a rebate determined by our board. Our success is their success. The more deposits (and we are competitive with this as well including 100% deposit insurance), lending and services they have with us, the more they will reap. A lot of members are not even aware that we do this.
    Another item is that we give back to the community – to local charities and organizations. As much as we want to say that rate is the only thing that matters…most of our members (these are “A” qualifiers) will disagree. They want to support an organization that not only is willing to negotiate a competitive rate on their mortgage, but also gives back to the community.
    As a mortgage advisor I do not want to post our CU rates as that puts us in a box. I make it clear to realtors that based on the qualifications, we will be competitive on rates. I want to talk with the person and see what their needs are first. Based on that information, I will give them the “Best” rate.
    And it doesn’t require a spreadsheet to determine, it is quite simple.

  29. Hi CU Advisor,
    Counterpoints are always welcome. Thanks for sharing your perspective and for voting “non-ignorance.” Now, if I just had that tie-breaking vote. LOL.
    CUs offer several benefits to consumers. No argument there whatsoever. In fact, we have a mortgage with one now.
    Credit unions will also be a rising force in mortgage lending once: (a) they go national, (b) they consolidate further, and (c) their pricing gets more exposure with online rate aggregators.
    On that note, I’d maintain that displaying only posted rates (or worse yet, no rates) is a mistake. Among other things, the next generation wants ease-of-comparison. Opaque pricing models are a complete turn-off to many and (in our humble view) detrimental to lead conversion and revenue growth.
    In any event, opposing views make for interesting debates. Thanks again for yours and continued success…Rob

  30. If you don’t quote rates then your best rate is NOT “simple” to determine.
    How do I know what your “patronage dividends/rebates” formula is? How do I know what I’ll get back? How do I know how much business I need to do with you to get your “best rate?” More importantly, why would I even care when I can get 2.99% from 100 other places?
    Charity is great and all but I’d rather keep the $1,000 extra you charge (or whatever it is) and give to my charity of choice.
    It’s funny that in your second last paragraph you use the word “I” four times.
    “I do not want to post our CU rates”
    “I make it clear…”
    “I want to talk with the person first”
    “I will give them…”
    That says it all. It’s not about you. It’s about the C-U-S-T-O-M-E-R, and customers DON’T want to go through all the rigamarole to know if you’re competitive.

  31. Then why do mortgage brokers cry about their 2-deals-per-year peers getting the same rates as them at the local mono-line?
    Don’t call brokers monkeys; it’s not nice.

  32. Yes LenderX I agree.
    Big banks buying mortgages from non-banks = banks have significant control over non-bank funding.
    Thanks for pointing that out.

  33. Excuse me for the use of “I” that many times for of course its about the MEMBER.
    I didn’t realize I would be graded…..I will be more careful in the future

  34. Totally agree Rob. It’s obvious that some credit unions “get it” while many still don’t.
    Westminster Savings for example shows a 3.09% 5Y fixed right now:
    Who on earth is going to call a competing credit union that advertises 5.24% for the same term? Those old school posted rate tactics are ridiculous in this day and age.

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