Don’t blink, the times they are a’ changing
Because necessity is the mother of invention—or at least the instigator of action—mortgage sector firms took swift action at the onset of the pandemic to create online mortgage solutions for customers and remote working constructs for a suddenly distributed workforce.
Although the practice of in-person preparation of mortgage documents and in-person customer signing had been in place for decades, lenders, realtors, and other stakeholders in the market swiftly reimagined processes allowing business to continue despite necessary social distancing measures.
Digital transformation efforts gained momentum due to the pandemic restrictions; however, the resulting changes correspond nicely with the digital desires of young home buyers who now comprise a large share of the market. Specifically, millennials now account for more than 37 per cent of the home-buying market.1 Particularly, younger millennials are digital natives, and Generation Z, a digitally savvy generation, is not far behind.
Digital transformation allowed the mortgage industry to navigate the pandemic and better position the market to serve the needs of digital natives. In fact, Fannie Mae just issued guidance on remote closing and notarization which adds additional acceptance and momentum to digital transformation efforts. These changes are also contributing significantly to efficiency gains, cost reduction, and revenue generation opportunities.
The following are five technology trends and their resulting impacts ThoughtFocus’s mortgage sector experts are currently observing in the market.
The widespread adoption of AI technology is improving mortgage decision-making and process efficiency
Although some sectors of the financial services industry—like credit card and auto loan product providers—had already integrated AI in a widespread manner before 2020, the mortgage industry had not made much movement.
However, just like other financial sectors, the mortgage industry is extremely data-intensive and requires many repetitive tasks, like document handling and verifying application forms. AI and machine learning are extremely effective at analyzing large amounts of data and can train computers to perform cognitive tasks, like classifying information, predicting the ability to pay, and recommending approval or denial decisions.
The Bank of America was one of the mortgage industry leaders in applying AI when it launched its Digital Mortgage Experience in 2018. Its automated mortgage lending platform heavily leveraged AI, reducing the number of fields on the mortgage application from 330 to 10 and reducing the closing process timeline from 52 days to 20.
Although Bank of America was one of the first to apply AI to its mortgage lending processes, many other lenders and loan processors are now following suit.
Migration to the cloud became imperative
While the industry was already moving to the cloud, the pandemic made cloud computing nearly a requirement. For some time, financial services companies’ C-suite executives knew that cloud computing would enhance collaboration. Greater collaboration would help productivity, increase transparency, and improve operations.
With the onset of the pandemic, remote workers’ ability to conduct work and customers’ ability to finalize documentation remotely was no longer a “nice to have”; it became essential. Team members could no longer pop into each other’s offices to work out a problem. They had to work on files and issues from their respective locations; working in the cloud is the only feasible way to do so.
In addition to becoming an imperative of the pandemic era, cloud computing offers opportunities to streamline operations and reduce costs. As just one example, the database administrator—a role with an annual salary of approximately $150,000—can increasingly be automated by turning on an AI database administrator with the click of a button. Organizations may obviously still opt for a full-time database administrator role, but the role can be more strategic, offering long-term benefits to the firm instead of performing monotonous tasks.
By moving to the cloud, many compliance requirements are also reduced as cloud vendors provide compliance “out-of-the-box” and there is nothing on-prem that needs to be audited.
In addition to cost reduction, for mortgage sector clients, cloud computing provides revenue generation opportunities. For instance, some industry players are using the cloud to rapidly scale the servicing of large numbers of loans in aggregate worth many billions of dollars. Without cloud computing, quickly scaling load processing operations would not be possible, which would restrict revenue opportunities.
Outsourcing is getting agile and strategic
Outsourcing business models operate on a continuum. At one end, there are the simple lift-and-shift models where the customer defines the inputs. From price and scope standpoints, lift-and-shift constructs are easy to define. You tell a couple of providers exactly what you want and how many resources you need to deliver it; you explain exactly how you want it done; you read a few proposals, and you compare prices; and then you select the lowest-cost provider.
