How a small finance business can compete with a bank

Over the last few years, the major banks have joined a group of financial companies in creating a series of finance franchises that are offered to the public. These finance franchises come in different forms, and rely upon the operator writing or broking a loan between the customer and the money source.

Mortgage broking as an industry sprang from the initial conversation between lenders and a few young entrepreneurs, with the actual embryo of the industry widely disputed, not hotly, by various quarters. John Symond is acclaimed for his quote of “we’ll save you”, and is one of the main drivers. The Higgins brothers created Mortgage Choice, coming from their modest ship building business in the Perth suburbs, are also credited with the industry’s growth.

Wherever it actually commenced, the fact is that this industry has spawned and grown through the acquisition of many of the finance industries leading lights. The MFAA (formally the MIAA) and the FBAA are the two leading industry representative bodies. Combined, they look after the mortgage industry, including and with it the many finance franchise models that it has encouraged.

The finance franchise sector has become very lucrative and has been a vehicle for much of the growth of the industry over the past decade. We are now in the third generation of the franchise growth faze within the finance industry.

Mortgage Choice was really the first of the businesses to grow in this way. The mortgage broker franchise group has grown from 1 franchise to over 400 nationally and with it has come many replicas.

The evolution of these finance franchises saw the market changing from where customers went to local established bank branches to apply for loans, to where they came to you to write the loan. Being a time poor society, their offer visiting customers (normally after hours), and offering a range of loan options became very attractive to the public.

In our view, the market is divided into 2 types of loan organisations, those that source the loan themselves, and those that broker the loan with other institutions. The banks are naturally a source of money in their own right, or the loan can be arranged from a wholesale source. The other type of loan writer is a mortgage broker, such as Mortgage Choice, who recommend a series of loan options from many lenders, and the Broker’s role is to find the best loan for you.

With the recent credit crisis there has been a drying up of available funding, with customers seeking the perceived security of banks, and this has moved business back to the banks. Before the recent crunch, the statistics showed the following:

Preferred Choice for Home Loans (Source: MFAA/BankWest Home Finance Survey (Dec 2006)):

• 41.5% mortgage broker 
• 37.2% bank 
• 10.3% non-bank specialist 
• 8.5% credit union 
• 2.6% building society

Many years ago the banks had the majority of the loans market, and the public had to court them for a loan. The Mortgage Broking industry evolved where the brokers acted as go betweens to offer the bank’s loans in an environment where the Broker went to the customer to sell the proposition.

The Brokers became very successful, and hold around 35% of the loans market today. The banks have reacted to this dent in their business by creating their own mortgage franchises, each unique to the major bank responsible, that offers that Bank’s products through a network of people who will come to you and arrange the deal.

The first of the large banks to head in this direction was ANZ Mortgage Solutions. They created a project team and decided to tackle the Mortgage Brokers head on. The model they created offers an exclusive territory for a franchisee to work within and has 135 territories across Australia. ANZ have used their resources to create Local Area Marketing packages to assist their franchisees, and support them wherever possible. The model has evolved and the key to its success has been the integration of Mortgage Solutions into the mains team third party banking business model.

Commonwealth Bank followed suit with Mortgage Innovations 5 years ago and created a model that has seen it grow from 1 to over 35 operating businesses. The model is sustained as it allows the licence holder to operate under the CBA brand and with full access to all of the systems of the big lender. The MI business owner can approve the loans themselves, and can see the clients file online at any time, as opposed to the traditional broker. This has been a very large part of the attraction to the clients who have chosen to use CBA MI.

Mortgage Choice has continued to go from strength to strength, writing around 5% of all home loans in Australia. Mortgage Choice has around 450 franchisees and run around 130 territories Australia wide. The territory is not an exclusive territory, and there is the option for Mortgage Choice to add another franchisee if the territory is under performing. The mortgage broker franchise currently has a panel of 23 different lenders which they go to, so that the loan best suits the client’s needs. This also instills a level of competition between the lenders, hopefully so Mortgage Choice can offer very competitive loans. With a large number of franchises, Mortgage Choice runs an office in each State with a State Manager, Franchise Development Manager and other support staff. The Mortgage Choice model remains the most robust as it built its growth on the planned and scaled commission model. Additionally, the business retains some of the industry’s most experienced Mortgage Brokers. People such as Steven Heavey, (current head of Broker loans at St George), Geoff McDonnell (Current owner and operator of Multiple Property Services and co-author of this article), Chris Canty, (current head of Wizard sales and marketing) just to name a few have all come from the Mortgage Choice executive ranks over the years.

Wizard was started in 1996 and adopted a franchise approach recently. Having been purchased by GE Money from Mark Bouris, the original founder and Chairman, it has now been sold to Aussie, and the merger of the 2 businesses is currently taking place. Many Wizard franchisees are also being offered a package to enable them to compete in the commercial equipment market, as a back up to the home loan business they have traditionally operated in. Wizard really came of age as the first mono product line business model. The evolution to providing bank products was a reaction to the market and the lenders initial reaction to the influx of these sorts of niche lenders. The business model has never really evolved into and away from one that was branded and seen as the one product player.

Aussie, by comparison, has launched into franchising and has also evolved its model as it required a rethink away from the “we will save you” motto. Aussie has been widely considered to be the training ground for many other broker businesses.

Smaller players have recently come into the market to franchise their operations, businesses such as Citiwide in Melbourne, Mortgage Gallery in Perth and Count in NSW have launched into franchising in the finance industry. The main reason that these players are making the step is the number of aggregated brokers that are in the market and who are looking for a home that provides a solid training, product, management and potential selling price for their existing broker businesses.

Many brokers are evolving into a franchise model as a way of providing the security of tenure and the added protection that the franchising code provides them. 

Spectrum Analysis offer franchise advice and provide franchise and market analysis, Mapping and Franchise site selection.