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North America Mortgage Banking 2020: Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020
 

North America Mortgage Banking 2020: Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020

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To further compound lenders’ challenges to rebuild growth, profitability and efficiency following the recent credit crisis, convergent disruption is leading to a structural change in the industry; ...

To further compound lenders’ challenges to rebuild growth, profitability and efficiency following the recent credit crisis, convergent disruption is leading to a structural change in the industry; multiple disruptive forces are converging, creating an increasingly complex and highly dynamic future environment. Accenture examines the building blocks and roadmap to success in 2020.

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  • Payments Note: Approximately 30% of the market is payments-related~9% is from card network providers and payments providers (considered mono-line players)~21% is from Traditional Full-Service Banks
  • Jay Smith, Costco’s director of business and financial services
  • Payments Note: ~15% of the 35% market share loss of Traditional Full-Service Banks could be payments-related (potentially moves to Niche Digital model)
  • Payments Note: ~15% of the 35% market share loss of Traditional Full-Service Banks could be payments-related (potentially moves to Niche Digital model)
  • http://www.accenture.com/us-en/industry/financial-services/banking/Pages/index.aspx?tab=3https://kxsites.accenture.com/groups/GlobalBanking/assets.aspx?itemtype=Market%20Insights

North America Mortgage Banking 2020: Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020 North America Mortgage Banking 2020: Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020 Presentation Transcript

  • North America Mortgage Banking 2020 “Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020”
  • Executive Summary Current Situation: Convergent Disruption • Today‟s Lenders are still challenged to rebuild growth, profitability and efficiency following the recent credit crisis • To further compound lenders‟ challenges, convergent disruption is leading to a structural change in the industry; Multiple disruptive forces are converging on the Credit Industry at the same time, both from inside and from outside the Credit Industry, creating an increasingly complex and highly dynamic future environment Building Blocks for Success in 2020: 1. Optimization & Simplification, 2. Agility and 3. Continuous Innovation • To avoid being marginalized as the future evolves, traditional lenders must become agile and innovative; this will help Lenders adjust to industry changes and even help them define the industry‟s future • Three building blocks are essential for achieving sustainable competitive advantage in the “Era of Convergent Disruption”: 1. Optimization & Simplification are today‟s table stakes and are the essential foundation for 2020; this building block is required to survive 2. Agility is the new table stakes for 2020; this building block will allow lenders to succeed 3. Continuous Innovation will separate the leaders in 2020; this building block defines high performers • Lenders that become more agile and innovative will be future high performers, potentially realizing a sustainable >3.5% Gain on Sale Margin in 2020; this is far better than the ~2.3% margin expected for lenders that simply continue optimizing and simplifying the current model Successful Business Models in the “Era of Convergent Disruption”: New business models will take market share from today’s Lenders • Agility and product commoditization expand the business models for success in the future • Today‟s traditional Lenders could collectively lose about 35% market share by 2020 to new entrants and current players who adopt new business models • While traditional business models can succeed in 2020, new business models could emerge and be highly successful Roadmap: Today’s Lenders can choose several different paths • The choice of business model need not be a “one-size-fits-all” decision; Different business models can be adopted for different business units • Each business model can also deploy innovative go-to-market strategies to further increase returns • The Table Stakes will be much higher in the Year 2020 no matter what business model is pursued; Lenders must start building the groundwork today 2 Copyright © 2014 Accenture All rights reserved.
