2020: A Confluence of Strategy Events and Trends (Mark P. Dangelo)
(Mark P. Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA Insights. He can be reached at mark@mpdangelo.com or at 440/725-9402.)
Western cultures elevate youth as these emerging demographics represent larger markets and historically more affluent customers when compared to prior generations. Marketers have created narratives and penetration strategies to capture the interest and wallet for nearly 80 years against the premise of “new” is better.
We are conditioned to accept “big” as successful as evidenced by our love-hate relationship with those who are wildly opulent (the exception might be Warren Buffet, who lives simply). We find awe with their super-yachts, their million-dollar automobiles, their multi-million-dollar homes and their lifestyles of “hip” innovation. This psychology often drives innovation and the push to attract younger clients, offer state-of-the-art technologies, and appeal to what we are told are THE future trends.
Yet, in our rush driven by constantly changing innovations, are we missing opportunities staring us in the face? Do we associate the lack of first-time homebuyer supply with inventory and market prices, or do we recognize that future homeownership might begin with home renting and then move into purchase? Do our business models eschew opportunities for lending against sustainable microhomes (as now sold on Amazon, but impacting local tax revenues) in favor of traditional practices? Do we believe that if we innovate, join with FinTech solutions, our customers will stay loyal, while banks retain financial products and services market shares?
There are many trends taking place in the markets as huge adjustments are pushed onto customers by robust computing and data advancements (e.g., big data, AI, MI, VR, and digital usage “fingerprinting”). Our enterprises push towards the embrace of all things digital, content heavy solutions, and of course, automated regulatory compliance. But, will the dozens of corporate initiatives funded for 2020 accept the facts that to compete, innovation is not the only answer. Process improvement will only go so far. Additionally, compartmentalization and cloud provisioning are only as good as their orchestrated value equation.
Are we ready to accept, for example, that ownership is not the norm for Millennials (i.e., they rent clothes, equipment, autos, furniture, and jewelry)? Will the shift in attitudes towards sustainability across multiple growing “sharing economy” segments fundamentally altering borrower offerings and solutions? And, as the Federal Reserve Bank of San Francisco research indicates, climate change will spell a complete economic revamping (i.e., “demise”) of the traditional mortgage industry. What innovation will be used to align with the strategy implications to mitigate “market short-sightedness”? There are many moving parts but scant few cohesive approaches to account for rapid-cycling variability.
Why Now? What is Different?
From the latest FDIC Quarterly, it would seem from the snapshot of data and analytics, banks are healthy and kings of their domains. Net income exceeded $62 billion in the second quarter and 60% of the institutions had increases from a year prior even as the number of reporting institutions declined by 59 over the three-month reporting period to 5,303. Nevertheless, per TransUnion, subprime installment loans now exceed $50 billion in just five years signaling a transformation of financial instruments targeting middle income Americans–those already with significant debt and educational burdens. According to statistics released by Bloomberg, this class of individuals also experienced increases of home prices (26%), medical care (33%), and college expenses (45%)–they are stretched.
In October, McKinsey & Co. published a report stating that banks risk becoming a “footnote” in history as they are not prepared for economic uncertainty, innovative revolutions, and a consumer that relies increasingly on advancements put forth by “upstarts” challenging the once dominant positions held singularly by financial institutions. In a book published two years earlier, the authors of Beyond The Technology Traps, why financial services entities are ill-prepared for the future, describe the lack of disruptive innovation, commoditization, and “bigger is better” arrogance creating the opportunity for FinTech and non-traditional players to own the consumer, and subsequently, the homeowner.
Are banks stealthy reaching the edge of a cliff, or is this just due to the multi-decade decline in the number of FDIC institutions (i.e., >200 lost every year)? Is it due to volume, size, and commoditization where established institutions cannot react in an age of constant innovation iterations? Have banks and lenders merely become the utilities, plumbing if you will, not “appreciated” until the financial system gets “clogged?” Will government regulation or compliance rollbacks accelerate banking technology traps, or reveal roadmaps to improve efficacy? And, with the normalization of banking “utility” software (e.g., Backbase, Wipro), where will consumer differentiation come from, or will it be increasingly about how the financial supply chains are constructed and modified?
