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March 17, 2022

Referral incentives key for green mortgage take-up

Mohamad Hasan discusses the potential offered by green mortgages as part of banks' overall ESG strategies

By GlobalData Financial

As the UK, and the global economy, enter an inflationary period that is expected to slow growth and drive the most significant rise in interest rates for over a decade, financial service providers are beginning to offer new product types to reduce the impact on their businesses and signal their role in helping to deliver a better future.

As interest rates increase, it is highly likely that the volume of mortgages and re-mortgaging will fall, re-mortgaging being a key factor in driving mortgage growth over the past half-decade. In the UK, Swansea Building Society has launched a new green mortgage product in an attempt to expand its product range, which will somewhat strengthen its mortgage book while also enabling it to flaunt its environmental, social, and governance (ESG) credentials at a time when businesses in all sectors are expected to take positions on social and political issues.

The green mortgage product is applicable to properties with an Energy Performance Certificate rating of ‘A’ or ‘B’, rewarding customers who purchase lower-carbon and energy-efficient homes with a lower interest rate. The product offers a range of rate options, with the ‘Green 80’ charging a variable rate of 2.95% and the Fee Assist option charging a variable rate of 3.3%. Both variations of the product have a maximum LTV of 80%.

GlobalData’s 2021 Financial Services Consumer Survey

While the new launch by Swansea is an important one as ESG becomes a more pressing concern for customers, data from GlobalData’s 2021 Financial Services Consumer Survey shows that customers who care about ESG factors more than higher returns are likely to decide who to take a mortgage with on the basis of recommendations from family and friends. It would appear that customers who value ESG principles are on average wealthier and able to absorb higher-cost/lower-return products for the eased conscience that such products offer in terms of ESG value.

As a result of this, financial service providers’ strategies may best incentivize ESG and green products in ways other than low rates/high returns, particularly for customers for whom these are not significant pull factors.

In this respect, an incentive linked to referral for products may be a better strategy for financial service providers to employ for products that have a significant value or socio-political judgments attached. Fintech platform bunq has previously done this by creating a community section on its platform to facilitate referrals from family and friends alongside cash incentives.

The opportunity for banks to leverage networks

This could be hugely significant for banks, as the networks they have from their own customers may become a key source of growth as ESG becomes more important and the culture of sharing previously private financial information grows. Banks also have the opportunity to leverage said networks with merchants to offer highly energy-efficient white goods, which customers could receive a discount on in proportion to the size of the network they have with the bank.

Given the publicity that many customers, particularly those who are concerned about ESG principles, display, it would also be advisable for financial service providers to offer small tokens that speak to their values in an exclusive manner. This could include the offering of a non-plastic or green card when opening a debit account or applying for a credit card, in a similar vein to how new electric cars have a green strip on their license plates. Small, subconscious offerings such as these can be the pull factors that differentiate offerings in the long term as other competitors adopt similar types of product pricing strategies.

Mohamed Hasan is Retail Banking analyst, GlobalData

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