Service Thinking applied to the credit crunch and financial services.
Before the credit crunch 110% mortgages were on offer from lenders. Today, they are likely to demand a 30% deposit. Amid the turmoil and uncertainty, one thing we can be sure of is that mortgages will never be the same again. At livework we want to see mortgages designed to create long-term value for all parties.
Now is the time to start thinking about what went wrong and how we will buy homes in the future.
A collection of economists, regulators and bankers is already picking over the institutional and systemic failings. But for homeowners, and those who are losing their homes or cannot buy one, the problem is simple: the mortgages we bought didn’t meet our needs. We were sold a financial product. A hit and run discounted loan with, it turns out, the life expectancy of an Icelandic bank.
Instead of a bewildering array of unreliable and over-complicated products what we need are financial services. Services to help us acquire, live in and pay for our homes over our whole lifetime.
Think of mortgages as services and the world looks a lot different from the promiscuous free-for-all which got us into this mess. Services demand that lenders have close relationships with customers, because they want to keep them. Services adapt and change to meet the changing needs of customers. The future of mortgages lies in offering radically new types of services that at the same time resurrect older values.
So, what do lenders need to do to move from their fixation with products to embrace services?
First, lenders should get out more. They should visit customers to gain insights into how they live and their financial needs and aspirations. My grandfather had a bank manager who knew his family. They lived in the same part of Wandsworth. My grandfather stayed with the bank all his life. We need to recreate this depth of relationship through new means, new feedback channels and direct contact.
Lenders can then develop a much better understanding of customers’ financial situations. Information services can now enable businesses to use extremely targeted data to manage their business customers. These tools can be extended to consumer services to help lenders better serve customers — and manage their risk.
Armed with insights into what customers want, lenders can then respond inventively to the very different needs of very different groups of people.
Low-income households deserve the security of a home but not the excessive risk of a sub-prime mortgage. New mortgage services could get them on the ladder, building credit worthiness and helping them save.
People with a nest egg may be able to invest in property. But perhaps not in the buy-to-let market which encourages over exposure to risk. They could invest in local property in a way that gives a return without taking houses out of the reach of young families.
Having made an effort to learn more about customers, lenders must then invest in retaining them. That hasn’t happened. Banks focus relentlessly on winning new customers with the marketing strategies of soap and beer companies. We are promised that we can take a financial product home today. Worse, we are bribed with cash-back offers and gifts. These discounts and offers mean that the banks have to make their money by putting the rates up later.
Savvy customers then shop around, leaving when they spot the next great deal. The result is we have no meaningful relationship with the bank and the bank has no incentive to invest in us as customers. It is a vicious circle. Little wonder that the Norwegian insurance and banking firm Gjensidige found that over 50% of customers lack trust in financial service companies.
We need simple things. Such as statements that are easy to understand, or interest rates that are explained in English. We need to see costs and understand the risks clearly. We need important things. Such as help planning for life events like having a baby or illness. We may even need contentious things. Perhaps lenders could share the risk if things go bad — and the benefit if things go well.
Robert Shiller of Yale University argues that mortgage repayments should adjust to reflect the economic situation of the homeowner. In this model payments increase in the good times and reducing in the bad times. Perhaps even stop if the customer loses their job. That would really be a service that helps people save for a rainy day.
If more attention is paid to my ongoing requirements my mortgage becomes a living service rather than a lifeless product. And, I may then come to trust it.
Ben Reason and Chris Downs are founding partners of livework.