  • Current Situation
  • Industry Trends Market Environment and Outlook Mortgage Originations and Housing • Changes in interest rates drive outlook for mortgage origination market; $1.3 trillion in originations forecast for 2014, >60% expected to be purchase money1 • Home purchase demand is anticipated to remain robust, though some seasonal slowing is expected • Slow economic growth and fiscal uncertainty have modestly tempered the outlook for future price appreciation Distressed Whole Loans • Pipeline of distressed whole loan opportunities remains strong with additional sellers emerging – expected to remain strong through 2014 • Home prices impact returns; expectation of continued price appreciation at a more moderate pace • Alternatives to property resolution (e.g., modification, refinance) are increasingly important strategies to maximize returns Correspondent Lending Competition Jumbo Private-Label Securitization Mortgage Regulation • Contracting origination market has led to tighter margins • A smaller market results in higher barriers to entry for new entrants • Emphasis on disciplined pricing, execution and service to maintain profitability • Agencies dominate the high-balance loan market; conforming loan limits likely to remain until mid-2014 • Limited depth of market for private-label securities – significant near-term challenge • In the past, regulator efforts to protect consumers were prioritized by the risks consumers could pose to the safety and soundness of the institution if they took action, such as filing a class action lawsuit • Under new regulatory scheme, the CFBP will judge compliance by the extent to which consumers have access to financial products and services and that such offerings are fair, transparent, and competitive. Today, it‟s the consumer the government is out to protect, not the institution it regulates Copyright © 2014 Accenture All rights reserved. 1Source: Average of the Mortgage Bankers Association, Fannie Mae and Freddie Mac mortgage market forecasts as of October 2013 4
  • Industry Trends The benchmark 30-year FRM interest rate is projected to continue to rise over the next two years, according to the MBA. US Interest Rate Trending and Forecast “ 6.0% The increase in mortgage rates has pushed refinance application volume down to levels we have not seen since early 2011. Given the expectation for rates to remain at current levels or potentially move higher, the refinance boom we experienced over the past 12 years has…ended” – Compass Point analyst Kevin Barker, 2013 30-Year FRM (%) Purchase $US Billions Refinance Forecast (as of December 2013) 5.5% +0.9% 5.2% 5.1% 5.1% 5.1% 5.0% 5.0% 4.9% 4.9% 4.8% 4.4% 4.8% 4.7% 4.4% 4.4% 4.4% 4.3% $300 $250 $200 4.0% 4.0% 3.5% $350 5.0% 4.7% 4.5% $400 5.3% 5.3% 5.2% 5.0% $450 3.9% Recent Highlights: • An increased in mortgage interest rates – such as conforming, 30-year fixed rate mortgages – has caused a drop in refinance applications • Purchase volumes have remained more resilient to higher rates and continue their upward trend 3.8% 3.7% 3.5% $150 3.5% 3.4% 3.0% $100 $50 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Source: www.mortgagebankers.org/NewsandMedia/PressCenter/86645.htm Copyright © 2014 Accenture All rights reserved. 5
  • Today‟s lenders are still challenged to rebuild growth, profitability and efficiency following the receding credit crisis in today‟s low risk/low reward environment. Pre-Crisis Crisis Disruption 6.0% 1.4% Gain on Sale Margin Moving Forward 1.2% 4.0% 1.0% 0.8% 3.0% 0.6% 2.0% 0.4% 1.0% 0.2% 3Q13 1Q13 3Q12 1Q12 3Q11 1Q11 3Q10 1Q10 3Q09 1Q09 3Q08 1Q08 3Q07 1Q07 3Q06 1Q06 3Q05 1Q05 3Q04 1Q04 3Q03 1Q03 3Q02 -1.0% 1Q02 0.0% 0.0% -0.2% High Risk/High Reward Low Risk/Low Reward • Underwriting guidelines loosened • High volume • Record introduction of new businesses and products • Government guarantee of mortgages • Too big to fail mentality • Extreme focus on regulatory compliance • Limited work done to sustain competitive advantages in future Copyright © 2014 Accenture All rights reserved. Primary-Secondary Spread Lenders are still struggling in today’s low risk/low reward environment 5.0% Gain on Sale Margin Primary Secondary Spread Manageable Risk/Higher Reward • Balance rapidly increasing investments in regulatory compliance with investments to build the business • Focus on the Customer: Invest in product and customer experience structural innovations that capture market share and proactively respond to changing customer needs, including use of digital • Rebuild lender reputations 6
