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Connections No.1 A publication of the LoBue Group June 1998 Retail Financial Services... CUSTOMER-CENTERED FOCUS IS KEY TO SUCCESSFUL MERGER INTEGRATION Recent announcements of mergers and acquisitions in the financial services industry such as the Citicorp/Travelers Group will create entities with size and scope previously unseen in the industry. Many observers cite a major reason for the formation of the financial services behemoth as being the seemingly endless cross-selling opportunities that will be created when the combination is achieved. The huge availability of financial products should result in customers who are content with a large, full-service provider of their financial needs. However, simply offering services to customers of one company to those of another will not effectively achieve customer satisfaction and solidify bank-customer relationships. There are still issues that banks will need to address in order to remain competitive in the growing financial services market. The ever-increasing use of multiple retail banking delivery channels is helping banks to provide their customers with fast, easy ways to manage their finances. Customers are now banking more than ever on their home PCs and at ATMs that provide them with convenient hours and access. However, this increased use of multiple, easily accessed banking capabilities has not necessarily steered customers away from more traditional means like branches and call centers. Instead, the availability of new retail banking channels has created a more versatile, multi-channel using consumer with higher expectations of its financial services provider. So, what does this new type of consumer mean to bankers who are trying endlessly to establish and manage healthy, happy customer relationships? It means that bankers must continue to develop new technology not only to make their multiple services user-friendlier and more efficient, but to allow themselves to take full advantage of the multitude of customers who have adopted these technologies as part of the every day management of their finances. The diversity and quantity of retail banking channels is allowing banks to mine customer data in a more effective manner that can create new selling opportunities, but unless banks utilize this customer data for the creation of opportunities based upon the comprehension of customer behavior, the investment in new channels just adds to the cost of delivery. Many banks are losing business to non-traditional competitors because they are not properly marketing products and services to their qualified customers. Customer service representatives, tellers and call-center operators could market bank products if they were armed with the proper customer information. However, most banks are not sufficiently tracking customer transactions and financial behavior. If they were, they would be able to target specific segments of their existing customer base for specific products. This method also helps develop the bank-customer relationship by giving the customer the feeling that their bank has a true understanding of what retail services they need. For example, if a bank knows that a customer has made several recent credit card purchases at the Home Depot, a financial service officer can proactively call that customer to determine if a home improvement loan is needed. Certainly this creates a selling opportunity for the bank, but customers ultimately want opportunities for themselves. Many banks have tended to be "bank centric" rather than "customer centric," and thereby have not provided the opportunities to their customers. The result - customers look elsewhere for their financial service solutions. According to the ABA's 1997 Retail Banking Survey Report, over 70% of customers establish relationships with banks today by opening a checking account. Checking accounts are typically viewed as standard transaction accounts, and customers tend to be treated in a similar fashion as transactions. However, if banks capitalize upon their existing points of contact (branches, call centers) to develop an understanding of the lifestyle and financial service requirements of their customers, the current selling paradigm can be shifted to present the customer with financial service opportunities investments, debt consolidation, trust accounts, college savings, etc. It is only when a bank shifts from the transaction provider of today checking accounts to a financial service provider of tomorrow, that the infrastructure will be leveraged with new customer opportunities brought about via mega-mergers." Mortgage Banking... CONSOLIDATION BRINGS CHALLENGES TO BIG AND SMALL PLAYERS With the ongoing consolidation of the financial services industry, the mortgage sector continues to struggle to keep up with the resulting changes. We have witnessed companies all over the country expanding their operations, and have even seen foreign entry into the US mortgage market. Financial service organizations continue to use mergers and acquisitions as a means to reach new customers in new markets and to achieve the synergies that commonly come along with consolidating the operations of two companies. However, with those synergies that growing companies often achieve comes a new issue that must be addressed: how operations and customer service will be affected by the new size of the merged entity. Is achieving greater efficiencies and cost reductions worth the sacrifice of personalized service that can create a lifelong customer relationship? Tthe answer to this question is "no," but a lower level of personal customer service is typically not enough to justify ceasing expansion through mergers and acquisitions. It is extremely beneficial and profitable for an organization to achieve economies of scale to minimize per-transaction costs and maximize volume. This allows the organization to pass the cost savings on to the consumer who will pay a lower interest rate or a smaller fee for the origination of the mortgage, and will thus choose to do business with the large, efficient organization. While achieving these efficiencies, the close, personal contact between lender and borrower often diminishes. However, that does not mean that customer service erodes across all levels. There is, in fact, an increase in the quality of servicing loans when hi-tech systems with large volume capacities are in place. The presence of these systems are usually accompanied by employees whose functions are very focused and specific, such as opening payment envelopes and sorting checks. These focused processes greatly reduce the risk of error and help to assure the timely posting of payments. It creates a more "hassle-free" experience for the consumer. Advanced systems and focused business processes, however, do not guarantee an error-free environment. Large organizations that spend millions of dollars developing and implementing new technologies still make mistakes. It is here that a customer will experience the true difference between doing business with a small company and a large company -- the personal element. For example, the customer of a large mortgage operation who mistakenly receives a notice of late-payment will often feel lost trying to inquire about the matter. The customer may spend several minutes