To combat falling margins and declining customer loyalty, UK lenders must go beyond selling traditional products online, according to a new report from Forrester Research Ltd. (Nasdaq: FORR). Leaders will repackage mortgages into Dynamic Credit lines tailored to the individual customer, Forrester asserts.

“The growing number of Britons online and their rising confidence in the Web have the potential to drive the online mortgage market from today’s tiny £3 billion, or 2% of annual UK mortgage sales, to a £15 billion market by 2006,” said Forrester Senior Analyst Benjamin Ensor. “But the impact of the Internet goes far beyond the number of deals closed on the Web. The Web empowers consumers with information and widens their choices — reducing traditional offerings to their price and exposing their lack of flexibility. We believe that too many lenders fail to see that Net automation will exacerbate their three main problems: price competition, customer retention and product innovation. Lenders must actively shape the Net into a means to avert the ongoing credit commoditization and to meet changing consumer demands profitably.”

To this end, Forrester advises firms to adopt a new service approach called Dynamic Credit. This approach departs from traditional rigid products and pushes personalization and flexibility to new heights. Forrester defines Dynamic Credit as: “a single, flexible-term, variable-interest line of credit that automatically optimizes customers’ cash flows.” The main components of Dynamic Credit are a single credit line, flexible size and term, and variable interest. It will appeal most strongly to the young, well-educated, high-income consumers who are today’s most avid online users and already keen buyers of flexible mortgages offering them control, choice and cost savings.

“Dynamic Credit will replace discrete products with a continuous service; help individual lenders to capture market share from their rivals; and stop today’s price and margin erosion,” Ensor added. “Additionally, it will grow providers’ wallet share, increase customer loyalty, lower customer-service costs and price risk more accurately. Dynamic Credit won’t happen overnight, and it won’t benefit all UK lenders equally. Small and rigid organizations will struggle to make the transition to Dynamic Credit. Indeed, only a few innovative banks will lead while building societies will suffer, and non-traditional lenders will thrive while intermediaries will consolidate.”

For the report “Dynamic Credit” Forrester spoke with 31 UK mortgage lenders — banks, building societies and non-traditional lenders like insurance companies.