  • The net cost to originate a residential mortgage has increased dramatically since year-end 2009, including seeing a steady rise over the past five quarters. Total Net Cost to Originate Residential Mortgage Loans Based on Un-weighted Averages For Non-Depository US Companies $5,000 +97% $4,500 Net Loan Production Operating Cost ($) +36% Period Average $4,000 $4,182 $4,207 $3,813 $3,500 $3,539 $3,513 $3,000 $2,945 $2,500 $2,000 $4,573 $2,610 $3,360 $3,324 $3,413 $3,353 $3,224 $3,310 $2,722 $2,827 $2,345 Key Points: $2,324 • A re-engineered lending “factory” could cut cost of originating a mortgage by ~25+%, reversing a trend that has seen origination costs rise by 79% since year-end 2009 • Companies need to reduce sales/servicing costs via reduction of redundancy and automation • Increasing attention on technology applications: To improve efficiency and reduce costs, but also to help re-allocate resources based on shifting demand as well as adding necessary customer/credit analytics • Rising costs with decline of mortgage brokers , which has had had a profound affect on loan origination system providers with their customer bases shifting dramatically from broker to lender since 2008 $1,500 $1,000 $500 $2008 Q4 x 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 3Q 2012 4Q 2013 1Q 2013 2Q 2013 Period 3Q Average Footnote 1) The net cost to originate includes all origination operating expenses and commissions, including corporate allocated expenses, minus fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread Note: Tracked by MBA‟s Quarterly Mortgage Bankers Performance Report through 3Q12 Source: The Economist, 2 March 2013: “Spread Besting” – www.economist.com/news/finance-and-economics/21572796-feds-frustration-mortgage-profits-have-been-soaringspread-besting Copyright © 2014 Accenture All rights reserved. 7
  • Industry Trends Since FY08, originators as a group have raised dramatically their spending on (in order of magnitude): Outsourcing & Professional Fees, Personnel-related expenses and IT. Expenses of US Originators Decomposed Through 3Q13 (vs. 4Q08) Based on Un-weighted Averages For Non-Depository US Companies % Change in Expenses Through 1Q13 Radius = Relative Contribution to Expenses 98% 90% Outsourcing and Professional Fees 70% 50% Benefits 29% 30% Fulfillment Personnel Production Support Employees Sales Personnel 44% Technology 33% Expense Average = +31% 32% 38% Other Operating Expenses 10% -13% -10% 15% Occupancy & Equipment -30% $- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 $ Cost Per Loan at 3Q13 Source: MBA Performance Report, 3013 Copyright © 2014 Accenture All rights reserved. 8
  • Symbolizing the volatility in managing FTE capacity in the industry, Wells Fargo and other large bank providers are projecting large cutbacks in the foreseeable future. Trend of US Mortgage Industry Employment Wells Fargo FTE Trending…. Mortgage Industry Employment… Since 1990... Copyright © 2014 Accenture All rights reserved. Source: Compass Point Research & Trading LLC analyst Kevin Barker, 11 July 2013 9
  • Industry Trends Compared to other product/services customers purchase, Mortgage Servicing and Origination are ranked near the bottom in terms of satisfaction. Relative JD Power Consumer Satisfaction Scores Latest Annual US Customer Satisfaction Index Score by Category (Based on a 1,000 point scale) 950 900 850 800 750 700 683 710 733 736 771 752 763 803 817 787 789 797 801 857 836 851 885 890 896 650 Source: J.D. Power and Associates, 2014 Copyright © 2014 Accenture All rights reserved. US Dealer Leasing US Dealer Financing Digital Camera Buyers US Tablet Buyers Captive Luxury Lenders Captive Mass Market Lenders Repeat Home Buyers Repeat Home Sellers Mass Consumer Financing 1st Time Home BuyersSellers Full-Service Investor Household Insurance Residential Mortgage Origination Retail Banking Self-Investor Investing Smalll Business Banking Residential Mortgage Servicing Residential Home Telephone Service Internet Customer Service 600 10