trying to dial his way through an automated call center to a customer service representative who is neither familiar with the customer or the account. Because efficiency and rapid processing of transactions is a priority of large mortgage operations, the customer is less likely to speak with an employee who demonstrates a genuine concern for his satisfaction; and more likely to speak with someone who is concerned about taking care of the matter and moving on to the next customer. If the same customer had taken a loan from a smaller organization, however, he or she would very likely speak directly to the officer who originated the loan, who may even send a personalized letter of apology for the incident. While personal contact is great for customer relations, smaller mortgage operations also have their issues when it comes to quality customer service. Because small organizations usually lack the sophisticated technologies of their large competitors, they are more likely to err when servicing loans. No matter how much personal contact a customer receives, if the account is serviced poorly on a regular basis, he or she is not going to return to that institution for a loan in the future. In addition to competing with the efficient cost structures of large mortgage companies, small lenders are faced with other competitive disadvantages as well. For example, organizations that have achieved economies of scale and have developed a large customer base frequently offer additional financial services through multiple affinities such as insurance or credit cards. While a "true mortgage operation" does not serve as a one-stop shop for financial services, the benefits of consolidating multiple products under one roof are a major convenience for consumers. These large organizations will often provide consumers with a wider variety of payment channels as well, such as mail, direct-debit, and ATMs, if the mortgage operation is a subsidiary of a depository institution. Smaller mortgage operations frequently offer mail as the only channel of payment, which is where servicing errors are most likely to occur. Both large and small mortgage operations have qualities that make them appeal to different customers. Some borrowers will sacrifice personal attention in order to obtain a less expensive, more error-free product, while others prefer to pay the extra few dollars to guarantee that their account is being serviced by a person who is familiar with it. While neither a large or small mortgage company will ever be able to truly accomplish maximum efficiency and a genuine customer focus, both can and should attempt to strengthen their competitive weaknesses. Small organizations should work to increase their efficiency by installing more PC-based technology in order to speed up the origination process and reduce servicing errors. Large organizations, on the other hand, should strive to give their customers a feeling that they are not going to be lost amongst a sea of other customers, at least during the origination process, when the most company-customer contact takes place. The fact of the matter is that organizations of both sizes need to address these issues in order to please their customers to the best of their abilities. In today's market, there are too many competitors lurking in the dark, waiting to steal customers who are unsatisfied with the service of their mortgage providers. return Private Banking... NON-BANK COMPETITION CONTINUES TO ERODE BANK TRUST MARKETSHARE In recent years, banks have watched their share of the U.S. trust market drop alarmingly. Since 1990, banks have lost more than half of the 65% market share they once enjoyed. As wealth in the U.S. continues to grow, banks' share of the trust market continues to diminish. And things are not getting any easier for banks - the number of non-bank trust service providers is booming and affluent house-holds are enjoying a relative "buyer's market" for asset management services. Historically competing principally against other depository institutions, banks now find themselves up against a tough, new breed of trust organization: a non-bank with a thrift charter. This new type of trust organization aims to better satisfy trust customers by providing a wider array of investment products and delivery channels. To add to the challenge, banks are dealing with more sophisticated customers who are growing increasingly investment savvy and demanding of their financial services providers. This leaves banks in a do-or-die position: in order to retain their trust customers and acquire new ones, banks must begin to refine their trust businesses and offer services with a more modern approach. The recent decline in banks' market share of the trust business can be attributed to various factors. Besides the entrance of new players to the trust game, banks' traditional weakness in asset management, the slow development of new investment products, and non sales-oriented personnel are also contributing factors. Allan Morehead, a LoBue Associates principal and the Director of LoBue's Private Banking Group, believes that the issue of increasing competition in the trust industry is likely to grow more intense; however, banks can compete more effectively with improvements in asset management services, investment products, and relationship management. "Because of the Glass-Steagall Act, which prohibited banks from underwriting securities, banks have very little experience in managing the large assets of wealthy clients beyond traditional trust and fiduciary services," suggests Morehead. "The investment-savvy, high net worth customers of today are more familiar than ever with a wide range of investment channels that they demand be a part of the services offered by their financial institutions." Because banks are not traditionally asset managers by trade, their customers have turned to investment banks and brokerages with thrift charters to manage increasing shares of their wealth. These organizations can offer customers a more one-stop shopping approach to investing: they provide not only trust services, but a full array of investments and asset management styles to meet the demands of today's high net worth and emerging affluent markets. Banks have been moving in the right direction to remedy this situation. An increasing number of banks are acquiring securities brokerages to obtain the same capabilities as their new competitors. However, this is just now developing into a core piece of their business. Banks still need to refine their distribution channels and operations to take advantage of and profit from this new capability. Another major challenge that banks must face is the historical focus of their trust personnel. Trust officers of banks have not traditionally been sales-oriented. While an effective sales force will help bring in new trust clients to banks, it will also help generate additional revenue from a bank's existing client base by increasing the number of investment products and services that those clients use. "It is up to banks to build and equip their sales forces to effectively compete for the additional assets of wealthy customers," says Morehead. "Not only will this generate more revenue for banks, but it will also help establish the sense of one-stop shopping convenience that makes customers return to do