Embrace and extend is a strategy that’s helped Microsoft maintain its 25-year run at the top of the PC-software world. When a promising new software app begins to show signs of popular acceptance, Microsoft puts its stamp of approval on the code (embrace), then proceeds to rip it apart and add their own, often proprietary, enhancements to make it work better with Windows and Office (extend).

There isn’t anything particularly sinister about this practice. High-tech companies must ensure that their products continue to work with new customer requirements. On the Web, banks face similar challenges. When an interesting new financial service comes along, such as account aggregation, should banks ignore it, adopt it as delivered by the vendors, or embrace and extend? In the case of account aggregation, we are clearly in the embrace-and-extend camp.

But what about some of the newer concepts in online lending? We’ve just witnessed the dot-com flame-outs of Mortgage.com and iOwn along with the free-fall in the share prices of most other pure online lenders. Is it time to write off the online loan marketplace as a passing fad?

Hardly. Despite the rhetoric in the trade press, online lending has a bright future. We predict that within 10 years more loans will be originated online than off, including mortgages. Why the bullish forecast? Despite what their actions suggest thus far, we are absolutely convinced that deep-down most consumers hate the current loan process. It’s time consuming, confusing, and uncomfortable. Even worse, because consumers can’t readily shop their loan application, at the end of the process they are left wondering if they were ripped off

That’s why we recommend in this report that banks embrace “open lending,” helping customers research rates and even apply for loans at other lenders . The open model, facilitated by LendingTree and others, can be extended by running it within the confines of the bank’s own Web site, allowing the bank to maintain its primary relationship with the user regardless of who books the credit.