  • Industry Trends However Mortgage Originators have seen a rebound in their customer satisfaction and though Servicers have also seen a steady improvement, it is not as dramatic. Relative JD Power Consumer Satisfaction Scores Trending Annual US Customer Satisfaction Index Score by Mortgage Category (Based on 1,000 Point Scale) Origination 771 Servicing 798 +37 Points 784 761 757 750 747 747 +18 Points 730 739 718 734 Key Origination Points: The use of electronic closing documents improves customer closing satisfaction. Closing satisfaction among the 8 percent of customers who closed their mortgage using electronic documents in person averages 830, while satisfaction among the 84 percent of those who closed with paper documents in person is 772. 2007 2008 2009 2010 2011 2012 2013 733 725 Key Servicing Points: Leveling result of increase in new clients combined with new set of rules released by the CFPB – effective January 2014 – where under new rules, servicers are required to have systems, policies and procedures in place to ensure customers receive the appropriate information and support from servicers 2007 2008 2009 2010 2011 2012 2013 Sources: www.jdpower.com/content/press-release/c6oSdyC/2013-u-s-primary-mortgage-servicer-satisfaction-study.htm www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm Copyright © 2014 Accenture All rights reserved. 11
  • Proactively responding to changing customer values and needs is critical for Lenders moving forward. Today’s Customer Segments* Customer Trends Challenges for Traditional Providers Unbanked & Underbanked • Looking for low-cost FS alternatives, especially through digital channels Youth Consumer Lending • Frequent users of digital channels & wallets • Attract and position young customers • Many are delaying homeownership or opting through lifecycle to rent vs. buy • Gear mortgage and other credit products to shifting needs of this segment Mass Consumer • Customers are willing to switch from their primary-banking provider to find a lender with the best rates • Overall customer satisfaction with mortgage lenders reaches a seven-year high, with satisfaction among first-time home buyers improving considerably from 2012, • Many are still delaying homeownership or opting to rent vs. buy Mass Affluent / HNWI / Private Banking • Pitched marketing batted underway with lowcost delivery emerging disruptive providers • A number of emerging disruptive providers emerging, focused on customer-led, socially conscious innovation • Gear mortgage and other credit products to shifting needs of this segment • Despite improvements, customers purchasing a home, particularly 1st-time home buyers, continue to experience difficulties understanding the loan options available to them • Increasingly looking for high• The market opportunity for HNW customers value, customized wealth advice through is huge digital channels • High touch service will be critical with digital • HNW customers will not reliant on online making fulfillment process more convenient. applications; rather, they will want a financial • Banks focused on high net worth customers manager who knows of their entire financial are competing for market share that was left situation by large lenders who got out of jumbo lending to focus on their conforming business. As a result, a gap exists in the market for serving these HNW customers when it comes to mortgage Copyright © 2014 Accenture All rights reserved. Customer segments are evolving into lifestyle/behavior segments http://www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm 12
  • To further compound lenders‟ challenges, convergent disruption is leading to a structural change in the industry. • Becoming Digital on the inside of lenders and on the outside with customers and suppliers is rapidly redefining interactions, information flows and data transparency • Ongoing industry convergence is opening the door to new competition, new ways of doing business and new revenue opportunities • Emerging new entrants are joining the market (in many cases from different industries); they are competing in innovative ways for customers and profitably serving traditionally unprofitable segments • Customers are more empowered through social media and the prevalence of information and giving them an information edge over lender employees. Transparency will drive improved customer trust. Outside Digital Inside & Outside Expanded Regulation Inside Subdued Economic Outlook & Rising Rates Ongoing Industry Convergence Structural Change Emerging New Entrants • Rapid consolidation continues; 20%-30% of today‟s lenders will be gone by the year 2020 • A subdued economic outlook is forecast through the next 3 years as the Fed will leave targeted federal funds rate at between 0% and 0.25% in the foreseeable future and interest rates will rise Expanded regulations may cost largest US banks a further $104bn to resolve mortgage-related legal issues as they try to put the costs of the subprime crisis behind them. Also, the second largest civil settlement ever obtained by the state attorneys general will cost the nation‟s 5 largest mortgage servicers, which control about 60% of a servicing market, an ~$25bn to $32b 1 Source: 1) Office of Mortgage Servicing Oversight. Joint State-Federal Mortgage Servicing Settlement FAQ http://nationalmortgagesettlement.com/faq Copyright © 2014 Accenture All rights reserved. Continued Consolidation Customer Empowerment Convergent Disruption Multiple disruptive forces are converging on the Banking Industry at the same time, both from inside and from outside the Banking Industry, creating an increasingly complex and highly dynamic future environment with “permanent volatility” 13
