FINspeak

Over the last year, most large banks have shut down their businesses with mortgage brokers as seen in the exit of Chase, Wells Fargo, and Bank of America. There seems to be a realization that an in-house ‘direct to customer’ model is more profitable than relying on brokers to provide funding volumes.  

Brokers help banks to source leads to prospective borrowers and perform a significant part of the upfront process of originating a loan. Having cultivated the broker community as a viable channel for many years, why are banks exiting this market in a hurry?  

The primary reason is obviously loan quality and associated loan losses. Some banks have seen three times higher delinquencies in their broker business when compared to their retail business (where bank mortgage officers work directly with customers). Such a sentiment is explained in this article where the author goes on to say: ‘Customers are best served when a mortgage officer works directly with them, explains bank products clearly and then helps customers carefully evaluate the choices in light of their personal financial situation’.  

Apparently, there is a clear recognition that getting closer to customers is going to be good for business. (The decision to exit the broker market was also aided by falling volumes in a time when there is an excess capacity in the industry, in most cases due to acquisition of bank with significant mortgage processing capacity. There is also an expectation of severe regulatory pressure on broker business in the wake of the sub-prime crisis.   

Due to two primary reasons, the ‘distance’ between banks and their customer has significantly increased over the last 20 years. The first is the current, highly specialized mortgage ‘value chain’. The second is technology. 

Banks, at one time, used to be one-stop shops. They had an intimate knowledge of the communities in which they operated. They also held the mortgage to maturity – thus they were highly incented to create and cultivate strong bonds to the folks to whom they lent money. The creation of the CMO by Larry Fink in 1983 started to change this model. Within a few years the mortgage value chain had fragmented into several specialized intermediaries. Local brokers sourced leads from prospective borrowers. Thinly capitalized mortgage banks funded loans to sell to investment banks who designed product for hungry end investors.   

As volumes in the residential mortgage market peaked, lenders looked to manage their ‘supply chains’ much like manufacturing organizations. Raw materials (financial transactions) were sourced in the most optimal fashion (hence increasing reliance on mortgage brokers and correspondent banks). And, servicing companies were ‘outsourced’ the job of interfacing with the customer, receiving and remitting payments to all entities involved.  Thus banks lost control of the primary mortgage relationship – one of the most complex and intensive transactions ever conducted by a customer in her lifetime. 

Technology aided this increasing remoteness of the customer from the bank. Rather than go by personal relationships and community knowledge, more ‘hard information’ (for example in the form of credit data and property data) was infused early on in the loan approval process.  Decision engines with embedded business rules replaced human intelligence. Workflow technology streamlined loan flow and drastically increased the number of loan transactions a loan officer could process. While this increased capacity to cater to increased loan volumes, it also increased the number of customers that a loan officer had to deal with and thus reducing the customer to a statistic hidden away in one (or more likely a few dozen) relational databases.
The customer was thus spun to the edge of an increasingly complex and sophisticated mortgage ecosystem.  

And it is this distance that banks are now seeking to reduce in the midst of the credit crisis. Cutting out the brokers is the first, hurried, step towards increasing customer intimacy.  Over the next few quarters banks will take several more steps in this direct

Posted by Mahesh Makhija at 02:45 PM | Permalink | Comments (1) | TrackBacks (0)

This is a question that every sourcing professional is asking. More than 50% of the firms would be cutting their IT budget by 40-50%. And guess what they still will have to do a lot more with a lot less. This will result into significant shift in sourcing strategies. Here is what I think will start to happen: Move to transaction/Outcome based pricing, which will transfer the risk from the client to the service provider. This will require service providers to be able to understand the business a whole lot more than what they have had to do in the past.

Integrated Offering will be the order of the day. A lot of preparation has happened and now, service provider will have to deliver the results. Days of lift and shift inefficiency are over. Now, firms will have to redesign an efficient system and then outsource.

So what does this mean for clients - a different risk pattern? Data security, identify management and quality of people. If you are going to ask someone to do lot more with less and do it much better than you then you need to have the right set of people, who can learn quickly and implement the changes, and without baggage.

Service providers who can focus on these two challenges will pull away from the race.

Companies which are geared up to deliver transaction based pricing, platform/utility based models and delier software as a service will be there. Infosys is ready with all of this.

Posted by Mritunjay Singh at 04:59 AM | Permalink | Comments (7) | TrackBacks (0)

Cloud Computing has been gaining ground as a new IT outsourcing model where IT-related capabilities are offered “as a service”, allowing users to access technology-enabled services from the Internet (in the cloud), without the knowledge of, expertise with, or control over the technology infrastructure that supports them. Cloud computing is a general concept that incorporates “software as a service”, Web 2.0 and other recent, well-known technology trends, where the common theme is reliance on the Internet for satisfying the computing needs of the users.

Large Enterprises in financial services and other areas are slowly starting to look at this trend seriously...

 

As uncertainty continues to ripple through the global economy, organizations are looking for options which to purchase and deploy IT solutions with predictable payment options so that they can free up the budgets for other projects. In this backdrop, the convenience the Cloud Computing offers is certainly of huge value; not to mention the affordability that anytime anywhere access enables. The need for nimble response system is inhibited by the old procure and provision approach uses in many large organizations due to long approval and IT deployment processes. It is very difficult to plan the data center capacity and increase the capacity on a need basis within a short window of time. Cloud Computing offers this capability with greatly reduced cost structure ability and better ability to manage dynamic capacity load requirements.

