GETTING AN EDGE
Mortgage companies need to set themselves apart in the eyes of the marketplace. There are several ways to do it, but doing it is critical to survival.
Mortgages are commodities. This leaves very little opportunity to differentiate one mortgage company's products from another. Therefore, the only factor that really matters is price. And, the intensity of competition will naturally force prices down to commodity-like margins.
Is this really true? Are mortgages necessarily commodity products? Is the industry relegated over the long term to severe price competition because that's the only way to win busness? We certainly tend to behave that way as an industry today.
The business dynamics of pure commodity-like competition that we exhibit today are clearly not healthy. Even with the shake-out of the last three years, there is fragmented competition, competing principally on price. The result is low margins that are no longer offset by high values for servicing rights. More importantly, there is very little perceived differentiation among lenders at the company or institutional level. Whatever marketing differentiation Realtors and borrowers perceive among different lending organizations is ascribed to the individual originator. Consequently, not only are the company's products perceived to have very little differential value other than price, but also the mortgage company doesn't have very much marketing leverage with its clients. This marketing edge among mortgage customers is controlled instead by the individual originator. What we have just described is a fundamentally bad business deal. As academicians would ask, "Where is your value-added? What are you going to be paid for?" Their admonition would be that we must create, either perceived or real, a differentiation in our products over time, or we will cease to make an economic (i.e. acceptable) return from the business.
The movement toward a large segment of the business going to wholesaler-broker operations and ultimately direct wholesaler-Realtor relationships is a natural outgrowth of the lack of differentiation/value-added features. Many retail mortgage banks have evolved toward wholesaling because of their lack of value added at the branch level. They now rely principally upon their value-added contribution through their secondary marketing abilities.
On the mortgage broker side, this value-added marketing edge comes chiefly from years of established relationships with individual Realtors or their differential skills as marketers. As we are all too aware, most of these successful mortgage brokers are former originators for integrated mortgage companies. This exodus of originators was an outgrowth of the fact that these producers also recognized that their companies were not a very significant factor in their success. They, therefore, asked "why should they continue to share origination revenues with their firms when the mortgage companies brought very little to the party that the originators couldn't obtain elsewhere for free (i.e. loan programs and lock-in protection)?"
Without developing some perceived distinctive added value attributed to its operations, the integrated retail mortgage bank will no longer be paid for its expensive delivery system and overhead. It's time the retail mortgage banker seriously examine just how it can differentiate itself in the marketplace. Without clear answers to this question and effective implementation of the answers, the long-term viability of the business is in serious doubt.
Mortgage bankers are certainly not alone in facing the problem of marketplace differentiation. Ask any consumer-goods or service provider. Stripped of the brand images and advertising influence, most consumer goods and services have very little technical differentiation. Yet, consumer products firms work mightily to create even a little edge, either perceived or real, in their products or services. The expense profile of a consumer goods producer typically shows heavy expenditures in research and development and marketing, in continuing attempts to find and defend edges over the competition.
That's nice, but you can't really differentiate financial services. Tell that to American Express, a firm that has been able to extract premium fees and continue to grow, despite having an otherwise undifferentiated credit product. Anyone who has dealt with American Express can tell you why he/she retains their card, however. The product is differentiated by the quality of service one receives any time one needs to have contact with American Express.
Indeed, the fundamental game in any industry is to attempt to create some uniqueness or qualities in a product or service for which the consumer is 1) willing to select your product over others and 2) willing to pay somewhat more than for a raw, generic commodity product. Very few competitors in any industry have shown the capability to survive as purely commodity providers. Price competition as the only means of differentiation is almost certainly a losing long-term proposition.
Creating differentiation that works
There is normally a four-step process for creating a differentiated position in the marketplace that works...