on-line banking, in which transaction costs average 10 cents or less -- more than $4 less than it costs to conduct a transaction in person.

On-line mortgage lending just may be the killer application banks have been looking for. It is still in its infancy, however. In 1998, on-line originations -- loans initiated by consumers, brokers, or real estate agents over an electronic application -- accounted for just 0.5% of the $1.5 trillion in mortgage originations in the United States.

Contrast that with on-line trading. During the first quarter of 1999 alone, the number of on-line accounts jumped 21%, to 8.5 million, and average daily trades surged 49%, to 496,000.

But on-line mortgage lending may be starting to come of age. Consumers are already turning to the Internet as a favored place to shop for mortgage rates. Last December, an IBM study found that more than 90% of surveyed IBM employees looking for a mortgage used the Net to search for the best rates. If this trend continues among all consumers -- and we believe it will -- in five years, on-line originations may account for 25% to 30% of all new home loans.

Why does on-line mortgage lending offer so much promise? For one thing, the Internet allows mortgage providers to create a national presence and build networked information services that cut lending costs and simplify the process for customers. By establishing a new sales and origination channel on the Web, traditional lenders can build on their strengths: leveraging their economies of scale, vast customer information files, and extensive local branch networks.

On-line mortgage lending provides a strategic opportunity for lenders to simplify the process and enhance their value proposition to customers. By leveraging e-business technology, lenders can expand the capacity of their origination pipeline, potentially turning on-line mortgage lending into a profit maker instead of just a loss leader.

But such lending also carries a risk. If mortgage banks cannot master the new disciplines of interactive marketing and execution, they may forfeit control of the on-line origination pipeline to nonbank Web services.

And in a race where the first-to-market have an inherent edge, many network specialists are already using Internet technology to introduce Web-based services that allow consumers to shop for mortgage rates quickly and conveniently.

That's why it's imperative for banks to create an on-line mortgage lending process that creates compelling value for consumers. Simply moving some of the process onto the Web may be a critical first step.

A complex, time-consuming process, applying for a mortgage is one of the most emotionally charged transactions most consumers ever face. Buying and financing a new home typically involves numerous third parties, from the real estate agent to an appraising engineer, from a credit rating agency to the insurance company. Mortgage banks have added to the confusion by creating hundreds of different loan products that vary by rate structure, maturity, pricing and payment options.

Countrywide Home Loans offers a textbook example of how applying for a mortgage on-line can benefit consumers. Available 24 hours every day, their Web site offers a streamlined, electronic application platform linked to a back-end approval system. At any point in the process, a customer can contact an on-line service rep who can recognize what area of the site the borrower is visiting. Once the application is complete, the file is transferred electronically to a local branch for closing.

Done successfully, on-line mortgage lending lets banks achieve four key objectives:

It enables smaller banks to expand their geographic reach. The Internet allows them to compete on a national scale without having to build a brick and mortar branch system. At the same time, major consumer banks, which currently dominate mortgage underwriting, can use on-line lending to retain and enhance their national presence. But this battle will certainly go to the provider that best establishes its brand on the Internet.

It helps banks of all sizes attract customers through one-to-one marketing. Through interactive on-line offerings, best practice lenders have been able to reduce customer acquisition costs significantly. On-line marketing costs can be as low as $75 per loan, for example, compared with $200 or more for traditional off-line channels.

Lenders can use interactive servicing accounts to better anticipate customer needs and cross-sell other products and services, such as refinancing and home equity lines of credit. The convenience of on-line accounts helps them build customer loyalty and preempt competition from on-line aggregators and brokers.

On-line mortgage lending helps banks provide value-added information to consumers, while also reducing costs and raising productivity. It's a true win-win situation.

The opportunity is there for the taking. What traditional mortgage lenders must do is create a more compelling value proposition for customers and then build their brands on the Web. But most important, they have to act now. Ms. Gorsuch-Bradbury is an executive consultant in IBM's finance industry consulting unit. Ms. Stevens is a senior consultant in the group.

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