 

Many vendors including Amazon, Google, and Salesforce.com are active cloud providers in the market space. There are numerous players from the large vendors like Microsoft, IBM to many smaller players with smaller companies providing niche cloud utility computing platforms in the race for leadership in the arena. Microsoft has made cloud computing one of five priorities for fiscal 2009, according to a recent memo from CEO Steve Ballmer. Microsoft's version of cloud computing, Software-plus-Services, is designed to let customers choose whether they want traditional software, software services, or a combination of the two.

 

Infosys has been a pioneer in evangelization of this opportunity with the client organizations financial services, automotive, and entertainment and other verticals. Infosys has created an auto industry "integration hub" using Azure's SQL Server database services for dealer-to-dealer information sharing and Web mashups.  We have been actively collaborating with Microsoft in this area and have contributed to the Microsoft Professional Developer conference event in the recent past.

 

I will continue to add to this blog to evaluate the applicability of this technology trend to financial services.

Posted by Srinivas Prabhala at 04:03 AM | Permalink | Comments (2) | TrackBacks (0)

What a turbulent three weeks of the New Year it has been! It began with the hope that major stock markets around the world (led by the US Dow Jones Index), were beginning to thaw. But what promised to be a sneak preview to a turn-around, rapidly changed course; over the past week, the US Banking system teetered on the brink of collapse for the third time in four months. Citi finally accepted the fait accompli that its days as a Universal Bank  were numbered. Bank of America’s much vaunted acquisition of Merrill Lynch almost came unstuck!

The US Treasury and Federal Reserve (along with the FDIC) have made multiple attempts at resuscitating the credit markets. After the TARP approach of investing in Banks’ preferred stock and (subsequently) using the back-stop guarantee mechanism, the latest thinking among US Government bureaucrats is to segregate the “bad” assets on Banks’ balance sheet from the good ones or what is popularly being termed the "Good Bank – Bad Bank" model.

Read more about this on the Think Flat site.  

 

Posted by Balaji Yellavalli at 01:17 PM | Permalink | Comments (0) | TrackBacks (0)

In July of 2008, American consumers coined a new phrase at the height of the summer vacation season: staycation.  American’s opted to stay at home instead of travelling due to astronomical oil prices. High oil prices drove prices at the pump to dizzying highs and, in response to record fuel prices, airline fares skyrocketed where checked baggage fees and fuel surcharges became the primary (and unpopular) strategy of airlines to offset fuel costs.

July certainly wasn’t the first time oil prices gravely affected the airline industry’s ability to operate cost effectively, but, due to the industry’s dependence on oil, little could be done to reduce oil costs other than tacking-on vexing fees to ticket prices.  Recently, however, airlines have begun experimenting with a new, green fuel source—biofuel.  In fact, this week, Continental Airlines successfully flew a Boeing 737 fueled by a mix of Kerosene and blend of fuel derived from algae and the weed jatropha.  Both of these biofuels are unique as they do not contribute to deforestation nor compete with food production—like ethanol.

While the airlines experimentation with biofuels is certainly in its infancy, it’s great to see a large, fossil fuel dependent industry exploring innovative, sustainable and green fuels.  In the next few years, as the world decreases its dependence on fossil fuels, a jatropha and algae fueled jet will be the norm raising the question—are passengers ready to travel on a jet powered by a new, unconventional fuel source? 

To learn more about experimental biofuel jet flights, check out this article from the Los Angeles Times. 

Posted by Jitin Goyal at 02:59 PM | Permalink | Comments (0) | TrackBacks (0)

An analysis of the recent developments in image based check-processing shows remarkable success stories for Federal Reserve and Remote Deposit Capture (RDC) offerings. It also highlights some of the characteristics of the market, which have potential to shape the payment processing industry.

In November 2008, Federal Reserve announced that it would further expedite rationalization of check processing sites and by the end of 2009, Federal Reserve Bank of Cleveland will be the only paper check processing site. Effectively, Federal Reserve will reduce the physical check processing sites from 45 in 2003 to only one by the end of 2009. Even after considering a few other limited services sites being operated by Fed, this is a great success story, which also resulted in meeting the expectations of the 1980 Monetary Control Act, which requires Fed to recover the cost and earn profit in line with a private business firm.

Check 21, which is at the core of image-based check processing, has also enabled rapid growth of RDC service by financial institutions. As per Celent assessment, over 3,000 new implementations will result in an estimated 7,200 RDC-deploying financial institutions through 2008, resulting in an estimated 382,000 users/scanners by year-end 2008, a 72% year over year growth.

The success of image based check processing highlights some of the key characteristics of the market, which will shape the payment processing industry. First, payment processing is not only a service offering but also it can be a significant competitive tool for the financial institutions. RDC has become a core part of deposit capture strategy of the financial institutions. Second, market participants especially commercial market is open to redefine its interactions with financial institution if there is a justifiable business case. Though the jury is still out about the adoption of RDC for consumers, many significant players and ASPs are betting on it. Last, success of Federal Reserve corroborates a growing market perception that there are opportunities not only at the front-end e.g. mobile payment but also at the back end of the payment processing industry.  Should we look forward to coming changes and increased competition in the back end payment processing and network space?   

 

Posted by Neeraj Kumar Jindal at 08:16 PM | Permalink | Comments (0) | TrackBacks (0)