additional business." In order to remain a major force in the U.S. trust market, banks need to address the issues that caused the diminishment in the first place. Slow innovation of new investment products, general inexperience in asset management, and the non sales-oriented perspective of trust officers are responsible for turning market share over to new, non-bank trust institutions with thrift charters. By providing a large, diverse group of products through a variety of distribution channels, banks can offer an array of investment products that are tailored to customers' needs. "Achieving satisfaction of today's market-savvy consumers by providing a more competitive approach to their investment needs," concludes Morehead, "can help banks recover lost ground in pursuing the large, high revenue-generating assets of wealthy Americans." return Connections No.2 A publication of the LoBue Group January 1999 Private Banking: THE SELF-SERVICE GENERATION COMES OF AGE IN THE AGE OF THE INTERNET Already losing share at an alarming pace, U. S. private bankers must now move fast just to survive. LoBue Principal Allan Morehead looks at the competitive erosion of private bankers' strengths, the market upheaval in pursuit of high net worth clients, and the perfect union of the Internet and today's "self-service" generation. THE BATTLE FOR THE BABY BOOMERS Y2K holds special significance for U. S. private bankers. It marks the beginning of the 10-year count-down to 2010 the year when the leading edge of the Baby Boom (the U. S. population "bubble" comprised of the post-WWII generation) will begin retiring from active business and professional life, with balance sheet legacies of their upward mobility. Already responsible for an historic explosion in U. S. upper affluent and high net worth (HNW) segments, this aptly named "boom" generation represents the richest market of portfolio management, trust and estate-planning business ever faced by private bankers. Although the battle for boomers' business has already begun, many of the "weapons" and tactics are just being recognized. And time is short, especially in an industry not known for its quick reaction time. TRADITIONAL PRIVATE BANKING STRONGHOLDS Private bankers, traditionally concerned with competition from commercial and private banks and more recently pre-occupied by the inroads of full-service brokers, need to focus sharply on the Internet. On-line discount brokerage firms, such as Charles Schwab and E*Trade, are now competing for customers by offering expanded services instead of just low prices to attract business. To compete and perform profitably in the future, Morehead suggests that private bankers must immediately re-think their traditional competitive strengths in order to find their position in the emerging on-line marketplace. Let's begin now with a brief examination of the traditional strongholds of private bankers and investment managers: 1. Market Knowledge Global market information, real-time stock quotes and breaking economic news stories are no longer the special province of portfolio managers and brokers.
2. Portfolio Performance The "secret's" out managed portfolios rarely beat market indices. As a case in point: only about 1/10 of mutual funds have bettered the S&P 500 since 1995. This sort of statistic has never been news to the investment management industry, and now it is not news to anybody else, either. While it is still possible to find consumers who believe that investing to beat the market is a professional skill that can be mastered by the top managers, they number fewer with each passing day's performance reports. Just consider how few people knew what "S&P 500" meant in, say, 1970 compared with today, and you will have some idea of how those reports are infiltrating the consumer consciousness. Cashing in on the performance promise of "professional money management" will only become increasingly difficult. 3. Investment Power Certainly there is investment power -- and pretty soon everybody will have it. Throughout the 1990's, private bankers have been losing HNW and upper affluent investors to full-service brokers. The general industry view is that this is a reflection of brokerage firms' superior marketing and sales culture, not any comparative shortcomings in banks' performance or service. That is, all banks have to do is knock down anti-cooperation internal turf walls, build sales teams, and unleash a properly-incented sales and marketing culture on the client universe, to find themselves back on solid-ground, duking it out with their broker adversaries. But just as banks have begun to respond to this years-in-the-making client shift to full-service brokers, their world is being turned upside down yet again. And this time, traditional brokers are standing on their heads beside them. Who's rocking their world? Look no further than the Internet. In fewer than five years, on-line stock trading has grown from nothing to 25% of all retail stock trades. Of course, clients wanting to take advantage of IPO's and Private Placements, invest overseas, or cover certain exposures with options, will still have to deal with their full-service broker or private banker, right? Wrong. Or at least heading towards "wrong" with lightening speed:
4. High-Touch Service Everybody knows you attract the high net worth with high-touch service. PaineWebber agreed, until recently: While still on the Internet trading sidelines, PaineWebber conducted a trial study of visits to an Internet site by its clients, and got a couple of big surprises. First, the average visiting client had an $800,000 portfolio, or about four times the average ($200,000) for full-service clients. Second, fully _ of all visitors were over the age of 50!
5. Professional Analysis Still, if you want top-flight investment reports and analysis . . . Well, you have got the picture by now these are on-line too! Here is a sampling of what is available:
6. Trust, Tax and Estate Planning Services Historically a competitive "sure thing" for bankers, more than 50% of their share of trust assets under management has been wrested away by brokers and others during the 1990's. And here too the Internet appears to be making inroads. These are two of dozens of examples:
7. Client Reporting Reporting is one of the top complaints of the HNW investor. Even the average affluent household can approach 10 statements each month by the time you add up the brokers, mutual funds, banks, 401(k)'s, rollovers and mortgage statements. Without your own family office to handle the consolidations, it can seem impossible to get a current handle on your portfolio. Clearly, nobody has mastered this task yet. But the Internet may be the first to succeed:
STRATEGIES FOR WINNING AND HOLDING THE SELF-SERVICE GENERATION Morehead will explore each of these in more detail in coming issues of Connections, but here now is a brief list of mandatory strategies for success in the count-down to 2010: Re-design your Private Bank for 2000+: Think through the linkage between your market growth strategy and your current sales, service delivery, and operations structures. Non-strategic services and operations must be radically streamlined, outsourced to more efficient providers, or shed altogether in order to maintain justifiable economic value- added in the next three to five years.