  • A view to the mortgage industry revolution Market Events Begin planning for GSE consolidation Non-agency market collapses (Lehman) Subprime Mortgage Crisis 2007 DoddFrank Act Original passes conservatorship timeline ends Basel 3, QM and QRM rules in place GSEs return to profitability US Presidential Election GSE Conservatorship begins 2009 2011 Uniform GSE Guidelines and Tech Standards begin 2013 FHFA strategic plan released Dodd-Frank Act induced technology changes 2015 “NewCo” established to build common “GSE” platform 2017 GSE conservatorship ends? Private-label MBS market running smoothly GSE „consolidation‟ occurs? 2019 2021 Uniform GSE Guidelines and Tech converge Common US mortgage secondary market GSE platform induced platform goes live? technology changes begin? Technology-Related Events Source: CEB TowerGroup Retail Banking analyst Craig Focardi, 2013 Copyright © 2014 Accenture All rights reserved. 14
  • Other industries have experienced similar levels of disruption in recent years; many leaders emerged with entirely new business models. In some cases traditional players completely redefined themselves to remain relevant… …and in others new entrants are taking dominant roles as they revolutionize the customer experience. Redefined Traditional Player Emerging Entrants From Ma Bell to Global Networking / IP Provider • From 1984 until 1996 AT&T was an integrated telecom services and equipment company • As new entrants eroded traditional profits, AT&T reinvented itself from a telecom and equipment company to a global networking leader to remain relevant • Excluding its divested Advertising Solutions unit, 81% ($126.4B) of AT&T‟s revenues in 2012 came from these growth areas, which grew ~6% YoY Redefining Retail Mortgage Origination 81% 19% Voice/ Other Redefining Information & Advertising of total revenues grew nearly 6% year over year 28% Wireline Data/ Managed IT Services 53% Wireless Copyright © 2014 Accenture All rights reserved. Redefining Music Industry and Content Distribution • The #1 online lender and the 3rd largest retail mortgage lender in the US • Recognized for a 4th consecutive years for its higher customer satisfaction (source: JD Power) • Time from application to approval averages 17.8 days for Quicken Loans customers, which is 8.5 days shorter than the industry average (26.3 days) • Best available technology/ largest content provider • Strong brand development • Optimized user experience • “Google is about getting the right information to people quickly, easily and cheaply – and for free” (L.Page) • World‟s largest music platform • First sustainable alternative to music piracy • Comprehensive user experience from online music to electronic devices 15
  • The telecom industry exemplifies how disruption can quickly and radically alter an entire industry; Lenders must prepare for a similar, sustained era of convergent disruption. Evolution of the Telecom Industry (a regulated industry like Banking) Ma Bell Era Baby Bell Era 1983 – 2003 (~ 20 Years) 1885 – 1983 (first ~100 years) Traditional Providers 1885: AT&T founded New Entrant Example 1941: First installation of coaxial cable in the network is placed in service 1983: 7 Regional Bell Operating Companies created in AT&T divestiture Cable Industry Convergence Traditional Telecom Player Response Media Era 2003 – Today (~10 Years) 1993: AT&T restructures into 3 separate companies (AT&T, Lucent, NCR) 1994: AT&T spins off Lucent and NCR 1997: Bell Atlantic merges with NYNEX, another Regional Bell 2000: 2005: Bell Atlantic SBC purchases merges with former parent GTE and AT&T Corp. and adopts rebrands AT&T name "Verizon" 2003: Skype introduced 1996: Comcast launches Comcast Online, a broadband Internet service Scale Optimize & Simplify Example: AT&T adopts “one phone system” campaign from 1907-1960s Example: AT&T restructures into 3 separate companies (AT&T, Lucent and NCR) then spins off Lucent and NCR Today; AT&T is the largest communications holding company in the world with phone, cable, wire-line data and managed IT 2011: Microsoft services buys Skype to “generate new Today: 33% of world's voice revenue opportunities” calls are on Skype 2009: Skype is largest