Although many mortgage companies are comfortable with straightforward lift-and-shift approaches and have been executing them for years, these simplistic models very often do not stand up to the complex needs and opportunities of today’s market.
With such a fluid and evolving economy, attempting to reduce operating costs by driving suppliers down on price, as traditional outsourcing models tend to do, maybe causing more harm than good. When outsourcing suppliers are under such immense price pressure, they cut resources, rotate senior talent out in favour of junior resources, and charge for extras. This creates a huge gap between expectation and reality.
Innovative organizations are rethinking how they outsource with an outcome-based model where desired outcomes are defined, and the outsourcer delivers using aggressive and dynamic technology and process-driven improvements.
Instead of hiring someone to manage “the mess for less,” innovators are giving their partners the flexibility to deliver desired outcomes in the best, most efficient manner possible. The goal is to create continual opportunities for scale instead of relying on static metrics.
In addition, finding key talent and skills is also an important benefit of outsourcing. With newfound mobility, many workers are moving away from the location of their employers – creating additional pressure on attracting and retaining talent.
Growing API usage increases the efficiency of business processes
APIs are the software-to-software interfaces enabling a growing stack of applications that mortgage lenders use, and they enable applications to communicate back and forth and data to flow in an automated manner. They can be used both internally and externally, and according to a recent Fannie Mae survey, mortgage lenders view APIs as the top technology that has the potential to improve or streamline processes.2
Getting the data to flow seamlessly across the organization and other aspects of workflow automation are the most important benefits of API utilization. Used in conjunction with a scheduling tool, an API can automate the execution of mortgage servicing software programs that improve operational efficiency and increase customer service levels.
This increased automation can reduce costs by lowering labour costs, decreasing errors, and improving overall operational efficiency. These improvements allow lenders to deliver timely and accurate documentation to customers, improving overall customer satisfaction levels.
Self-service and omnichannel capabilities are strengthening
With the social distancing era that the pandemic has brought on and with younger, digitally native customers becoming a larger portion of home buyers, mortgage companies have had to respond. Most customers are already familiar with online banking—now, similar functionality is extending to the mortgage market. The same trends are appearing in commercial loans as well.
Next, consumers now want to communicate with mortgage providers within their preferred channels. For this reason, omni-channel technologies such as AI-powered chatbots are rapidly growing in popularity and helping companies bridge mobile, chat, social media, phone, and email. The ability to quickly respond back to any inquiry is becoming a critical differentiator and captures a 360-degree view of the entire customer relationship.
Additionally, customers want to work with mortgage providers that can quickly deliver preapproval and lock-in lending rates and can provide access to the required mortgage documentation.
Mortgage and lending leaders are looking at these trends and building a next-generation operating model to support growth and scale. Finding ways to implement a rapid cycle of continuous innovation and improvement is now the norm instead of the exception.
Mortgage companies were already being pressured by the digital preferences of younger, tech-savvy customers. However, the pandemic era has been a vital pivot point that demanded the digital transformation of both internal operations and the delivery of mortgage services to customers. As the world locked down, the business needed to continue, and necessity did prove to be the mother of invention.
Although many of the technology trends currently guiding the mortgage industry were a long time coming, many organizations are challenged by these changing dynamics. If ThoughtFocus’s team of mortgage industry digital transformation experts can help, don’t hesitate to contact us.
- 2021 Home Buyers and Sellers Generational Trends Report,” National Association of REALTORS Research Group, https://www.nar.realtor/sites/default/files/documents/2021-home-buyers-and-sellers-generational-trends-03-16-2021.pdf
- Andrew Peters, “Impact of Digital Innovation on Lender Workforce, Now and Looking Forward,” Fannie Mae, May 13, 2020.