Build your on-line service offering: Establish on-line services at a level below your current entry threshold. Properly designed and integrated with your service and operations structure, this can represent a profitable delivery channel from which entry-level on-line clients can matriculate to full-service clients as their portfolios grow. At the same time, you can expand services to your existing clients by adding the full array of on-line features to their current service offering. Arguably, the longer you wait, the cheaper and easier it will be to build your on-line services. Unfortunately, by then it may be too late. Deepen your ability to evaluate and advise clients: Understand that the core of your value-added - your relationship with your client - has not changed. It's just becoming more demanding. You know that Buy + Hold = Wealth. But with so much often-sensationalized information available through the media and on-line, the temptations on self-service investors often result in impulsive trading. This self-service generation needs protection from itself in order to establish and adhere to appropriate long-term wealth-building strategies. Private bankers, however, will need more than the traditional questionnaires and allocation models to compete on the promise of superior advice. Behavioral finance theory offers insights into how this might be accomplished. The theory has been developed based on an understanding that investors are "human", with natural gut instincts that affect their decision-making processes. Even self-service Boomers need support and validation of their choices. Private bankers who truly understand their clients how they evaluate potential outcomes and how they react to current events will have an advantage over their on-line competition. "Look at what's happened in the market in just the last two years," concludes Morehead. "Unless you implement equally far-reaching change in the next two years, you may find yourself observing the Battle for the Boomers from the sidelines." return Mortgage Banking... ONLINE ORIGINATIONS, THE FUTURE OF LENDING Prepare yourself for the first Internet-driven consolidation in history. While a number of businesses are still trying to determine whether or not they should have a Web site, the mortgage industry is finding more business than it can handle coming through its modems. As reported in the August 1998 issue of Mortgage Banking, almost $265 million in online mortgage loans were originated in 1997 and industry experts predict that electronic loan originations will reach $725 million by the end of this year. Loan originators who haven't already built their Web sites may not be too late, but without a presence on the Web, they may find themselves putting the competition's name on the door. Buying a home is probably the largest investment most people make during their lifetimes. In the past, first-time homebuyers typically learned about the loan approval process while buying their home. They relied on either their bank or a recommendation from their real estate agent to find a loan, and rarely shopped around for a better deal. Those days are over. "Borrowers now log on to the Internet to educate themselves about the lending industry and to shop for the best rates," says Michael Scott, a principal and the Director of LoBue Associates' Consumer Finance group. "These people are excellent target clients for loan originators." They are often dual-income, college educated couples with upper middle-class earnings and a strong financial future. With very little free time, a computer at home and the desire to investigate the lending industry at odd hours, they want precise information and will quickly sign off from any site that doesn't meet their criteria. Attracting their attention doesn't have to be a monumental financial investment. A number of companies offer software specifically designed to establish an Internet mortgage origination site. Genesis 2000 recently released its WebBuilder system, an easy-to-use, template-based program that takes only minutes to install, is easy to customize, and can be updated 24 hours a day, seven days a week. Other software companies that offer similar mortgage industry packages include Mortgage Software Source at www.4-mss.com or HomeSide Lending at www.homeloan.com, an Internet-based company with links to other providers. There are three basic types of online mortgage web sites:
These electronic systems require far less paperwork to process an application because it can be sent directly to Fannie Mae or Freddie Mac for approval. Originators receive loan approval or a referral to a human underwriter based on as little information as a credit report, a FICO score and a subset of the uniform residential loan application. Fannie Mae reports that Desktop Underwriter is processing an average of 10,000 transactions per month. The system's use of selling guide rules and compensating factors results in maximum flexibility for borrowers, allowing lenders to tailor a loan based on an individual borrower's risk profile. Other benefits include:
Mortgage companies like Finet Holdings Company of Walnut Creek, California takes full advantage of the Internet. Finet created a fully integrated electronic mortgage approval system by tying together the required forms on its Web site with Fannie Mae's Desktop Underwriter software. Finet asks borrowers to fill out an application on a secure, electronic form, check the data against electronic credit reports and then automatically sends it to Fannie Mae for approval. The borrower learns of the outcome through email. The bank can then issue a check within 48 hours of approval. This example points out two important security factors that lenders need to address when building a Web site - transaction protection and data protection. Transaction protection provides a secure system, which allows customers to send personal information, such as credit card numbers, over the Internet. Data protection ensures that the information cannot be accessed by outside sources once it arrives. These computerized underwriting systems, which cut from weeks to days the time it takes to close a loan, are opening up competition in the mortgage business. These systems give small lenders the tools the giants of the mortgage business use to dominate the industry. Also consider that online loan originations are less expensive than traditional ones. An internet application requires fewer middlemen and costs about $25 to process, compared to the $250 a traditional lead costs to generate through direct mail. This ability to deal directly with Fannie Mae and Freddie Mac will greatly increase business in the lending industry. These agencies estimate that widespread adoption of automated underwriting will save borrowers $2 billion a year in closing costs and move some borrowers out of the sub-prime market and into conventional mortgages, saving them up to $100 million in annual interest payments. From the originators' point of view, such systems helped them handle this year's giant refinancing wave without adding significant staff. Since automatic underwriting was introduced in 1995, Fannie Mae reports a 14% increase in