How should mortgage companies approach “FinTech”?

As FinTech becomes the latest buzz of the industry, there are several tips that mortgage companies should take note of to best take advantage of the technology and remain competitive.

Financial technology or FinTech, as it’s called, is a line of business that uses software to provide financial services, per FinTech Weekly. Startups are generally the ones implementing this, as part of their goal to disrupt incumbent financial systems and corporations that rely less on software.

Mortgage companies have been automating their processes using technology to increase their acquisition rate and improve their back-end loan processing, underwriting and approval tasks. So, to be FinTech-enabled, should a mortgage company change the way they are doing business by overhauling their existing technology infrastructure and application stack (Option 1)? Or should they make the right incremental and strategic improvements to gain proper efficiency while leveraging their existing technology investments (Option 2)?

First, let’s walk through the mortgage lifecycle and see how technology is used to automate the business:

Customer Acquisition

Customer Acquisition is the most competitive area in the entire process. Business is highly regulated to restrict wrongdoings. It is also highly commoditized as rates and terms can be matched for the most part. The key to success is how fast a company can get to potential customers to engage them in a conversation to start the loan process. Many companies are successful with the call center retail model in which leads are purchased from multiple sources and can be used to reach potential borrowers in an almost real-time manner. Technology plays an integral part in this process. Many established vendors are offering very good telephone dialer packages that can be activated with little effort. The traditional brick-and-mortar retail and wholesale customer acquisition model still works based on established or hard-earned personal relationships.

Pre-Qualification or Point-Of-Sale platform

The next technological touch point is the Pre-Qualification or Point-Of-Sale platform. Mortgage companies can pre-qualify potential borrowers by entering several key personal data points to evaluate customer risk and qualification profile. The same technology platform can be used to negotiate with potential borrowers on the final rate and terms.

Secondary Marketing

If everything is agreed to by all parties, a loan file is created, and the standard processing/underwriting/closing/funding activities are initiated. Once a loan is funded, the secondary marketing process kicks in and loans are packaged for sale to the investment community. This entire process is mostly automated with multiple in-house developed and third-party technology platforms. Information such as credit, insurance and compliance are easily acquired via on-line integration with third-party vendor platforms. Web-based platforms, the Internet, Google, and the Cloud are many of the technological advancements making the entire mortgage lifecycle easier and faster.

FinTech Weekly listed 1056 FinTech companies with 66 companies considered as lending-focused, offering a variety of products and services spanning the globe.

Existing mortgage companies can choose Option 1 by investing heavily in technology and force wholesale changes to their business process automation. It may require the following:

1

Purchasing a new FinTech-enabled technology platform that will force retrofitting or overhauling of the current business process, employee culture and company risk profile.

2

Bringing in a new development team to build a brand-new platform while maintaining the legacy team to support the on-going business.

3

Re-training the sales, underwriting, processing, funding, and other support teams on the new set of applications, processes, and user interfaces.

4

Acquire stakeholders’ buy-in and patience to wait for the new platform delivery and success.

This is a risky and very expensive approach for any established company.

Option 2 seems to be a more realistic and reasonable approach. Indeed, incremental, and strategic technology improvements will open new sale channels, optimize operating costs, and reduce risks.

However, blindly investing in technological improvements may not be a good thing and may have a negative impact.

Here are some considerations for mortgage executives to ponder before authorizing the investment:

1

Do not automate a bad manual process. A terrible automated process is hard to detect and fix since it will be used by many people as a part of the business flow without true understanding of why this process was created in the first place.

2

“FinTech” is an improvement effort. It cannot make a technophobic company culture better. The lack of user training, technology documentation, data/process governance, risk behavior identification/remediation and process discipline will not be solved by having a better and more shining Pre-Qualification or LOS engine.

3

No amount of expensive hardware or systems can solve bad software applications and platform problems. Many companies have chosen to heavily customize their core applications based on perceived customer needs, compliance needs and unique business process advantages. Most of the customized efforts are poorly documented, along with key employee turnover over time, resulting in a highly customized and clunky software platform that no one knows how to untangle or improve. Furthermore, additional customization, fixes and upgrades are performed continuously over time adding more complexity to the platform. Lastly, as companies continue to grow, more employees/users are added further stressing the platform to its performance limit.

Here are some recommendations to address these challenges to get ready to embrace the “FinTech” evolution:

1

Strive to understand and document business processes by tasking IT and other key stakeholders to simplify and document the core processes and tasks. Ask the question: “Do we need to do this process and how can we do it better?” This is a tall task and will require executive sponsorship, commitment, and resources. However, it must be done to create a baseline for user training and technology implementation/improvement.

2

Take a serious look at the Buy vs. Build question. Ask yourself, do you need to improve a specific automated process? If you do, can you buy it from a reputable provider? Do you have the technical knowledge and proper due-diligence experience to consider purchasing a FinTech tool or application from a start-up firm? You should look at all Buy options before considering building it in-house. It is generally cheaper with better results. For most mortgage companies, the in-house IT team is usually better performing maintenance tasks instead of taking on innovative projects.

3

Direct the IT team to take an outside-in approach focusing on the customer experience. Ask IT to embrace the “keep it simple” approach when building or providing technology improvements. The CIO should be able to explain in simple, non-technical terms how the entire technology infrastructure and application stack is designed and implemented. Key areas such as user training, data security, process governance and infrastructure flexibility & DevOps integration should be clearly addressed and documented.

4

What about Artificial Intelligence (AI) and Block Chain? – There are many fintech companies working in these two spaces and building very good applications. However, do not blindly dive into AI and Block Chain until you have the first three recommendations under control. If not, you will add more complexity to the Business without realizing the desired ROI.

In summary, mortgage companies should embrace the FinTech evolution. However, critical house cleaning efforts must be done first before the full FinTech benefits can be realized. Successful companies understand that technology is a critical part of the business and should be viewed as a way-of-life (business life that is) spanning throughout all departments. It is also a continuous journey to maintain competitive edges with no destination as business will always change and technology will evolve to accommodate business needs.

Please share your thoughts and feedback. If you need help, call us. Thank you.

Michael H. Wilson is the President and Managing Partners with Dragon9 Partners. He is an experienced Mortgage and Technology executive. He held executive leadership positions with Plaza Home Mortgage, Option One Mortgage, First NLC Financial Services, loanDepot and Impac Mortgage. Mike received his MSEE degree at Loyola Marymount University and BS in Applied Mathematics/System Engineering at UCLA.

Contact Information –

mwilson@dragon9partners.com

949.306.4719