In the heady days of the Internet's infancy, when the financial services industry began exploring the new medium's possibilities, people often said that on the Internet one could "search for the lowest loan rates on the planet."
To consumers this sounded great. And to many bankers it sounded like yet another threat.
Is loan shopping on the Net a danger to banks? It is and it isn't.
In one sense global loan shopping via the Internet hasn't happened. In another sense it has, but not quite as envisioned.
Finding "the lowest loan rates on the planet" would be a daunting task for the most adept Net-head to undertake solo. For the uninitiated (that is, all but a very few prospective customers) it would be almost impossible.
Sometimes Net surfing isn't easy, even for the experienced. By definition, if the Internet is a mass market, it is composed of neophytes, or at least nonhobbyists.
Finding loans, rates, and a place to "apply" (submit one's name) to compare loans and come up with the best deal is so time-consuming and tedious that for all but the initiated it doesn't seem worth the bother.
Consumer inertia-where convenience beats a few basis points every time- is something that community bankers have known about and counted on for years in the low-tech battle against regional banks for market share.
Despite the difficulties Internet loan shoppers encounter, financial services remains a natural market for the Net. It was only a matter of time before someone would find a way to make global loan shopping practical and attractive.
The solution has been found by a small but rapidly growing group of entrepreneurs offering to do what most consumers are too busy to do for themselves. They may not search the planet, but they do reach a relatively wide group of lenders to match the individual consumer with the right loan.
The Tower Group calls them "Internet loan brokers"-sites such as QuickenMortgage.com, E-Loan, GetSmart, and Lending Tree. And keep an eye on homeadviser.com from Microsoft Corp.
The integrated lending and real estate services to be offered at this site could quite possibly put the software giant "in the banking business" as neatly as its aborted acquisition of Intuit Inc. a few years ago would have.
At the heart of each of these broker systems is software that matches consumers with appropriate loans. The software takes a consumer's criteria and qualifications and searches among available products for the best fit.
Loans are available from lenders with which the broker has contracted. The technology in each system is proprietary and therefore differs, more or less radically, from one broker to another, though all make use of relational data base technology.
Also, each of the Internet loan brokers has a quite different business case, reflecting the nature of the products.
Tower Group expects these disparate business cases to continue to develop more or less independently, with no clear winner emerging for some time. Further, the category itself will grow at a very healthy rate, at least for the next five years.
Consumer demand will be one reason for growth. Another will be thatInternet loan brokers will search for the right combination of convenience and value.
The biggest loan-brokerage inroads have been in credit cards and mortgages. Included among the credit card products are those offering debt consolidation. Included in the mortgage category are home equity loans. Both categories are as close to commodities as consumer credit products have come.
Though attempts have been made in other categories such as auto and student lending, the on-line business case is less compelling than for plastic and property.
In the mortgage market, Internet loan brokers collect their fees from the consumer. They try, broadly speaking, to present the customer with a value proposition, which entails eliminating either the mortgage broker that is often aligned with a Realtor, or the loan officer at a bank, thrift institution, or mortgage specialist.
The business case is built on the fact that the fee collected from the consumer is lower than those attached to loans from either a conventional mortgage broker or other financial institution.
In credit cards, the brokers collect their fees from the lenders. They give card issuers an opportunity to present their product offerings to consumers who are, by definition, "open to buy." This can be a cost-saving alternative to spending fantastic amounts of money on prospect lists, credit scoring those people, and then mailing carefully tailored "pre- approved" card offers to more and more finely identified segments of the list.
It is interesting to note that by training and heritage, the people behind the mortgage Web sites such as E-Loan are almost exclusively from the real estate brokerage world, while the people behind the broad-based lending or credit card sites invariably have banking backgrounds.
Though broad-based lending sites also offer mortgages, they have a very pronounced emphasis on credit cards. A number of varying business cases have arisen at different sites.
For example, GetSmart delivers its prospects to lenders in bulk, as it were, leaving any credit scoring up to them. Lending Tree does its own scoring, pulling credit bureau information on the prospects applying at its site. Lending Tree essentially performs sales as well as marketing for the lenders.
It is unlikely that any one of these disparate business cases-mortgage versus credit card, referrals versus completely scored loan applications- will in the end dominate. Especially in real estate lending, the possibility of partnering with nationwide realty franchisers, real estate developers, even municipalities or state Realtor associations, becomes extremely attractive. It also points the way to a widely diverse market.
This is where Microsoft comes in. Word has it that the new HomeAdvisor site will include visuals (maybe video) of houses, as well as relocation and lending referral information. Of course, the data that Microsoft stands to collect will in the long run be just as valuable as any fees it collects from the lending and sales process. Therefor the site could be a significant point of entry into the financial services business.
The same goes for the loan brokers. The information they collect on visitors to their sites-in Lending Tree's case, fully scored loan applications-will grow in value as it grows in bulk.
The question remains: Do Internet loan brokers represent a threat to banks? The answer, again, is ambiguous. Major national mortgage lenders such as Chase Manhattan and Countrywide, which offer loans through loan brokers, apparently do not believe so.
Such lenders are simply in the business of moving as many loans out the door as possible, even at the cost of disintermediating their own sales organizations.
Community banks will continue to originate mortgages at a healthy rate for the same reasons that have made a surprisingly large proportion of them impervious to the growth of both superregionals and the new class of national or near-national banks.
If any banks are to be squeezed by Internet loan brokers, they will probably be the regionals that can barely deal on price, fall down on service, and cannot offer the advantages of a local community bank or thrift. But that is an old story, hardly unique to the loan broker scenario.
In credit cards the case is much clearer. The average cost of acquiring new credit card accounts is high and, according to Tower Group estimates, going higher. For the local bank that offers a standard card when opening a demand deposit account, the cost will be much lower.
For a monoline or national issuer like Chase or Citibank, employing new analytical methods and running multiple simultaneous campaigns, the cost will be somewhat higher. Any means of supplementing such marketing techniques (most of which depend on information technology) with a less expensive way of attracting credit card customers is to be welcomed by such large issuers.
Internet loan brokering is added to the arsenal of alternative techniques such as affinity and demographic marketing that seek to reduce reliance on the prescored, pre-appoved card offer.
With those offers, delinquency and chargeoff rates, along with the cost of acquisition, further hurt the value the loan.
In the end, consumers can't find the lowest loan rates on the planet, but they can now price funds on the Internet. It is hardly a new world, but it isn't the way things used to be, either.
Will Internet loan brokers be able to resist the temptation to underwrite loans or originate loans themselves?
And will that change the fundamental economics of the business? Don't ask the people at Microsoft. They have troubles of their own.