productivity, measured by total yearly origination volume divided by mortgage banking employment. Automated lending doesn't stop there. For loans that are in default, Altel has developed software designed to save lenders time and money when dealing with severely delinquent loans. These loans are automatically transferred to a special computer service after 60 or 90 days of delinquency. Instead of manually entering in the data, the information can be electronically sent. This eliminates delays and delivers greater resolution of delinquent loans. The mortgage industry definitely belongs on the Internet. The National Association of Realtors reported in the November 12, 1998 issue of American Banker that online mortgage origination saves $21 billion a year nationally - $7 billion by eliminating the middlemen and $14 billion by automating the paper trail. Understanding, reacting and profiting from this change is critical to the survival of lenders both big and small. Like it or not, service is now secondary, because the key to attracting borrowers is online access to information. Whether your site is a simple brochure, or offers the capacity to apply for a loan directly, understanding the demands of your client base and positioning yourself to offer flexibility and respond quickly are critical. Those lenders remaining after the next round of consolidations will be the ones who have the ability to originate and close loan applications electronically. return Technology... BUSINESS PROCESS ANALYSIS FOR SYSTEMS DEVELOPMENT, INTEGRATION AND IMPLEMENTATION In an era of rapid change, financial service organization managers must streamline back office operations and develop flexible systems to effectively compete in today's market. Sandy Heitler discusses new tools and approaches to developing systems that actually accomplish business performance goals. THE NEED... BUSINESS-ORIENTED SYSTEMS METHODOLOGIES Financial services companies have invested heavily in technology during the past 10 years to streamline back office procedures and improve customer service. But it has not produced the desired results. Managers have initiated systems design on a project-by-project basis, resulting in hundreds of stand-alone systems that are unable to communicate, are difficult and expensive to upgrade or enhance, and fail to meet the ultimate goal of the organization, which is to increase its client base and facilitate cross-selling. Historically, computer engineers used a complicated language and methodology they developed to direct systems design. Regardless of the industry, they used the same four-step procedure to deliver a new system. The process required a lengthy planning period to define the desired result, followed by months spent designing the system. Next, the actual writing of the code, along with continuous testing to correct problems and eliminate glitches often took more than a year to complete. This top-down approach is often referred to as "over the waterfall", because just as it is impossible to swim up Niagara Falls, the time and financial investment needed to complete each phase of the project make it prohibitive to reevaluate the plan at any time during development. As a result, the process itself is extremely inefficient, prone to delays, and often delivers a product that is out of date. Managers have learned the hard way that employees omit information if there is no space available on their screen. ENTER A METHODOLOGY SOLUTION... OBJECT- ORIENTED MODELING Fortunately, a new philosophy called object-oriented modeling revolutionizes systems development. Instead of the traditional technology-driven approach, this process works from a business perspective, effectively bringing together business processes, business people and technicians. "We anticipate that in the near future, most systems development will use the object-oriented modeling method," says Sandy Heitler, a principal and Director of Information Services at LoBue Associates. "This model tends to produce sounder design, is easier for non-technicians to understand, and can substantially decrease maintenance costs during the life of the system." Object-oriented methodology holds that each task in a business has a certain behavior and defines these behaviors as objects. Each of these objects are unique, yet related, in much the same way that a parent and child are related. The objects are then used as building blocks to create a system that is connected but allows each cell to operate independently. This approach delivers a system that is constantly evolving, easy to maintain and flexible. For example, let's look at a basic customer bank account. It has a name, address, an eight-digit account code and other basic information. There are certain steps or behaviors that it performs for the bank. The first task, or object, is to bring the account to the teller's computer screen, an action behavior that programmers can deliver almost immediately after the project begins. Next, programmers create a cell to post a balance. Another object, or behavior is to calculate interest earned. Each of these additional requirements is a cell, or block, that can be added to the basic account cell at any time. Because each cell functions independently, if future growth at the bank requires that accounts be recorded with nine numbers, then the only reprogramming necessary is done at the account cell. All other cells continue to operate as previously instructed. This flexibility is critical for today's companies to succeed, but reconfiguring programs to an object-oriented model is not enough. ENTER THE FULL BUSINESS SOLUTION... BUSINESS PROCESS ANALYSIS To maximize the potential of the object-oriented modeling methodology, organizations need to integrate systems development with all business process design. LoBue Associates has developed a program, called Business Process Analysis, (see chart below) that does just that. Through an in-depth examination of the organization's entire operation, all business functions are analyzed and unified business processes are designed. The program consists of two major segments:
In conjunction with this examination, LoBue Associates also rationalizes existing procedures in an effort to streamline back office operations. Sub-processes, hand-offs, and the people needed to complete tasks are examined. An easy way to illustrate this activity is to look at the work a loan officer does for a bank. The first object on our model is the loan application. The loan officer receives this document, then conducts a series of tests or behaviors to determine the credit worthiness of the loan. We may find that the loan officer repeats some steps already completed by a previous employee and suggest ways to eliminate the redundancies. At the same time, each step the officer takes is defined as a behavior that can be placed on the object model, with a long-term objective to automate as much of this process as possible. Checking on the credit history, applicant's income, and risk factor of the applicant are all objects easily accomplished by the computer. With these new efficiencies in place, the loan officer can now handle a larger number of loans or spend more time serving