carrier of Int‟l voice traffic 2005: Comcast creates 2009: General Electric Comcast Interactive (GE) and Comcast Media, a new division announce a buyout focused on online agreement for NBC media Universal Today: Verizon Wireless to pay $1B to air NFL games over customers' smartphones Become more agile and digital Continuously innovate to stay relevant Example: AT&T is a worldwide provider of IP-based communications, manages largest 4G US network, has wireless coverage overseas and recently developed AT&T U-verse to deliver services across mobile devices, PCs and TVs Lessons Learned from Telecom Industry Disruptions (Credit Industry Parallels): • The pace of change is much faster when enabled by agile, digital technology • Leaders find innovative ways to improve the customer experience, and they continually redefine themselves (e.g., AT&T was a telecom services and equipment company in 1983 and is a global networking leader today) • Those companies that do not innovate and adjust to industry disruptions eventually become obsolete (e.g., NYNEX) Copyright © 2014 Accenture All rights reserved. 16
  • The NA Lending Industry is already experiencing disruptions of the magnitude seen in the Telecom Industry; disruptions that completely transform an industry. Evolution of the NA Banking / Lending Industry Glass Steagall Era Build Specialization Universal Banking Era Scale Late 1990s – 2008 (~ 10 Years) 1933 – Late 1990s (first ~65 years) Traditional 1933: Providers Glass– 1938: Fannie Steagall Act Mae separates created; commercial Freddie and Mac investment created banking in 1970 New Entrant Example Industry Convergence 1969: First ATM installed (at Chemical Bank) 1995: First large bank offers online services (Wells Fargo) Post Credit Crisis Era Optimize & Simplify Agility & Innovation On Horizon 2009 – Today (~5 Years) 1998: LendingTree created to provide consumers a centralized location to receive multiple loan offers 1985: Quicken Loans, originally Rock Financial Mortgage, founded 1998: Citibank merges with Travelers to form Citicorp combining banking, securities and insurance services 2007: Wells Fargo reintroduces mobile banking 1999: goodmortgage.com founded 1999: Gramm– Leach–Bliley Act: allows commercial banks, investment banks, securities firms, and insurance companies to consolidate 2008: Significant consolidation • Bank of America acquires Countrywide • Wells Fargo acquires Wachovia • JPMC acquires most of Washington Mutual from FDIC‟s receivership 2008: • PennyMac founded by seasoned lending executives who have focused on origiinating HARP-based loans 2010 :GSE conservatorship begins 2013+: S&P reports that the biggest US banks may have to spend a further $104bn to resolve mortgagerelated legal issues as they try to put the costs of 2012: • Simple (Bank) the subprime crisis behind launched – 100% online bank them. • American Express and WalMart launch Bluebird, a prepaid debit card 2012: • Capital One acquires ING DIRECT in the US and rebrands its retail unit CapitalOne 360 • Scotiabank acquires ING Direct Canada Lessons Learned from Evolution of the Banking Industry • After a decade of focusing on building scale in the 1990s, the dominance of the universal banking model is being questioned, including by regulators who are examining “Too Big to Fail” and possible scenarios to carve up failed large full-service banks • In the post credit crisis, banks – traditional and emerging - are focused on strategies to boost customer centricity (e.g., social media/Big Data) Copyright © 2014 Accenture All rights reserved. 17
  • Building Blocks for Success in 2020
  • To avoid being marginalized as the future evolves, traditional Lenders must become agile and innovative; this will help Lenders adjust to industry changes and even help them define the industry‟s future. • No longer will traditional practices of optimizing and simplifying the existing infrastructure and business for improved efficiency and effectiveness yield a competitive advantage; this simply allows lenders to survive • Rather, adoption of a new, broader mindset focused on managing change quickly and effectively is critical to compete in the increasingly complex and highly dynamic banking industry of the future – Agility is table stakes for the Year 2020 – Continuous Innovation is what will separate the leaders in the Year 2020 • The “Era of Convergent Disruption” has begun Copyright © 2014 Accenture All rights reserved. Journey to Sustainable Competitive Advantage Business Performance Agility (Year 2020 Table Stakes) Continuous Innovation (Year 2020 Leaders) Optimization & Simplification (Today’s