Credit is life-cycle-driven. Consumers who shop rates turn to the Web, and when they do, they’re less likely to borrow from a bank. Slimmed-down specialists will win online consumers’ business.

 – Kenneth Clemmer, Forrester Research, “Why Bank Loans Suffer Online”

Bank of Dreams Loan Center

Source: Online Banking Report, 11/00

In one of the first research studies to delve into the question of how well banks will fare online when competing against non-bank specialty lenders, Forrester analyst Kenneth Clemmer concludes that in the process of shopping rates online, consumers will become more aware of non-banking financial specialists offering better rates, resulting in lost business to banks.

That’s may be true, but research also indicates that loan decisions involve far more than rate. There are a number of tools banks can use to focus attention away from who has the lowest rate. Convenience, quality, reputation, loan servicing, security, privacy, preapprovals, previous experiences with the lender, and branding are all factors weighing into the final decision.

However, when designing an effective online lending operation, banks must keep in mind that the majority of their good prospects will be inclined to shop rates online. And the less convenient the bank’s loan process is, the more likely consumers will shop around.

In this Report, we outline an online loan-origination system that caters to the psychological needs of online loan buyers. Users must be assured of getting a fair and timely evaluation and a competitive price. And the more control you give customers over the research and evaluation process, the more likely they will be to apply for your loan, even if it doesn’t offer the absolute lowest rate in the cosmos.

I. Research Center

What’s the first rule of business? Give customers what they want. It’s clear that on the Internet, consumers love to research, especially big-ticket items such as cars, stocks, homes, remodels, computers, and so on.

Credit shopping has grown dramatically in the past three years as shown in Table 1. Online households that applied for a mortgage (on or offline) and conducted mortgage research online have grown from zero in 1996 to more than a third of all applicants in 1999. And the popularity continues to grow. According to Forrester, more than two-thirds of online households expecting to get an auto loan in 2000 plan to research the loan online.

Table 1

online households that applied for each product

Source: Forrester Research, Why Banks Suffer Online, by Kenneth Clemmer, published 5/00 with data based on a 100,000 person North American survey fielded between Nov. 1999 and Jan. 2000.

n.m. = not measured

This makes a Loan Research Center a crucial part of your efforts to capture the attention of both existing customers as they begin the loan research process and non-customer surfers who happen to get to your site through banner ads, offline branding, or serendipity.

According to Forrester, consumers view their online credit research experiences as moderately satisfactory but are generally unenthusiastic about the process. The average satisfaction score on a 5-point scale with 1 the lowest, was 3.5 for mortgages and 3.7 for car loans (see Table 2). That means on average about half the respondents said the experience was OK and the other half said it was good.²

¹Of U.S. households that bought a car between 9/99 and 3/00, 42% of new car buyers and 32% of used car buyers used the Internet for research.

²According to Forrester a mid-3 score on a 5-point scale with 5 the highest, means that users tolerate the product but are unenthusiastic.

There is room for proactive financial institutions to gain a following among users by providing better research tools.

Table 2

online households that applied for each product in ‘98 or ‘99

Source: Forrester Research, 5/00, Why Banks Suffer Online

¹The respondents rated the research experience on a scale of 1 to 5 as follows: 1 = awful, 2 = poor, 3 = OK, 4 = good, 5 = great.

²Percent of 46 million online households that have applied for each loan type within the last 2 years and used the Net to research loans prior to applying

³Includes rate comparison sites such as BankRate and brokers such as E-Loan

You have precious few seconds to engage prospects as they land on your Web. As we pointed out last month in Building the Amazon.com of Financial Services, Version 2.0 , you should offer something useful, easy-to-understand, and free. You also want users to identify themselves with at least an email address early in the process so you can draw the shoppers back to your site when they are ready to apply.

We recommend dividing the Research Center into two parts, both of which would be free: a basic area that can be used by anyone, and a premium zone that requires user registration to access.

A. Registration-Free Zone

1.       Basic financial calculator: There are hundreds of different online calculators that allow users to evaluate Roth IRAs, the impact of extra principal payments, and so on (see  www.financenter.com ). However, the most important calculator is also one of the simplest: the loan payment calculator. We highly recommend that you provide a clear link into a simple Java-based calculator where users enter any two of the following variables to receive an instant calculation of the third:
– loan amount
– payment amount
– interest rate

You’ll also want a non-Java alternative for those with older browsers, or who are surfing with Java disabled.

Free BankRate.com search button.