customers. The computer can also be programmed to continuously monitor the loan. If it becomes delinquent, a cell can instruct the computer to issue letters to the borrower, rather than having the loan officer review monthly printouts. The cell responsible for tracking delinquent loans can also be used by the credit card, auto loan, or business loan department, eliminating the need to write a new code for each of the other departments. Consolidation, competition from non-traditional sources and an ever-more demanding public require financial service organizations to quickly meet the needs of their clients. "By integrating flexible systems and streamlined processes," concludes Heitler, "managers will be able to achieve the overall business performance to effectively compete in today's market." return Connections No.3 A publication of the LoBue Group June 1999 Moving to the Euro... ARE WE REALLY READY OR ARE WE A STEP AHEAD OF TIME? The euro has arrived on the international scene with much fanfare... but is the world really ready? Looking at history as a lesson for the future. "Business men of all sorts are showing their willingness to come into this arrangement, which I venture to characterize as the constitution of peace." A HISTORY LESSON While the strength of the United States economy now depends largely on the careful fiscal policies laid out by the Federal Reserve Board, it took the United States three attempts and more than 100 years to create a working central bank. Can the European Community succeed on its first try? Has it made the necessary political adjustments to ensure economic stability? To better understand what the future may hold for the euro and the steps that must be taken to ensure its success, a quick review of the history of the American banking system might present some interesting clues. When the US decided in 1781 to call its monetary unit the dollar, it was comprised of 13 member states and was very similar to today's European Union of 15 sovereign nations. States' rights advocates believed the federal government had no constitutional right to meddle in their affairs and this included the banking system. Each state chartered its own banks, which issued their own demand deposit notes. Banks would only accept notes from other banks at a discount. As a result, interstate commerce was difficult, monetary stability was almost impossible, and counterfeiting was rampant. It was estimated that a third of paper money in circulation was bogus. In 1791 Congress created a national bank, named The First Bank of the United States, to help pay off debts from the Revolutionary War. During its 20-year charter, it competed with state banks for customers from its home in Philadelphia. Political pressure from states' rights activists who questioned Congress' right to open a bank, pushed for its closure and won. The war of 1812 severely hurt international trade and notes issued to finance the war needed to be retired. This economic turmoil forced Congress to once again grant a 20-year charter to establish the Second Bank of the United States in 1819. During this time an important battle over a state's right to tax a federal institution reached the Supreme Court and decided the constitutionality of the federal government's right to charter a national bank. In 1819, Justice John Marshall decided, in McCulloch vs. Maryland, that Congress did have the right to establish a bank and that states can not tax a federally chartered bank. This effectively meant that monetary policy for the country belonged in the hands of the federal government. Despite strong evidence in its favor, the Second Bank of the United States also became a victim of politics, lost its national charter, and monetary control again returned to individual states. It was Abraham Lincoln who in 1863 finally brought the country together under a single currency. The National Banking Act was enacted to encourage the sale of government bonds to help finance the North's involvement in the Civil War. In order to expedite the development of the national banking system, a 10% tax was placed on state bank notes, effectively eliminating them from circulation. The government's new notes, commonly referred to as "greenbacks," were last issued in 1971. For a short time this system helped to stabilize the economy, but because there was no allowance for seasonal currency needs, or any flexibility in national or local lending practices, it failed to stave off two financial panics. Congress realized that a better system needed to be developed and in 1907 established a national banking commission. Its members traveled overseas to determine which aspects of various European central banking systems could be molded into an acceptable American monetary institution. Their findings helped to create the Federal Reserve system, which took effect in 1913. Its original purposes were to give the country an elastic currency, provide facilities for discounting commercial credits, and improve the supervision of the banking system. After WWI, the federal government expanded its role to manage currency and credit in order to solve worldwide economic imbalance as well. These three national banks chartered by Congress were established to pay off debts from war, whereas the European Commission was created as a way to ensure peace throughout the continent. Some have called it a "top-down" revolution spearheaded by elite politicians. This elite sees the introduction of a single currency as only one step, not the end result, of the process towards lasting peace. While the success of the euro is critical, there are still a number of important hurdles to overcome before the euro can truly take its place as the second strongest economic unit in the world. CAN HISTORY BE REPEATED?: SOME ESSENTIAL DIFFERENCES? The design of the European Central Bank, which was recently empowered to monitor Europe's single currency, roughly resembles the Federal Reserve system in the United States. Both systems are charged with the responsibility of maintaining a healthy economy. However, Housen points out some troubling differences. WHO IS ACCOUNTABLE? When the Federal Reserve chairman determines that the economy is growing too quickly, he or she can take steps to curb growth and hold off inflation. Before making its decisions, the Fed is required by law to take production and employment figures into account. In theory, it also works with the Treasury department to guide the economy. The White House can also try to influence the outcome since the Fed can be held accountable for its actions by Congress. In Europe, the aim of the Maastricht Treaty was to ensure that no single government could control monetary policy. The role of the European Central Bank is to oversee the euro with price stability as its goal. It is expressly forbidden to "seek or take instruction from community institutions or bodies, from any government of a member state or from any other body." "As a result," states Housen, " the bank is accountable to no one. Even the proceedings of the council's meeting can remain confidential." THE EFFECTS OF ASYMMETRICAL SHOCKS Allowing the central bank to freely decide monetary policy can lead to