Evolving the Retail Business Model to Stay Ahead of the Curve
By Howard Michalski
In today’s environment, all retail lenders should be asking themselves, “What value am I truly offering a borrower?” We know that more and more consumers use an online, self-service option when making any retail purchase —mortgages included. When such convenience is available, why would a customer pay more to get a home loan from a retail lender instead?
Most originators would likely respond with answers like “They’d get better service and communication,” “They could receive help in comparing options,” or “They’d get assistance in qualifying for better terms or a larger loan amount.” That kind of thinking is about 20 years outdated. In today’s technology-driven world, there are a plethora of resources at our fingertips; customers can get tax tips by using Turbo Tax and rent-versus-buy calculations from sites such as Trulia, Zillow, or Bankrate, and there are even mortgage rate comparison tools from the Consumer Financial Protection Bureau (CFPB) website and, soon, Google.
To have a future, the distributed retail sector of the mortgage industry needs to update its way of thinking—both culturally and technologically. Before we consider what independent lenders must do to stay ahead of the curve, let’s first look at the forces putting pressure on the traditional retail model in today’s market.
The 3 C’s: Challenges Facing the Mortgage Industry
Today, the mortgage industry is being challenged by the three Cs: consumers, competition, and the CFPB.
1. Consumers are more self-service oriented and more tech-savvy than ever before. According to the 2015 National Association of Realtors’ Home Buyer and Seller Generational Trends study, more than half of Millennial homebuyers find the home they eventually purchase via online research.
2. These homebuyers are also going online to shop around for the best rate. This is creating more competition, and it’s forcing traditional lenders to keep a tight control on price in order to stay in the game and remain competitive.
3. But, not only do homebuyers want more insight into the cost of their mortgages, the CFPB wants them to have it, too. It has already implemented rules on loan originator compensation. Earlier this year, the Bureau also introduced a new interest rate comparison tool. Its critics have suggested that the tool is misleading consumers, and many have questioned why a government agency would create a tool that doesn’t inform borrowers of the other costs, especially those that lenders are mandated to disclose under Truth In Lending Act-Real Estate Settlement Procedures Act (TILA-RESPA) requirements such as closing costs and APR. These are just a few steps the CFPB has taken to allow for greater transparency to the consumer. And despite what some in the industry may think, this trend of transparency is here to stay.
So what can retail lenders do to stay in the competition? First, they’ll need to justify their position on pricing, which means they’ll need to be experts on what prices are most relevant in their market and how those compare to the prices of their competitors. More so, they’ll need to offer true added value to the consumer to substantiate a higher price point than other channels that offer consumers access to financing.
Learning from Customers’ Habits
Retail lenders need to acknowledge the impact that current consumer purchase habits have on the mortgage industry. To many, getting a mortgage seems like a scary and complicated process, but there are other approaches that have proven it doesn’t have to be.
For instance, those operating a consumer-direct model have invested significantly in technology that caters to consumers’ tendency to make purchases online, as well as the demand for an easy experience. Its high levels of automation make manufacturing hyper-efficient and, therefore, more cost effective.
According to a recent article on Forbes.com titled “5 Secrets of Selling and Serving 80 Million Millennial Customers,” Millennials are a fast-growing home buying customer segment and are “enemies of inefficiency and stupidity . . . such as filling out duplicate forms on paper when they know this is the same information they entered with your company online and you should just have it on file. Many customers just put up with these stupid ways that business waste their time, but Millennials are not interested.”
Of course, similar to retail lenders, consumer-direct has licensed originators who are good at what they do. However, their tasks are narrowly focused on a particular part of the origination process, so they tend to see more volume than your average retail originator. They’re also not chasing paperwork or running down escalations. They’re specialized to deliver a service that aligns to a particular set of customers’ habits.
Lenders also need to acknowledge that their customers are communicating differently. Fewer customers want to go to a lender’s office or meet to manually fill out paperwork. They don’t need “face time.” They want to do things on their own time. They want to receive communication when and how they want it. They want the ability to review documentation and respond to it when it’s most convenient for them.
This is all to say that by listening to and paying attention to the customers’ needs and tendencies, we, as an industry, are able to evolve our business model and better compete by providing services that align well with customer needs and expectations.
Evolving the Business Model
While the distributed retail model does provide a higher-touch service, there are customers who don’t want or expect it. To some, it seems antiquated, inefficient, and expensive. Retail lenders ought to take steps to add value to their services offered, while finding efficiencies that keep up with its range of customers.
First, lenders will need to offer fair, competitive pricing so customers are paying for the services they actually receive. Perhaps this means offering customers an “a la carte” menu, working within their budgets, and prioritizing the services that are most important to them. It also may mean reconsidering retail cost allocation--examining what the cost of added services such as marketing or commission structure might mean in exchange for the price point offered to the borrower.
Next, lenders will need to develop more automated processes that increase efficiency and scalability. If a retail lender moves to an e-signature offering, as an example, then all a borrower needs to do is sign one form and their lender can obtain all the documentation required to submit the loan file—pay stubs, tax returns, etc.—without having to bother the borrower multiple times.
Finally, retail lenders will need to ensure a superior customer experience. There are two ways to do this:
Invest in technology that understands and anticipates what the customer needs or wants and delivers it seamlessly, so there are no problems to resolve.
The other approach, which is the one the mortgage industry has largely implemented, is to rely on humans to fix problems for customers as they arise.
What now intervenes with the latter approach is a customer’s impatience with what should be a systematic process with little—if any—room for error or disruption. Here’s an example: if every time I order a steak from a particular restaurant, the chef is quick to fix it if it doesn’t come out as ordered, that’s nice. But why can’t my steak simply be prepared the right way, initially? If a retail lender is spending more time chasing solutions to problems or correcting defects that could be prevented earlier in the loan manufacturing process, that lender isn’t adding value to the customer’s experience.
To meet the needs of today’s customers, retail originators need to go deeper, extend beyond traditional practices, and invest in establishing more meaningful, trusted relationships with their customers. Originators need to be educated on how products work in their market and for whom, so they can better inform and lead their customers to the financing that best suits each individual circumstance. This empowers originators to establish these deeper relationships, and it’s more efficient and more cost-effective for both sides, which ultimately creates a better, more intentional customer experience.
The Future of Retail
Yogi Berra once said, “The future ain’t what it used to be.” As consumers become savvier, the competition becomes more aggressive, and the CFPB pushes for greater transparency, retail lenders are being forced to rethink how they’re doing business and how they need to evolve. Moving the industry forward will mean reinventing or, at the very least, reiterating processes and patterns. It may not be easy, but it is necessary.
By implementing a more systematic and value-driven approach, not only will retail lenders be able to reduce operating costs and offer better pricing, they will allow originators to better cater to their customers’ needs while serving as a trusted partner for the long term.
Editor's note: This select print feature appeared in the June 2015 edition of MReport magazine, available now.