30 years ago the mortgage broker space was still a relatively young industry. Innovation was the ticket and mortgage brokers were starting to no longer be the place you went when you could not get approved by a bank. This meant that consumers now had choice and the industry responded with exponential growth. While independent brokerages dominated the space, the rise of national franchised brands was starting to take hold. As the value of being under one banner started to resonate across the country more and more independents started to hang their shingle with these large brands.
This was the first round of consolidation.
The second round started about a decade ago with the merger of a couple of brands. As the competition increased for volumes and the industry became saturated with franchised brands, the surest way to improve the bottom line was to buy up the competition. Fast forward to today and even companies that decried the consolidation in the industry only 2 years ago are now also playing the game with a recent acquisition of a brand only two weeks ago.
While consolidation in any industry can produce benefits, such as more lobbying power with government and improved profitability, it can also cause harm. Consolidation is the primary cause of the loss of mom-and-pop businesses around the world, workers rights have been reduced, and the bottom line becomes the single most important focus. Improved economies of scale mean that larger companies can return better fiscal results and can streamline their business practices through the adoption of unified procedures and technology. This improves profitability for some, but reduces it for others by compressing margins, and removes choice from the workforce.
In the Canadian mortgage space we have seen the entrance of private equity firms that have proceeded to acquire smaller brands. While they have left the operating brands of these acquisitions in place, behind the scenes they have aligned the business models to improve margins. There has also been a merger of culture with integrated conferences, awards events, and more all in the name of reducing costs. This means that the people who make up the brands, the franchisees and their independent contractors, actually have less choice. Instead of being able to choose the organization based on their culture and differences, they are left to choose between a smaller number of companies whose differences are marginal at best.
Consolidation also stymies innovation as it is far more difficult as the development of new technology or business practices are pushed across all of the conglomerates brands. If everyone is the same, how does that result in innovation?
The very nature of the mortgage industry in Canada also means that as consolidation happens, there are less and less opportunities for growth. At some point the few dominant players control so much of the marketplace that the industry as a whole starts to be more challenged to capture market share. It also means that at the top there is almost no truly new leadership as executives float from brand to brand. In a bid to convert mortgage brokerages from one company to another, companies will recruit executives from each other in the hopes that they will have a 'following'. You are then left with leadership that maintains the status quo in their business practices.
It also means that internally the conglomerates compete amongst themselves for growth. Brands that are owned by the same parent company will compete with each other for new franchisees and instead of there being growth, volume is simply shifting back and forth. The brokerage and their contractors end up becoming pawns in the game for improved revenue. Conglomerates will also by nature have a focus on one brand over another and give scaled service levels based on that preference. One brand is considered to be top tier, while others are considered to be more expendable and it becomes common to see the less favoured brands eventually fazed out.
What it all means for the industry is that with consolidation the choice provided to the mortgage professional and the consumer start to become diminished. With the focus so heavily on the bottom line and the acquisition of market share one of the first things to suffer is the quality of the experience consumers and mortgage professionals have.
One thing that consolidation does do is allow for new, innovative, brands to enter the marketplace. These companies focus on being different and driving innovation as a way to grow and hopefully flourish. The large companies will act to try to block the success of these startups, but they only do that out of fear that they will not be able to nimbly respond to the changes brought. Their goal is always to protect their bottom line and will do whatever is necessary to make that happen.
While consolidation is a given and will always happen in a free market, it is also important to recognize that competition is healthy. It drives growth and provide people with new opportunities to succeed and in return benefits the consumer greatly. These small, nimble, startups can act quickly to address a dramatically changing world and provide solutions, options, and benefits larger more cumbersome companies cannot.
Small companies may not have the deep pockets of the larger brands and their parent companies, but that doesn't mean they should not be considered as a viable alternative. If the Canadian mortgage professional wants to grow and build a future for themselves, this competition should be welcome and considered seriously as an option. As independent contractors the question needs to be, are you happy with the status quo or are you looking for an opportunity to spread your wings and really fly?
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