Back to the Drawing Board

The dot-com demise forces financial institutions to reconfigure online lending offerings

Following a string of high-profile online lending flops, the banking industry is coming to grips with a hard fact about consumers, the Internet and life: slick presentations and eye-popping graphics do not a revenue stream make. Or, as the old adage goes, "You can lead a horse to water, but if you can get him to float on his back then you really have something."

The good news is that consumers are quite ready to borrow online, if and when they are offered the right blend of convenience, speed and customer service. "Online lending is where online banking was two or three years ago," said Jim Bruene, editor of Online Banking Report. "The average affluent consumer is going to get online once they feel safe."

In 2000, total online consumer loan originations (mortgage, auto, home equity, credit card and personal loans) totaled $44 billion, according to Forrester Research. LendingTree, a Charlotte, N.C.-based lead aggregator, alone accounted for $4.6 billion, or more than 10% of the total. Still, that $44 billion represents just a tiny slice of the $1.9 trillion in total U.S. consumer loan originations.

Looking to make a quick killing, promoters of online ventures swiftly overreached themselves. In mortgage lending, a market deemed ripe for online exploitation, Mortgage.com, iOwn and HomeAdvisor Technologies ceased to function as independent entities. Mortgage.com was absorbed by ABN AMRO, where it has rebounded-in July, it originated $422 million, a 1,200% jump over the previous July.

HomeAdvisor Technologies was folded last spring, a year after being launched by Microsoft and several banks as an online mortgage origination solution. Its primary software asset, Tuttle Decision Systems, was sold to Freddie Mac, which had been licensing the software for several years. Microsoft continues to ply the online mortgage trade with its MSN HomeAdvisor portal.

Several of the "dot-gones" have been associated with big banks, including Bank One's Wingspan and Loans.com, which Bank of America purchased for $3 million at a domain name auction. The site is now being used to redirect traffic back to www.BankofAmerica.com.

Still, despite these early setbacks, the outlook for online lending remains bright. In mortgages, for example, online lead aggregators and e-brokers like LendingTree, E-Loan and HomeAdvisor are helping to push online originations (purchases and refinancings) to $45 billion this year, or 3% of total mortgage originations, according to TowerGroup. That's projected to rise to $180 billion, or 13% of the total, by 2005.

"E-Loan and LendingTree have pushed the envelope in terms of functionality," said Craig Focardi, senior analyst at TowerGroup. "It's only a matter of time before they dominate the online lending space." Banks are doing their part as well. "Institutions like Wells Fargo, ABN AMRO and Citibank have done quite a bit in being able to originate mortgages and home equity loans over the Web."

Credit card is the leading category by far in online originations; estimates of the percentage of credit card balances originated online go as high as 25%. The reasons are plain: credit cards are generic products and the approval process is easily automated.

AGGREGATED ASSAULT

Well behind credit cards are mortgages, with just 3% originated online. Unlike credit cards, mortgages are high-dollar transactions and involve a much more complex approval and closing process, including appraisals, title, insurance, escrow services, etc. This almost guarantees that a mortgage application submitted online will end up being completed manually.

But that hasn't kept people from "shopping rate." In 2000, over a third of new mortgages-and 56% of refinancings-were researched online, according to International Data Corp. Other types of consumer loans have comparable figures. For mortgage brokers and lenders, that represents both an opportunity and a threat. "Any mortgage lender who is not tapping into this activity is at a competitive disadvantage," according to Aaron McPherson, a research analyst at IDC.

Rather than risk being underbid, lenders are embracing online aggregators. "The LendingTree model could become commonplace," said Online Banking Report's Bruene. "You could go to your bank and they could deliver you into the LendingTree system. You see this with mortgage lenders now."

By displaying competitors' rates, banks build credibility and lock in customers. "You could save several hundred dollars at Lender X, but is it worth the risk?" goes the thinking.

An example is giantbank.com. The online banking arm of Ft. Lauderdale, Fla.-based Landmark Bank, giantbank launched an online Loan Center to enable customers to receive competitive rates from lenders nationwide. After choosing their loan product, customers complete an application that's transmitted to LendingTree's network of lenders. Within 24 hours the customer receives a response containing bids from four lenders, and may contact the one with the best offer. Powered by LendingTree's Lend-X technology, the Loan Center allowed giantbank to create an online portal for mortgages, home equity and auto loans without creating a nationwide infrastructure.

As banks become more proficient with the Internet channel, traditional channels, such as mortgage brokers, risk being disintermediated. "Another player like LendingTree will be used by lenders in some cases to bypass a mortgage broker," Focardi said.

But rather than disenfranchise brokers, most banks will prefer to work with them.

GreenPoint Mortgage built an online loan monitoring tool called Pipeline Manager for its 18,000 mortgage brokers. Rolled out in July after being piloted in northern California, the service provides 24-hour monitoring services exclusively for brokers at www.greenmort.com.