2.        Basic rate search (of the competition): This will be a tough sell internally, but you should consider helping users research rates at your competition. You could simply post a BankRate.com search button on your site (see above). This is free and easy, but you’ll expose users to banner ads for the Blue Light Special at TheLatestNetBank.com. To become a BankRate affiliate, go to  www.bankrate.com/brm/affiliate/affiliate_home.asp

To keep customers at your site and avoid the banners, consider licensing the rate data directly from BankRate.com or other providers.

Contact: Ned Newhouse, SVP Sales,                                             nnewhouse@bankrate.com , (561) 630-2400.

3.       Educational material: While the Education Area is difficult to get enthusiastic about, it shouldn’t be ignored. If you don’t have deep, well-written educational material you lose credibility, and ultimately business. This area could also reduce customer service expense by allowing prospects to quickly find answers to basic questions. We recommend hiring an outside writer or intern to breathe life into what often becomes a dull part of your Web site. 

B. Registration-Required Zone

This area is still free, but it offers additional value for registered users. A simple registration process allows users to establish a username and password for continued use of the premium features. On the registration form, you’ll probably want to allow customers to opt-out of any email marketing you are considering.

1.       Advanced calculators and worksheets with saved inputs. Here’s where you post the more-advanced calculators dealing with questions, such as: Should I rent or buy? How much home can I afford?  Ideally, users should have the option to save the data they input into the calculators. Store the info on your server, not in cookies that could potentially be viewed by other users of the person’s PC.

BankRate.com rate search.
Note: banner ad on top for CNBC’s loan marketplace powered by LendingTree.

2.       Advanced rate search with email notifications: This feature is similar to the Rate Search outlined in the previous section. In addition to those features, users may establish rate-based and/or periodic emails that keep them informed of changing rates. Users could choose to receive emails based on one or  more of the following triggers:
– when interest rates reach a certain point
– when projected monthly payment reaches a
   certain point
– when rates decline by a certain amount

Or users could choose to be notified of current rates on the following schedule:
- daily
– weekly
– monthly
– quarterly

3.       Free online credit reports: One of the most-used online freebies is the “free credit report.” ConsumerInfo.com has been beating this drum for more than three years and in October bagged more than 3.3 million unique visitors (see Table 4 below). That’s more traffic than any full-service online bank.¹ 

The free credit report pitch is so common; most consumers either ignore it or don’t believe it. But we think the same message coming from a bank could be a powerful draw, enticing non-customers to register and provide information that will help you qualify them for loan offers.

¹Among financial companies, only payment specialists, X.com and NextCard, had more traffic than ConsumerInfo.com (see Table 19).

Table 3

Online Credit Report Providers

Source: Online Banking Report, 11/00; Web traffic from PCDataOnline.com, 11/15/00; ¹Also runs several other URLs including FreeCreditReprot.com and CreditMatters.com

²See Product of the Month write-up

³ConsumerInfo.com only recently begun delivering reports online

Table 4

Online Credit Report Provider Traffic Growth

thousands of unique users

Source: PCDataOnline, 11/15/00

There are now at least four companies providing online credit reports (see Table 3). The pioneer is QSpace, which launched the first online credit report in July 1997² . Several new entrants are also worth a look. TrueCredit.com is backed by Citibank and used in the bank’s MyHomeEquity.com Web site. An even more intriguing entrant, despite a completely forgettable name, is WorthKnowing.com, the latest OBR Best of the Web designee. The Web-only company has partnered with TransUnion to deliver credit reports online. WorthKnowing has built a unique patent-pending loan preapproval process that integrates with the credit report and can be used to turn lookers into loans.

TrueCredit is another source for online credit applications. They are privately held and partly owned by Citigroup and Lehman Brothers

4.       Mock application to test the waters with no obligation or credit bureau inquiry: After registering and receiving a credit report online, users could “test the waters” to see what type of loan they might qualify for. Because it’s not an actual loan application and you are not initiating a consumer credit-report inquiry, we don’t believe that it would constitute a loan application from a compliance standpoint. However, it could depend on how the service was worded, so check with your compliance department first. 

²Actually, Experian beat QSpace to market by a few weeks, but the service was forced to shut-down almost immediately because of a technical glitch which sent credit reports to the wrong people. The service never reopened .

II. Virtual Credit Manager

Last month we outlined a suite of virtual banking products, one of which was the Virtual Credit Manager. The VCM is an account that tracks all credit usage and outstandings across multiple providers and automatically allocates debt to the lowest after-tax source. Below are additional details on how a  VCM could be structured:

Core Features

1.       Loans-at-a-Glance (name borrowed from Citibank’s small-business Web, bizzed.com which debuted “Accounts-at-a-Glance” in October) – Using screen-scraping technology from Yodlee, VerticalOne, or others, users could load all their loans onto the site and automatically track payments and outstanding balances.

