The return of competition

I read, without any surprise, that Tesco Bank has made the first set of rate reductions to its recently launched mortgage range, including their fixed and tracker mortgages.

I suppose by doing that, they are really throwing their hat into the ring.

If they want to be a serious player in the market, I guess they don’t have any other option. With the Funding for Lending scheme working now, some extra £80bn of funding is available for banks to lend direct to consumers so it’s hardly surprising that competition has returned to the market. Also, without doubt, helping competitive pricing is the record low bank base rate agreed by the Bank of England’s Monetary Committee. And this is unlikely to change for the foreseeable future – possibly until well into 2014.

So good luck to Tesco Bank.  I hope it builds their market share because I really think it is healthy to have newcomers out there challenging the existing lender model.

However I do hope they have adjusted their rates within the parameters of a properly worked product pricing model. All too often I have seen lenders set their product pricing as a knee jerk reaction to what’s happening elsewhere within the market. As a generalisation, I think more thought needs to go into setting the headline rate – and not only that but the criteria sitting behind the rate plus the service standards supporting it. (It’s all well and good to have a market leading rate but do you have the back up team waiting to process the application?). And will it contribute to shareholder value?

When Home Funding Limited started originating for German Bank Westlb back in 2007 we had an innovative product pricing model which we actively looked to share with our broker partners. This enabled us to have a win/win scenario with our distributors as they were proactively involved in pricing the product. We were able to originate genuinely bespoke products which challenged the market but also enabled us, acting on behalf of the lender, to offer products which were profitable.

I believe that with the right model sitting behind you, there really is the opportunity for lenders to come up with products that build market share and that make money.