Twenty branches across the country receive loan application information from brokers and transmit it to an Oracle database, which is replicated by GreenPoint and pushed out to the Web site every 15 minutes. At the site, brokers access real-time reports containing loan status and other details.

The system is far more efficient than the fax-and-phone system it replaced, said David Anderson, vice president of Internet business development at Novato, Calif.-based GreenPoint Mortgage. "We are in the information sharing business, and we want to make it as easy as possible for brokers to do business with us."

But auto lending, another major consumer loan category, is an anomaly. Although not far from credit cards in simplicity, auto loans are right down there with mortgages (about 4%) in online originations. What's holding them back are the auto dealers, who wield enormous power because they control the underlying physical asset. And they are loathe to give it up.

Those who attempt to disenfranchise auto dealers do so at their peril, said Christine Pratt, senior analyst at TowerGroup. "Those dealers are firmly entrenched. They have their own systems, so they direct and control where the paper is going."

Ultimately, though, the online channel will prevail, with or without dealer cooperation. The most telling evidence is a survey by IDC, which found that 43% of respondents who researched auto loans online at aggregators (e.g., Autobytel, Autoweb and Carpoint) and banks ended up applying online. That bodes well for lenders such as Capital One's PeopleFirst.com and E-Loan.com, which provide "blank check" auto lending, in which consumers are preapproved for a fixed amount of credit in the form of a check that can be used to purchase a car anywhere.

THE BIG BUILDOUT

Despite such successes, banks still find themselves caught between consumers' desire to shop for rates online and their reluctance to apply. Having had their fling with the standalone Web model, they face the difficult task of integrating the Web with existing channels like branches, call centers, auto dealers, and mortgage brokers. "They've come off the idea they're going to drive all their customers to the Web," said TowerGroup's Pratt. "Instead, they're focusing on using Web-based technologies to acquire or service loans."

The Internet's promise lies in making loan processing faster and cheaper than traditional methods, including the elimination of duplicate data entry and paper forms, and the transmission of loan documents and status via e-mail or a secure Web site. But it's still largely a promise. "The implicit assumption is improved productivity and speed. But unless they're using the technology in a meaningful way, that isn't going to happen," said TowerGroup's Focardi.

One of the problems is that the Web is both a sales channel and an enabling technology. "The Internet is an enabler throughout the mortgage supply chain, but it is only a channel at the consumer level, where borrowers and lenders search for each other," said Focardi.

Online lending is more than a consumer filling out an electronic form or sending an e-mail, with the rest of the process taking place offline. It's Internet-enabling each step of the loan process: product and rate search, application, disclosures, decisioning, processing and closing.

The emphasis should be on improving, not replacing, the traditional channels. "Online lending is a click-and-mortar process. The goal is to minimize, not eliminate, human interaction," Focardi said.

Customers will continue to rely on expert advice from loan officers and mortgage brokers. The key is to employ automated loan decisioning and "e-advice" to deliver this knowledge via the electronic medium. With automated loan decisioning ("e-decisioning"), once a borrower submits a loan application, a lender will respond with an approval within minutes, not hours or days. During the fulfillment process, e-mail and secure Web pages provide real-time loan status. E-advice enables borrowers to use Web-based loan product selection tools to find the product that meets their needs. Call centers, too, need to be capable of managing multiple channels like voice, Web chat, voice over IP, interactive voice response and fax to create a unified customer experience.

Such electronic handholding addresses one of the primary concerns about online lending-that consumers find it intimidating and are more comfortable dealing with a person, even if it requires a lot more time.

Still, with cost cutting and efficiency the primary drivers behind online lending, banks are using the Web to communicate within the organization and with partners in the value chain. "A lot of organizations are using Internet technology as a foundation for their multichannel strategy, especially large lenders who have acquired different banks, branch systems and loan platforms," said Pratt. "Web technologies can bring those together."

Citibank faced such a situation two years ago with its new online home equity loan service, myHomeEquity.com. Citibank sought to build a platform that would automate the complex steps of the lending process-credit reporting, applications, appraisal, title search and closing documents. Seeking an edge in a highly competitive market, executives were anxious to get the site up and running quickly, thereby beating competitors to the punch.

But first they had to figure out how to accept online applications from outside providers like LendingTree and transport them to one or more loan origination systems, without building a separate connection to each provider. The same for providers of other services like appraisals.

The solution was NetCredit, a B2B network from InsideOut Technologies, a subsidiary of American Management Systems, Fairfax, Va. NetCredit has helped Citibank turn a loan application around in about 10 seconds.

An electronic communications network (ECN) that links financial institutions with external service providers, NetCredit relieved Citibank of the hassles of building multiple connections and at the same time saved it money. Instead of an employee calling to request an appraisal, the request is made electronically and the appraisal is transmitted electronically as well. Similarly, instead of having to print documents for every state it lends in, Citibank can farm the work out to a third-party, and have the third-party send the documents electronically to the consumer.

For Citibank and others, the Web is proving to be an excellent way to service as well as source loans.