Diversification in funding options could affect savings strategies

02 May 2019

By Richard Pike, sales and marketing director of Phoebus Software Ltd

Although being affected by a lack of clarity around Brexit, the securitisation market continues to strengthen. In addition, more institutions are looking at using different funding options to increase lending balances.  

The equity release market in particular has seen a host of new funders coming to market over recent years. Many are established life assurance companies looking to achieve long term, stable rates of return by way of funding lenders who have the infrastructure to compliantly originate equity release mortgages. However, the PRA’s Solvency II highlighted the difference between equity release mortgages and traditional mortgage books and the way risk needs to be handled differently for each type of mortgage. It is therefore possible more of these new funders could look at finance lines for mainstream mortgage products for the marketplace as well as equity release. 

It is the norm for many institutions to still lend on balance sheet and fund lending via deposit balances. This is the same model that was seen in the UK until the 1980s when wholesale funding started to emerge and the UK securitisation market began to take off. Funding lending though deposits has also been a reason some existing financial services institutions became challenger banks, as deposit balances effectively become a new funding arm not available previously.  

New deposit takers, offering savings to fund lending, tend to provide fixed term products to ensure they can mitigate any potential run on funds. A growth area we have also seen is commercial deposits which can fund commercial, and other, lending at higher margins, again with a focus on term products. Although some systems can handle originating and servicing retail deposits, there are many that cannot deal with SME deposits and even sometimes loans. This is a fairly niche, but growing, sector in terms of market size and a reason Phoebus has invested a significant amount into our new digital business savings platform to assist new and existing players originate and service SME deposits.

Adapting traditional funding models for some companies may not always suit, but there is clear evidence of where it has been extremely successful. What is clear is that the funding market will evolve and to a certain extent, dictate the need to look at varying funding options - to maintain market share all possibilities may need to be strategically considered. This, of course, is not just in terms of products, but also includes the systems originating and servicing lending and deposits because of differing requirements for varying funding options.

 

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Debbie Staveley
Director and Owner,
bClear Communications

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