political trouble. For example, if asymmetrical shocks are incorrectly handled by the central bank or individual governments, they could lead to a loss of confidence in the government and strong resistance to remaining tied to a single currency. Asymmetrical shocks occur when a group of economies experience growth or contraction at different rates. When the United States faces an asymmetrical shock, there are several steps the government can take to avoid long term problems. First and most importantly, the work force in America is very mobile. Moving from state to state is relatively simple. There are no language or strong cultural barriers. If emigration fails to balance the employment market, the federal government can step in to help alleviate economic stress. For example, if auto sales plummet and unemployment in Michigan threatens the local economy, the government can take surplus funds from California and send them to Michigan in the form of education grants to retrain people, tax incentive programs to stimulate new business, or other growth-oriented policies. In Europe, the adoption of a single currency has eliminated each member country's option to handle its own economy. Now, if France suffers from a drop in tourism while Germany is experiencing strong growth due to an increase in demand for automobiles, the European Central Bank must decide which country needs more help. If short-term interest rates for the euro are dropped, France might recover, but the move would increase the rate of inflation in Germany. "Take into account all 11 countries," suggests Housen "and the magnitude of the problem the European Central Bank must deal with becomes very apparent." ECONOMIC CONTROL AND ITS IMPACT ON POLITICAL POLICY When each country had its own currency, it had three options at its disposal to help put its economy back on track. These options include: interest rate adjustment, exchange rate intervention, and fiscal adjustment. For France the correct monetary policy might be to use interest rate adjustments to encourage growth in other sectors of the economy. Or the government might believe that exchange rate intervention is the best way out and could devalue the franc and reduce the cost of a trip to Paris. The last option would be to pump money directly into the tourism industry through direct subsidies to encourage job growth. The single currency is encouraging businesses to consolidate, and while these corporations become stronger, the jobless rate will increase. People in Europe are first either Italians, Dutch or French, and Europeans second. They face cultural differences, language barriers, and social institutions that keep them from crossing borders to look for work. The right policies must be established to help people relocate for jobs. It is a steep uphill battle and politicians who are guiding the transition must decide whose job it is. Currently, there is no help available to individual countries. The European Commission in Brussels, which oversees the member governments, does not have the power. It has a budget of only 2.5% of all taxes received in the member countries, with more than half of the funds going directly to agriculture. The result is that the EC has no significant resources to offer and if they do attempt to choose one country over another, the political implications could result in conflict, calls of favoritism, and eventually a collapse of this fledgling economic unit. When the president of the European Central Bank, Wim Duisenburg, recently lowered rates for the euro to 2.5%, he mentioned that he had done his job, but the ball is now in who's court? Is it the responsibility of the heads of government in each of the 11 member countries to initiate radical political changes, or will the European Commission need to be granted more power to see that strict political policies can be established and enforced? The media continues to watch the economic effects of Europe's new single currency. The hope is that the politicians spearheading this transition remember the original goal of European unity and focus on policies that encourage long-term change and political harmony. "The reality of a successful, united Europe with a strong single currency," concludes Housen, "will arrive when its people see themselves as Europeans first." return Out of the Dark Ages ... REDEFINING THE MORTGAGE INDUSTRY PARADIGM It would appear that on-line mortgage originations are a current reality. However, LoBue principal Michael Scott, head of the consumer finance practice, points out that customer-centric on-line service is an opportunity waiting to be taken. On the way to an important client meeting you spill coffee all over your best shirt. No time to return home and change, you decide to dash into a nearby department store for a new one. After parking, you grab your portfolio and look through the papers inside to make sure you have the necessary documents. No, not for the meeting - to get pre-approval to shop. It's all there, social security number, a current credit report, your last six pay stubs, and receipts showing what you paid for the last shirt you bought. Fortunately, you know exactly what you want. People who are 'just looking' need a notarized letter of credit from their banker. Of course it sounds ridiculous. Traditional retailers lure customers into their shops by targeting them with goods that meet their needs and desires. The buying public is free to roam the aisles in search of a shirt, a computer, or any other product that suits them. If the consumer arrives at the cash register with insufficient funds or credit, the savvy salesperson knows to redirect the customer's attention to a product that meets their financial limitations. Retailing on the Internet is no different. Payment is requested after the consumer is through filling his or her on-line shopping cart. If the price tag is too high, on-line shoppers cancel their order and go to a site that better meets their price range. For mortgage companies to succeed on the World Wide Web, they must recognize this fact. As it stands now, mortgage companies have taken their brick and mortar approach to selling loans directly to the Internet. Yes, most mortgage sites offer extensive information on the difficult lending process. Certainly, some mortgage companies are streamlining the lending process to reduce costs and combat diminishing profit margins. But throwing in calculators, updating annual percentage rates daily, and delivering testimonials from satisfied customers will not capture an Internet user's interest. These steps are insufficient in an arena where the consumer makes buying decisions based almost exclusively on price, and is gone with a click of a mouse button when a roadblock appears. On-line consumers quickly leave a site when they realize that they can't see a lender's products until they have submitted their personal financial information. "Mortgage brokers must redefine the way they do business on-line," says Mike Scott, a principal and the Director of LoBue Associates' Consumer Finance group. "The Internet is an opportunity to increase market exposure with very little investment, but the site and support systems must be