The Cost of Digital Disruption in Financial Services

Technology is drastically reshaping the financial services industry as fintech innovations revolutionize how companies create and deliver products and services. Fintech has disrupted traditional financial services in areas as broad as trading systems, mobile payments, and fundraising.

Mortgage lending is arguably the financial segment in which technology has had the largest economic impact to date. In the face of such disruption, incumbents are losing market share and margin.

__Mortgage Lending: Then and Now__
Residential mortgages have been traditionally managed by local lenders who rely on deposit financing and branch-based operations. In this setting, applying for a mortgage typically entails hours of paperwork and in-person meetings.

However, in the wake of the financial crisis, the mortgage environment has changed dramatically. As banks have pulled back from mortgage lending due to regulatory changes, nonbank lenders—including fintech mortgage lenders—have stepped in to fill the void.

Fintech mortgage lenders have reconstructed the traditional mortgage process by building end-to-end online application and approval processes. These new processes are supported by centralized underwriting operations and augmented by automation. A borrower can complete an application completely online and be approved for a loan without speaking with a loan officer or ever setting foot in a brick-and-mortar location. Fintech lenders also process applications about 20% faster than their traditional counterparts. Additionally, enhanced data analysis and automation help fintech mortgage lenders make better, more efficient lending decisions. However, these disruptive improvements in underwriting and customer experience pose a serious challenge for incumbents.

__The Cost of Disruption__
The volume of mortgage originations—composed of purchases and refinances—ebbs and flows according to several factors, including interest rates, home sales, prices and inventory levels, and the overall health of the economy. As new fintech lenders enter the space, the landscape becomes more competitive as more players fight over the same pie. Any gains made by fintech mortgage lenders come at a cost to incumbents.

And although fintech mortgage lenders are new to the scene, they have grown at a remarkable annual pace of 30%, from $34B of total originations (2% of market) in 2010 to $161B (8% of market) in 2016.

Today, fintech mortgage lenders are unseating big incumbents in a major way: not only was Quicken Loans the top originator by number of loans originated in 2017—surpassing traditional bank lenders Wells Fargo and JP Morgan Chase—it also ranked number one for client satisfaction for the eighth consecutive year. Fellow fintech lenders loanDepot and Guaranteed Rate also landed on the list of top 20 originators by number of loans originated.

While the mortgage industry at large saw a roughly 16% ($69B) quarter-over-quarter decline in loan origination volumes in the first quarter of 2018 due to rising interest rates and housing costs, JP Morgan Chase and Wells Fargo lost volume at a quicker pace, down 25% ($6.2B) and 19% ($10B), respectively. Making matters worse, Wells Fargo is reportedly struggling with narrower margins and lower fees in the face of swelling competition.

__Lessons Learned and Looking Ahead__
Looking ahead, the mortgage environment will become increasingly competitive as volumes of mortgage originations are poised to decrease—meaning all lenders will be competing for the same shrinking pool of dollars. The Mortgage Bankers Association predicts that total mortgage originations in 2018 will be $1.612 trillion, a 6% reduction compared to the 2017 figure of $1.710 trillion. The group expects volume to continue declining in 2019, with a forecasted total volume of $1.608 trillion.

Incumbents are employing multiple strategies and tactics to protect their market share in an increasingly competitive landscape. Big banks like Bank of America Merrill Lynch and Wells Fargo are sharply focused on “digitization” at the highest levels, as evidenced by how often the term was referenced on recent earnings calls. And it’s not all talk; some banks are making direct strategic equity investments in fintech companies. JP Morgan Chase, for example, has invested in technology company Roostify and collaborated with the firm to enhance its digital mortgage products. Others are opting to build their own tech-powered products or acquire online players to fold into their existing systems.

Regardless of the chosen path, the focus must be on the customer, as a vastly improved customer experience has been a central catalyst in the rise of fintech mortgage lending. Customer expectations in financial services are shifting, driven by demands for greater transparency, ease of use, always-on access, and automation. Harnessing the right technology is key to winning the race to improve customer experiences, protect market share, and defend profits.

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