In the early 1970s, computer engineers developed an experiment. They set up two rooms, and the only connection between the rooms was a fax machine. They sent development requirements from one room to the other via fax to determine whether work could be effectively accomplished by a remote team. The experiment was successful and became the genesis of remote work and offshoring. However, the disruptions of the COVID-19 pandemic shook the very foundations of the successful offshore work arrangements that had evolved in recent decades.
Palaniappan Rajaram, a ThoughtFocus vice president who has led business analysis, quality assurance, and development teams for a variety of projects, has some fascinating thoughts as to how work—domestic, nearshore, or offshore—can be reimagined to reduce risk for financial services organizations.
In the earlier days of offshoring, the move was primarily a cost-reduction measure. Although containing costs is still a meaningful consideration, many financial services firms in the US have faced a shortage of technology workers. For business continuity purposes, many firms have continually expanded their remote teams. Although a highly effective arrangement, managing remote teams in the midst of a pandemic has been challenging. But with some new thinking, remote team constructs will be stronger than ever.
Even though ThoughtFocus has teams based in four different cities in India and in the Philippines, this geographic distribution was not sufficiently diverse to avoid pandemic-induced disruption. Might further geographic diversity be helpful in decreasing the risks of future operational disruption?
Raj: Absolutely. In our strategy work to identify measures to reduce future risk, we identified further geographic diversification, technology-enabled strategies, and working arrangement reconfigurations. I’ll start by discussing further geographic diversification.
We have been talking about this issue for some time, but the COVID-19 pandemic has brought the issue to the forefront. The ThoughtFocus executive team generally believed that our technology centers spread around India, coupled with our center in the Philippines, represented sufficient geographic diversification. However, the COVID-19 pandemic proved that more geographic diversification is likely needed.
Ultimately, increasing the political and geographic diversity of our technology centers serving the financial services industry makes a great deal of sense. The leadership of some nations was simply better suited to containing the pandemic, which reduced the degree of disruption in their societies. In addition, some countries are more isolated than others and do not tend to host as many international visitors; these countries also tended not to be hit as hard.
Therefore, providers such as ThoughtFocus should consider diversifying risk by having delivery in geographically and politically diverse areas around the world.
You mentioned that technology-enabled strategies could be part of the answer for managing work-from-home technology team members. What might this look like?
Raj: Some of the processes our team conducts for our financial services clients are quite sensitive. The pandemic has forced our workers to sometimes work from home rather than always working in our secure technology centers—this is obviously a huge concern. We can do things like disabling USB drives on laptops to protect data, but when workers must work from home, typical supervision and restrictions are obviously not in place. There is a risk that workers could do something like take a picture of a computer screen to capture sensitive information.
But what if we split up processes so that no one worker can access or see valuable confidential information? This approach takes a bit of inspiration from spy agencies passing information up the chain of command—no team member has the full confidential story. I think of it as business process encryption.
Have you made lower-tech adjustments to manage both teams and work during the pandemic?
Raj: Hybrid working arrangements have worked well, especially as restrictions in many parts of the world were partially lifted. Basically, a worker comes into work at a technology center two or three days per week, then works at home two or three days per week. We have been able to readjust work assignments and have people working at home when they are not working with highly sensitive information, but working from a technology center when they are working with sensitive data.
This allows us to keep the worker count down in technology centers so that we can operate safely but work with sensitive data while in a secured environment.
Is the pandemic delivering changes to how work gets done that will be with us after the pandemic is over?
Raj: People will start traveling more again, but I don’t think we will return to pre-pandemic levels. I was traveling nearly every week, as were many of my colleagues. The pandemic has taught us that we can manage work and relationships remotely. Although travel to resume in-person connections will be healthy for business relationships, I believe the amount of travel will be reduced.
Additionally, onboarding teams might be handled differently in the long term. It was common for at least some key members of an offshore team to spend three to four weeks in a client’s office at the beginning of a new project or relationship. This approach to onboarding probably will not resume.
We’ll need to continue to invest in advanced video conferencing technologies, but I have a feeling that this is the way clients will want to manage these processes for years to come.