One can debate whether retailers of hard goods such as pet food and sofas will ever find a sustainable advantage online. On or offline, these retailers must deal with physical inventory (storage, shipping, and tracking), dissatisfaction with the delivered goods, and ultimately returned product.

Financial products have none of those messy problems. In fact, most financial activity, whether it’s transferring funds, paying bills, or trading stocks, is simply rearranging bits on computer networks — an activity perfectly suited for a Web or wireless front-end. It’s only a matter of time before the majority of financial products are sold, delivered, and serviced online, here’s why:¹

1.       No tangible product to warehouse, process, ship, get damaged, or returned

2.       Users are already online researching rates; they just need more experience and incentives to transact online

3.       The next generation of loan buyers, those in their 20s and early 30s today, will have few reservations about transacting online

4.       It’s a better buying environment: no clerk or salesperson looking over your shoulder while you divulge your most-private financial info.

5.       It’s easier to shop your loan application at online loan auction marketplaces and feel satisfied that you did your best to get the
lowest rate

 

¹We know we are “preaching to the choir” here, but given the recent backlash against all things online, we wanted to take a moment to reassure you that online lending is significantly better suited to for the Net than other B2C retail products.

 

Table 1

Pros and Cons of Applying Online through the eyes of the consumer

Pros

•  less “psychological” risk (e.g., fewer concerns about revealing personal details to someone face-to-face)
•  perception of a fairer price due to the ability to research prices online
•  faster turnaround time: the better online programs provide conditional approvals within minutes of applying
•  useful feedback: the more sophisticated online apps provide feedback and help on every question
•  less bias: individuals concerned about the fairness of the loan process may perceive an “anonymous” online system to be more objective
•  money savings: Web-based products often are perceived to be lower priced, and given the expected level of competition, they probably will be
•  time savings: wired consumers will likely view an online form as quicker to complete than a handwritten one
• more control/tracking: wired consumers will feel more in control of the application process by using Web and email tools to monitor progress

Cons

• more technological and process risk: borrowers using an online loan origination system for the first time (the majority of borrowers during the next few years) will worry about making mistakes with the technology (e.g., hitting enter twice) or with the process (e.g., missing an important email from the lender)
• more impersonal: some borrowers strongly desire face-to-face contact for reassurance on major purchases
• less perceived help: many online lending site have a “do-it-yourself” feel, making users feel like they are all alone in the process
• less control: many casual Net users will feel as if they have less control after pressing submit

Source: Online Banking Report, 11/00

 

Table 2

Projected Online Originations by Loan Type: 1999 to 2003

number in thousands, dollars in billions

 

Source: Forrester, 1999              OL %= percent of the dollar volume originated online             ¹Total originated on- and off-line

Table 3

Projected Total Online Loan Originations: 1999 to 2010

dollars in billions

Source: Forrester for year 1999 and 2000; Online Banking Report estimates (+/- 30%) for 2001 to 2010

 

Jumping to the Wrong Conclusion: Will They Apply Online?

Table 4

Reasons for Not Applying Online

Source: Forrester Research, 5/00 from data gathered in late 1999

You have probably read that only 1% of all mortgage applications are being submitted online, or that fewer than one in four online mortgage shoppers actually submits an application online. These figures are usually used in trade publications as evidence that mortgages aren’t suited for online delivery, that consumers need the hand-holding only an off-line application can provide.

We think the writers have it backwards. Given the half-baked state of most online applications in terms of layout, clarity, privacy safeguards, and usage incentives, a 25% penetration rate of online rate shoppers is evidence of high customer demand for online applications. To support our hypothesis, consider the research results cited in the May 2000 Forrester Report, Why Banks Suffer Online (see Table 4).

Forrester asked online loan shoppers why they didn’t apply online. Respondents mentioned six major reasons. The first five are all related to a single issue: users are uncomfortable with a new process. That will change with time as consumers have more experience with online finances. Only 3% of mortgage applicants and 1% of car loan applicants said they didn’t apply online because they needed more help. This refutes the widely held belief that users won’t apply online because they need help.

During the next few years, Web lenders will dramatically improve their sales and delivery techniques. As a result, we expect that by the end of the decade more than half of all loan originations will occur online (see Table 3).