organized with a customer-first attitude in mind." Surfing the Internet is much like entering an enormous shopping mall for the first time. On the first visit, choosing the entrance closest to a favorite boutique is almost impossible. But after visiting a few times, it becomes easier to navigate the most direct route. Borrowers shopping on-line for a mortgage can choose from more than 2,500 sites, with more opening every day. These on-line shoppers expect lenders to have homepages similar to the retail sales sites they are familiar with, and will choose to remain only at sites that are comparable to their previous on-line experiences. There are basically only three types of mortgage sites those operated by a single lender, sites that provide links to a variety of lenders, and auction sites that send the winning lender to the borrower. These sites are all interested in signing up new borrowers, but very few take a customer-first approach. SINGLE-LENDER SITES At first glance, single-lender sites appear to be very similar to retail sales sites. The homepages of lenders such as usaloan.com and countrywide.com fill the screen with their brand name and quickly route the visitor to the department they are looking for... first-time home buyers, refinancing, or second mortgages. They suggest that first-time home buyers learn the basics of mortgage lending before applying for a loan -- as if these borrowers will be given the freedom to decide for themselves what loan is best. But despite a borrower's level of financial finesse, when he or she is ready to see what types of loans are available, wham!!! The curtain comes down on the glitz and glamour. For the next 10 minutes or more, prospective borrowers are instructed to fill out personal financial information before proceeding. Even if one line of the questionnaire is left blank, the screens refuse to go forward, restricting the consumer from further information. Some of these sites take the information on-line with promises that a loan officer will either call or e-mail later with a decision. Borrowers are then left to wonder if they can meet the credit requirements of the mortgage lender. If they want to stay in touch, they can read about the company's new job listings or learn more about the lending institution; its history, annual sales figures, and other facts that management finds interesting. With luck, borrowers may receive e-mail updates, but from this point on it's a return to the traditional method of lending. A number of single-lender sites are eliminating commissioned loan officers altogether in an effort to cut costs, but have done it at the expense of value-added customer service. Instead of full-service professionals, they offer salaried mortgage counselors who help guide borrowers through the process by phone. The savings are then passed on to the consumer. At rockloans.com, a Michigan-based lender, borrowers can choose to work with either a loan counselor or a loan officer, but the more experienced loan officer will cost more. LINKING SITES Prospective borrowers often fear they are paying too much for a loan. Linking sites such as eloan.com, quickenmortgage.com, and lendingtree.com are not direct lenders. These companies try to eliminate buyer remorse by providing borrowers with extensive industry information and access to a wide range of lenders through links to their Web sites. The credit information borrowers must provide is then used to match prospective borrowers to a lender who meets their needs. The actual process is handled over the phone by the lending institution. The benefit for the consumer comes from the wide variety of lenders they can review. It is far easier than going door-to-door, but while this service costs the consumer nothing, it still requires them to wait for loan approval before they can make a decision on which product they want. AUCTION SITES Probably the least customer-centric sites are mortgage houses like priceline.com and mortgageauction.com. Planning a vacation? While bidding for airline tickets and hotel rooms you can now pick up a mortgage as well. But if mortgage auctions work like their hotel reservation system, it's buyer beware. Borrowers are required to fully disclose their financial information along with their best guess at an acceptable interest rate, points, and closing fees. Consumers have no idea who will win their bid. At priceline.com, prospective hotel guests auctioning off their weekend stay must accept the winning bid. Will the mortgage auction agreement also force the borrower to accept the proposal from the winning lender? Priceline.com has admitted that to jump-start the company and create favorable buzz on the Net, they often paid the difference between what an airline or hotel reservation charged and what the bidder wanted to pay. Prospective borrowers are at the mercy of these sites to connect them with responsible lenders who have free access to the information the borrower must provide, as well as credit checks they can make on their own prior to contacting the borrower. CONCLUSION There is no reason for mortgage companies doing business on the Internet to demand that the potential client disclose their financial data prior to providing information on the company's exact products and fees. The risk that a loan officer might quote rates that have changed, or cannot be offered to a borrower, no longer exists. Fast-changing lending rates can be obtained instantaneously and credit checks are easily accessible. Giving borrowers the opportunity to choose from a variety of loan instruments will not only make for a more satisfied customer, but speed up the lending process as well. Buying a house will never be as easy as replacing a stained shirt, but because today's borrowers have easy access to information on the entire lending procedure, they can now choose a lender based on price, and manage the home buying process with or without the assistance of a traditional loan officer. Lenders must redefine the way they do business on the Internet. Correctly combining the Internet with sophisticated software programs will allow mortgage companies to make better use of their resources, improve customer service, and remain competitive. Even though on-line originations continue to be only a small percentage of the industry, the fact remains that as more and more Internet users become comfortable shopping on-line, a larger portion of the market will go to companies doing business over the Internet. The most successful will be those lenders who adopt selling techniques that meet customers' on-line expectations. "Lenders who continue to believe that the added value of their personal service will always be a key factor refuse to see the full potential of the Internet," concludes Scott. "They will fail to redesign their sites to meet consumers' expectations will lose out in the long run." return 1The third definition of democracy in Webster's Ninth New Collegiate Dictionary is "a system of administration marked by officialism, red tape, and proliferation," p.188. 2The Jensen Group, The Search for a Simpler Way, 1997 p18. 3Past and Present, Book 1, chapter 3. return |
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