​Supermarket shakedown

Consumers may soon be taking the term ‘shopping for a mortgage’ quite literally, if Coles and Woolworths enter the home loan space as rumoured. But is their potential expansion into mortgages really viable – and how could their launch potentially impact the market? Sarah Megginson reports

A new mortgage with a side of milk? 

Consumers may soon be taking the term ‘shopping for a mortgage’ quite literally, if Coles and Woolworths enter the home loan space as rumoured. But is their potential expansion into mortgages really viable – and how could their launch potentially impact the market? Sarah Megginson reports

Following their respective successes in insurance and credit cards in recent years, it has long been expected that Coles and Woolworths will try to carve out a niche in housing finance.

“Both Coles and Woolworths have signalled their intent to expand into financial services; however, neither operator has obtained a banking licence or approval by all the relevant regulators, so it will take some time before we see them offering the full spectrum of banking products,” says Kirsty Lamont, director of Mozo.com.au.

To date, both grocery retailers have kept quite a tight lid on their intentions to branch into mortgages.

It was reported last year that Coles was pursuing a banking licence from the Australian Prudential Regulation Authority to allow it to take deposits, and Richard Wormald, GM Financial Services at Coles, has confirmed the recent formation of “a joint venture financial services business” that will operate from next year, pending relevant regulatory approvals.

“The focus of that will be credit cards and personal loans,” he told the ABC.

Coles has also trademarked a number of brands over the last year, including Coles Money, Coles Financial Solutions, Coles Financial Group and Coles Mobile Wallet, the latter of which sets the retailer up to break into the high-growth digital payments space.

Woolworths, meanwhile, is ramping up its credit card offerings and, with a full suite of insurance products (car, home, pet, travel and life) under its belt, the retailer is reportedly keen to convince its 13 million plus weekly grocery shoppers that it can be trusted to provide not just produce and petrol, but also a home loan.

IS THIS REALLY FEASIBLE?

The question isn’t can they do it, but whether they should do it, according to Shannon Ingram from Smartline Personal Mortgage Advisers.

“Coles and Woolworths are certainly able to enter the financial market space, but I believe it’s potentially a recipe for disaster if they rush into it,” he says.

“I have a Coles MasterCard; it was quite the process applying for it, and I had to send my documentation to them three times before they got it and issued my card. I can only imagine how much of a disaster a significantly more complex loan transaction could be.”

Consumers today seem to be more wary of companies that are involved in multiple industries, particularly in relation to professional services, adds Walter Bonnet, director of Acquest Financial Services.

“It’s only a matter of time before Coles and Woolworths enter the mortgage arena, and they’ve had an impact on the finance and insurance market, which will undoubtedly be the case when they offer mortgages,” says Bonnet. “But consumers don’t only want a good rate and low fees; they also want choice, education and service.”

That said, any competition is healthy, and if there’s one thing our national supermarkets know, it’s how to be fiercely competitive.

“It will be interesting to see how the venture goes,” adds Stephen Zamykal from Mortgage Choice. “The more exposure mortgages get in general, the better for us all. But I wonder if customers will be able to chat to someone [about mortgages] at 11pm while picking up some milk and bread?”

MATTERS OF FUNDING
Woolworths’ and Coles’ potential expansion into home loans is not altogether surprising, considering what is happening in the UK market, says Alex Sperling, principal mortgage consultant at Our Mortgage Options.

“The largest supermarket in the UK, Tesco, operates Tesco Bank and TescoCompare.com, while Sainsbury’s, the second-largest supermarket chain in the UK, also has their own bank,” Sperling explains.

But while these grocers have established banking divisions to fund their mortgage offerings, Woolworths and Coles have not, which creates their first and most significant challenge.

“Who is going to be funding these loans? Are the funds coming from Woolworths’ and Coles’ balance sheets, or are they obtaining the funds from a wholesale lender?” he asks. “And with approximately 50% of all loans in Australia originating via the broker channel, will they be utilising the third-party distribution channel?

“If Woolworths and Coles only sell their own products, then like banks they are only offering products that may or may not be suitable to that person’s individual circumstances. I’m not saying that [their potential entry into mortgages] is a bad thing; [it isn’t,] provided they offer real alternatives to the main lenders, and consumers are the real winners.”

MORTGAGE STRATEGY, SUPERMARKET STYLE

Our biggest food retailers do possess one unique and powerful competitive edge, in the form of copious amounts of highly valuable customer data.

Woolworths director of group retail services Penny Winn last year shared with the media the power of harvesting ‘big data’, explaining how they were able to overlay their insurance car crash database with their Woolworths Rewards database.

Thereafter, they discovered that customers who stocked up on milk and red meat tended to be “very, very, very good car insurance risks”, Winn said, whereas those who ate pasta and rice, filled their cars with petrol at night, and drank spirits could be considered riskier on the road.

“What that means is we’re able to tailor an insurance offer that targets those really good insurance risk customers and gives them a good deal ... And it helps to avoid the bad insurance risks,” she told AdNews. “I rarely see actuaries get excited, but they were very excited about what we found because it was so statistically significant.”

If this is the kind of data they can harvest to create tailored insurance offers for drivers, can you imagine the opportunities that await them in the mortgage space?

Indeed, Andrei Hantu, director and principal at Bloom Lending and Financial Strategy in Sydney, recognises that Coles and Woolworths have size and stats on their side.

“They’ve got a large client pool that they have access to, and they have something unique to offer in terms of packaging discounts around fuel and groceries,” he says.

“How successful they’ll be is a case of how do they actually go about it. I have a gut feeling they will start with a simplistic, vanilla product offering.”

That is to say, they will aim to service safe applicants with strong employment histories, strong deposits, and LVR requirements of 80% or less.

A FLAWED APPROACH?

One of the key problems with this approach is that the basic products attached to low rates and product discounts “don’t suit everyone”, Hantu explains, “with only customers sitting in very certain criteria able to get across the line”.

“It takes the whole relationship and service element out of the interaction,” he says. “It also puts a lot of onus back on the client to do a lot of the work behind the scenes.”

Even so, their products will likely suit those in the mortgage belt who are very interest-rate-focused, “whether they should be or not”, adds Dominique Bergel-Grant, director of Leapfrog Financial and the founder of Leapfrog Women & Money.

“They’ve got a captured audience – nearly every Australian is walking into one of those stores every week. But it’s actually probably not going to create the right outcome for the Australian public, who do really need the right advice about finance and mortgages,” she says.

“And as a broker, if you provide good-quality mortgage advice to your clients and you add value by offering budgeting and other services, and you’re building a long-term relationship with your client, then no supermarket call centre can damage that.”

This article is from Mortgage Professional issue #14.10. Download the issue to read more.