Europe’s neobanks initially attracted customers with colourful cards and fee-free trading and spending abroad. Now, as many of them reach profitability, they’re moving into one of the more grown-up portions of financial services: mortgages.
UK neobanks Revolut and Monzo are both looking into the home ownership space, while Germany’s N26 and Dutch challenger bank Bunq have launched mortgage products in recent years. The product push will be a key litmus test to see whether consumers trust them enough with what is one of the biggest financial decisions you can make.
To pass that test will also require them to compete with incumbent banks such as Santander, Deutsche Bank and Barclays, which currently dominate Europe’s €8tn mortgage market.
“People will use a fintech product for international payments, getting their toe in the water of investing or managing their small direct debits here and there […] but when you want to do something big, you usually go to incumbents like Barclays, Lloyds or HSBC,” says Carl Hazeley, CEO of financial platform Finimize.
Making mortgages
German neobank N26 rolled out its first mortgage offering in the Netherlands in 2023 and has since grown its loan book to €1bn.
The Netherlands is a low-risk and “very attractive” market, CEO Valentin Stalf told Sifted earlier this month, as around half of owner-occupied mortgages are state-guaranteed, which means the government provides a safety net in case of default..
That’s also why Dutch neobank Bunq was one of the first challenger banks to roll out a mortgage product, its CEO Ali Niknam tells Sifted.
Launched in 2021, Bunq’s mortgage product serves first-time buyers and expats in the Netherlands. It operates through a partnership with a local mortgage company, which provides advisors, and proposals are delivered within 24 hours of application.
And while it’s doubled its mortgage portfolio year-on-year to €1.3bn, that figure is still a drop in the ocean compared to the Netherlands’s largest bank ING, which has €354.8bn in residential mortgages on its balance sheet.
It’s going to take a long time for both N26 and Bunq to catch up.
Consumers will have to feel comfortable with a completely digital mortgage process that relies on the balance sheet of banks that are comparatively very young (ING began offering mortgages in the late 90s but its history as a lender goes back to the early 19th century).
Banking on homes
As a financial product, mortgages also carry high risks. There’s the potential for financial loss due to fluctuations in the market interest rates. There’s also a risk of default, in that the borrower fails to make the required monthly payments as agreed, which would lead to a foreclosure.
That makes it a difficult product to innovate, especially for challengers with less access to capital than a traditional bank.
Revolut, for example, has £30.2bn in customer balances, according to its latest financial results, but that’s a far cry from the £243.1bn held by Barclays. On top of that, Revolut’s banking licence in the UK — one of its largest markets — is still in the ‘mobilisation’ stage, meaning it’s currently unable to lend in a country where it has over 10m users.
Neobanks are also up against smaller-scale next-generation mortgage lenders such as Generation Home, which has looked to innovate by enabling the relatives of customers to act as “income boosters” to boost the amount first-time buyers can borrow. It also allows friends or family to act as “deposit boosters” by contributing to a deposit via an equity or interest-free loan.
At the moment, the challenger banks appear to be more focused on replicating the mortgage process on digital rails rather than creating innovative new spins on homebuying.
“Mortgages aren’t that creative a product,” says Hazeley. “There’s not much innovation and there hasn’t been for ages.”
Speed is key
Georg Hauer, a former N26 exec who now advises and invests in the fintech industry, says one way neobanks could gain an advantage is by speeding up the lengthy housebuying process, which can take up to six months with a month usually spent on obtaining a mortgage.
“If a digital bank is able to give you the legally binding agreement for a certain mortgage for that property or as collateral within 24 hours, this would be a massive boost,” he says.
Speed appears to be a priority for Revolut’s approach to the market. It’s currently testing mortgage refinancing in Lithuania with an intention to expand to classic mortgages later and to locations such as Ireland and France.
According to a person with knowledge of the matter, customers seeking a mortgage deal in Lithuania with Revolut can be pre-approved in minutes by using an income verification tool and pulling information from credit bureaus and user data.
By automating the underwriting process, Revolut can pass on savings to the consumer and offer competitive rates compared to big banks, the person says.
For digital banks like Revolut, making sure they don’t overestimate their capacity to assess risk is key to avoiding default and interest rate risks.
“The lifecycle of a mortgage is so long that you might only notice you’ve made a mistake way too late,” says Hauer. “By that point, you could’ve already built up a massive loan portfolio and it might be way too late.”
Revolut declined to comment for this story.
Monzo, on the other hand, has taken a different approach. Customers can connect an existing mortgage to Monzo’s app and view information such as their remaining balance, estimated property value and equity. Monzo doesn’t lend for home ownership off its balance sheet but it does work with a regulated broker to help customers remortgage.
The fintech also posted a job advert in April this year for a senior product manager to grow its product portfolio in home ownership, and work with engineers and designers to make the “remortgage experience seamless”.
Remortgagers have a history of repayments and may have already paid off a portion of their house, so are typically seen as less risky than first-time buyers.
What’s the risk?
There’s a lucrative upside to gaining market share in the mortgage space. But to do that neobanks will have to make sure their compliance checks are in place so they don’t run up against regulators.
German regulator BaFin previously placed a growth cap on N26 for more than two years over concerns around money laundering and financial crime. And it has already landed in hot water with German financial regulators over its mortgages business, according to a June report in Manager Magazin.
The regulator is reportedly demanding that N26 adhere to German, rather than Dutch, risk management requirements for mortgage lending and customer screening (N26’s Stalf didn’t comment directly on the matter when Sifted spoke to him earlier this month).
Hauer says regulators are typically more sensitive when it comes to mortgage risk, citing the size of a mortgage compared to other types of loans and its capacity to create pressure on customers if a bank is unable to refinance or is forced to sell its loan portfolio to another party.
Still, customers borrowing for a house via a neobank would encourage them to use challengers as their primary bank account to receive their salary, rather than a secondary account. Mortgage providers usually require regular and easily-accessible payments — the most straightforward way of doing this is by having the borrower’s main income deposited directly into the account they pay for their mortgage. According to data collected by financial services data company RFI Global, neobanks only hold 6% of primary banking relationships.
“Revolut has been trying to get out of the stigma of customers not using it as a primary account,” the person with knowledge of its mortgage product said. “Mortgages play a big part in that.”
Read the orginal article: https://sifted.eu/articles/neobanks-are-getting-into-mortgages/
