Why does innovation scare brands in the Canadian Mortgage Industry?

There isn't a company executive anywhere in the country that will admit to being afraid of innovation and what impact it could have on their business, especially in the mortgage broker industry.

This industry was built on the model of independent contractors building a personal business and paying a portion of their earnings to their brokerage. As the industry expanded and national brands were introduced the business model changed to closely resemble the existing Real Estate industry model.

Like the Real Estate industry margins to the brokerage and the brand have become compressed as the Independent Contractors have demanded a higher percentage of the commission earned on a deal. Where it was once common for the brokerage to earn as much as 50% of the commission, it has now decreased to less than 15% with the brand owners taking as much as 7%.

That effectively has resulted in an industry that has remained largely the same over the past 40 years. The focus on production volume and the recruitment of new franchisees and independent contractors has dominated the space. Vast amounts of money has been spent on upgrading technology offerings from the brands. Stack them all side-by-side however and it becomes quickly clear that they are all just a variations of each other with marginal differences in looks and functionality. The issue here is that all of the development is focused squarely on the mortgage agent and franchisee to either entice them to leave their existing brand, or move to a new one.

To bring in any real change to the way the industry is modelled would mean a dramatic shift in the way each of these brands does business. To change their current business model is daunting because of the inherent risk and costs associated with such an exercise.

The mortgage industry in Canada is, according to several consumer research studies, as much as 5 years behind the United States and a decade behind other parts of the world. The resistance to change at the top echelons of the industry in Canada doesn't bode well for the roughly 22,000 licensed mortgage professionals across Canada who rely on the large national brands to guide them into the future.

Brand leaders will point to their growth of volume and tout that they are bringing about real change. They will sell that they are different, and better, than the competition to the mortgage professional to recruit them. For some the growth is absolutely a mark of success, but is that growth really due to the spin doctored story put out?

The actual market share of the mortgage broker industry in Canada has barely moved in the past 10 years from a range of 20 to as high as 25 percent (some show as high as 30%, but that can be shown as incorrect when looking at the total mortgage volume of 427 billion vs. broker volume of 92 billion). That means that the volume growth at one brand equals volume loss from others. Compare the industry market share in other countries and some have shot up to an outstanding 80%. The reason for the dramatic shift in other countries? Innovation.

In some countries the industry has moved away from the independent contractor model and is focused on the direct to consumer via technology. In other places that have experienced the most dramatic growth in market share, the focus has been on creating a hybrid model that has independent contractors that support the technological change happening. The belief is that technology should not replace, but enhance, the ability of the mortgage professional to provide exceptional service.

So why hasn't Canada kept pace with the rest of the world? The answer is simple. Fear.

For any large company to pivot so dramatically the cost can escalate into millions of dollars and would not guarantee success. Change like this could also sour their current franchise networks as it would mean altering the franchise agreements and essentially forcing people to accept a new normal. Not an easy task, and in of itself is reason enough to sell change that is less risky and doesn't stir dissention.

The problem is that the world, and the consumer, is changing the way that they do business. There is evidence in every single industry around the world that consumer behaviour and their preferences are experiencing an evolution unseen since the industrial revolution. Businesses that have dominated their spaces for over 100 years are collapsing and falling victim to new companies that have challenged the status quo. Even in industries that were once seen as essential and where change was never thought possible have been rocked by new disruptive models.

With the current world wide pandemic and the resulting impact it has had on society and how we interact with each other, the need for change has never been more relevant.

Brands that are focused on providing mortgage professionals with better technology that embraces artificial intelligence and machine learning to give the consumer, and agent, a better experience are in a better position to weather the coming change.

Most brand leaders will simply downplay new entrants to the industry and tout their size, growth, and long standing history as making them the obvious choice. That will work for a while, but as we have seen around the world and across all industries, eventually the cracks will cause the foundations of the business to collapse. When that happens the most impacted people will be their network of franchisees and mortgage professionals through the loss of income, business, and reputation.

Smart mortgage professionals are starting to look outside the traditional brands and are looking for alternatives that are far more future proof in their business modelling.

If you aren't doing the same, you should probably start before it is too late.

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