2.       Loan Minimizer – Users would designate a fixed amount to be transferred out of a deposit or investment account(s)¹ and the software would automatically allocate interest and principal payments across all registered loans (in #1 above) to minimize after-tax interest expense and/or payment amount. An advanced Loan Minimizer could be programmed to automatically analyze deposit and investment accounts and recommend an appropriate amount to be allocated to loan interest and principal repayment.

3.       Loan Payment Center – Allows users to make online payments to any loan at any lender:

• Users could make one-time payments or setup automatic recurring payments.
• Users choosing one-time payment would use a very simple payment screen, akin to PayPal, where users simply enter name, loan provider, loan number, loan amount and hit enter.
• Users would be encouraged to at establish automatic recurring payments for at least their minimum payment amounts to avoid late fees. The user could manually enter payment amounts each month or screen-scraping techniques could be used to automatically capture the minimum payment and statement balance across all loans and credit cards. The aggregated information would then be emailed to the customer, who would decide how much to pay.¹

4.       Loan Trade-in Dept. (aka loan appraisal, refi) – Users would be encouraged to bring loans in for an “appraisal.” All loan variables would be evaluated and the user would receive a report comparing their loan to all options currently available. Situations with significant cost savings could be handed to human sale reps for telephone and/or email followup.

Optional Features

5.       Reducing the risk (aka credit insurance): While many credit insurance programs are of questionable value to the vast majority of consumers, we think the market has room for a fairly priced credit insurance product that covers the outstanding loan balance across all registered loans (from the first section). Coverage and premium amounts would rise and fall automatically depending on the total indebtedness of the user. On mortgages, you could help users cancel PMI (when allowed) and use that monthly payment to fund credit insurance.

6.       Equity Maximizer (aka Tax Minimizer): A service that allows homeowners to easily turn unsecured debt into home-secured debt, thus qualifying for an interest tax deduction (assuming the customer itemizes taxes). Rather than requiring a full application, customers would simply list the credit obligation they wished to turn into secured debt, and the bank would take it from there, matching the interest rate and term and closing the original loan.²

7.       Balance Transfer Station: Using real-time credit report data, users could log in and instantly move balances from competing loans to your account.

¹The account funding the payment could be at any bank, credit union, or brokerage that supports ACH withdrawals.

²Assumes the customer was current on all accounts.

III. Express Loan Application Center

Sections I and II are the loss leaders designed to funnel creditworthy prospects into the Application Center. Here is where you turn lookers into loans, potentially making your entire Web site—loans and other products—into a clear profit center.

1.       Direct one-click application (with or without recycling).  This is the fastest and simplest way to apply for a loan. Current bank customers simply verify the existing information on file, update it if necessary, and then answer a few questions (this varies by the type of loan and user profile). You might also offer customers the choice of choosing the “recycling option” which turns declined applications over to other credit providers in the hope of finding a loan.

Table 5

Users Likely to Choose One-click Direct

• Time-pressed looking for a quick decision
• Those seeking the simplest, easiest, or most straightforward approach
• Impatient users unwilling to consider more complex solutions, regardless of whether they might offer money savings
• Loyal customers
• Users who distrust others (more than you)

2.       Bank-managed loan auction (loan concierge)  The bank submits the loan application to one or more auction sites, collects the results, analyzes the choices, and makes a final recommendation. The recommendation may or may not include an offer from the bank. For credibility, users should be able to view the various offers and a complete discussion of the rationale used in making the final choice.

The final decision will be based not only on price but also on intangibles, such as size and location of the competing lender. Users will be free to select any of the offers.

Regardless of their choice, users will be encouraged to use the bank’s Loan Payment Center to manage the new loan.

3.       User-managed loan auction: This is similar to number two, but takes the bank out of the middle. Users submit the loan application to the auction, and the bank bids on the deal on an equal footing with other lenders. At the end of the bidding, users can accept any offer.

Most banks would choose to offer either number two or three, not both. It’s hard enough for users to comprehend a loan auction; they don’t need the added complexity of two flavors. We believe number two is the optimal choice, but it’s more expensive and may not be feasible depending on the your budget, platform choice, and service provider(s).

Table 6

Users Likely to Choose the Auction Option

• Price-conscious
• Those that will feel better about their decision if they shop it around
• Users with time to evaluate multiple offers
• Users who love a “deal,” regardless of the “time cost” in pursuing the savings
• Users who distrust or dislike your bank
• Users who perceive the bank to be high priced
• Early adopters eager to try something new
• Those with poor or no credit who hope for a better chance of approval if more lenders review the deal
• Younger users who are new to the process

4.       Trade-in Department

5.       Equity Maximizer

Table 7

Putting loan tentacles all over your Web