Time to Find Out What Is at the Core of the Onion
Let’s frame our discussion a bit more so that we can deduce some likely outcomes. financial institutions are now into the beginning of the Fourth Industrial Revolution (4IR)–characterized by innovation singularity with artificial intelligence, biometric identifications (e.g., facial, voice, and genetic) and “everywhere data” tracking our every action. The logical conclusion of the 4IR will be a utopia or a dystopia in less than a decade, and it may usher in an operating environment we won’t recognize due to the advancements of computing power and the adaptation of humans to a lifestyle of their own creation.
The implications for financial institutions, in a world coming completely online 24/7, is that the data they control, the data needed for risk-adverse decision making and the data generated by sought after demographics, will increasingly be sourced by retailers, peer-to-peer (P2P) platforms and emerging digital trends that eliminate the use of centralized clearing and settlement. With advances of solutions surrounding initial introductions of blockchain, cryptocurrencies (sovereign and private), P2P payments and biometric security, the demand for identification and authentication of an individual will increasingly wrest more control and power from financial institutions and into omnichannels once discounted as non-financial.
However, who will be the benefactors of these advancements steeped in technological complexity and defined by building blocks assembled by innovative visionaries? Will the compartmentalization of financial capabilities lead to new sought-after products and services (based on channel improvements in form, time, place, possession, information or utility)? Where will rapid innovation take homeowner demands when it comes to real estate? Where will innovation impact the data about the homeowner? Who will use the vast amounts of tangential information to qualify homeowners? Where will AI (artificial intelligence) aid with risk management, robust loan due diligence and post-origination aging?
Finally, touching all the above questions and their implications, Fannie Mae released an October report showing that just 21% of Americans feel that now is a “good time to buy.” As housing prices rise, and economic parity with salaries and unemployment broaden even as rates decline, will there be enough innovation possible to make up for the eventual shock should equity markets and sentiment rebalance to normal? Stated with a bit more dramatic flair, is the market on the brink of rotting from the inside out? Perhaps an indicator often missed, can the average American household now carrying over $135,000 in debt continue its ascent–up nearly 300% in just two decades?
It’s More Than Rates
So here we are. Many indicators signaling change but politicians, industry groups and even some consumers believing in an economic cycle continuance that is now over a decade old. Will it last? What will signal a strategy transformation? Can we innovate our way out of any contraction and still push forward with needed changes in private securitization, consumer prosperity and healthcare mandates, while closing wealth inequalities now dominating headlines? Will it all work out if the Federal Reserve just keeps rates low regardless of global impacts, trade barriers and economic conditions?
Stating the obvious, the housing and real estate industries are complicated mechanisms with supply chains that stretch into vast swaths of the global economies. Our progress with standards (e.g., MISMO, ULDD) have improved accuracy, exchanges, speed and customer satisfaction. Industry progress with innovation cycles continue to advance with solutions becoming building blocks rather than lift-and-shift packages resulting in higher availability and deep-cycle complex analysis. Banking as a Service and Banking as a Utility have allowed for scarce capital to be leveraged forgoing the once huge software and infrastructure investments that consumed 80% of IT budgets (including maintenance) for decades.
Financial institutions meeting borrower needs have learned to become nimble, lean and aggressive in meeting non-traditional firms head-on. Collectively, it has been viewed as positive for corporate investors, while allowing the consumer greater options and transparency into a set of processes that were a black box to industry outsiders. However, with all the progress, the general strategies and visions of lenders has remained unfazed. That axiom of stability will be put to the test as 2020 dawns and the challenges kicked-down-the-road (e.g., compliance, Federal Reserve repos and liquidity, consumer and government debt) gain importance during a presidential election that promises to further divide the country with caustic and demeaning positioning.
For 2020, where will rapid innovation take homeowner demands when it comes to real estate? Where will innovation impact the data about the homeowner? Will vast functions of mortgage professional begin to lose their jobs in the wake of robust machine intelligence and process automation? The multi-faceted strategies necessary to add purpose to innovation have not kept up with the breathless sprint to incorporate competitive and consumer advancements.
A lot of questions. And, as some of us know, the answers can vary greatly across enterprises, which is why prescriptive approaches once sought after in a shrinking industry can lead to greater enterprise declines. The use of strategy and innovation frameworks are the future for financial institutions–not the one-size-that-fits-all mindsets practiced by high-priced consultancies for over two decades.
Has your enterprise truly taken a deep dive into the surrounding drivers that encapsulate constant process and consumer innovation? As 2020 dawns, this “oversight” may indeed relegate an increasing number of institutions to “footnotes” caused by tunnel vision with innovation singularity.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