Table Stakes) Era of Survival Today’s Penetration Average Time to Sustainable Benefit Lender Industry Examples of Agility & Innovation Era of Convergent Disruption 93% of lenders are here 5% of lenders are here 3-5+ years 2-4+ years <2% of lenders are hereTime 2-5+ years Online-only originator Quicken Loans bolsters its growing servicing portfolio • Leverage a proprietary analytics system that integrates into its servicing system of record • The system is used to predict loans in danger of delinquency and generate automated decisions to determine the best possible loss mitigation option. Leveraging virtualization and data mining tools • Recently completed a server / desktop virtualization initiative that improves data security and integrity and enhances employees‟ access to systems by providing remote access. • Also uses robust data mining tools to improve quality control, customer service and compliance. 19
  • As the production side of the business rebounds, lender margins continue their steady decline – so future winners will have to focus on boosting not only their efficiency but their agility and continuous processes to innovate. US Mortgage Volumes & Margin Trending Rising interest rates have reduced mortgage re-financings and income from the sale, securitization and servicing of retail mortgage loans by $4bn among the largest bank lenders Quarterly Averages of US Industry’s Gain on Sale 4.0% Industry Margin 1 Purchase 0.4% Recovery 3.5% “Era for Convergent Disruption” Refinance 3.8% $400 High 3.7% Performers of the $350 Future 0.5% 3.0% 3.2% 3.1% 0.4% 2.7% 2.5% 0.2% 2.3% 1.5% 1.5% 1.6% 1.6% 1.0% Performers $250 0.3% 2.1% 2.0% $300 Average 2.5% 0.4% 2.0% $450 $200 Status Quo (continued optimization & simplification only – Not Sustainable) $150 0.5% $100 0.0% $50 4Q10 1Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 e2H13 O &S Agility Innovation 2020 Footnote 1): Gain on Sale as reported by Compass Point Research & Trading Other Sources: The MBA and Accenture Research, December 2013 http://www.mba.org/files/Bulletin/InternalResource/86348_.pdf Copyright © 2014 Accenture All rights reserved. 20
  • Three building blocks are essential for achieving sustainable competitive advantage in the increasingly complex “Era of Convergent Disruption.” 3. Building Blocks for Sustainable Competitive Advantage in the “Era of Convergent Disruption” Differentiate Through Sustainable Competitive Advantage 3. Year 2020 Lender Leaders 2. Year 2020 Table Stakes 3. Continuous innovation Have the ideas, vision and leadership to proactively stay ahead of the market Adapt Through 2. Agility Be able to seize opportunities In times of change Drive Efficiency Through 1. Optimization and simplification Be as efficient and effective as possible in current structure Building Blocks Copyright © 2014 Accenture All rights reserved. • Become Digital: Transform IT platform to overcome rigid legacy technology in back office and enable analytical-driven front office • Be Customer-Driven: Make all decisions to improve the customer experience and proactively meet customer needs • Fulfill Self-Service vs. Channel Potential (including social media): Maximize channel management per broker, loan officer and consumer direct to best engage customers in sales and fulfillment using their preferred methods (e.g., mobility, social media and online) • Manage the New Talent Dynamic: Re-engineer human capital platform/program to leverage best available talent internally and externally on demand • Employ Optimal and Flexible Financial Strategies: Adaptable portfolio and product strategy 1. Today’s Table Stakes • Channel Fulfillment: Provide capability in all channels to serve target customers most effectively • Streamline and Simplify The Business: Remove redundancies and improve processes and technologies to become lean and rationalize business, products, technology and operations • Manage Regulatory Requirements: Handle increasing regulation as a competitive advantage • Manage Enterprise Risk Management Regime: Provide early-warning to emerging risk threats in possible siloes of business • Create Capital and Funding Strategies: Optimize to meet business opportunities/challenges as they arise 21
  • The building blocks are enabled by technology; lender leaders need to balance innovation demands of the business with ongoing scale and efficiency needs of the corporation. Enabling Technology in the “Era of Convergent Disruption” IT Balance Differentiate 3. Enabling Technology Year 2020 Lender Leaders Technology As Continuous Provider of Innovation 3. Continuous innovation Have the ideas, vision and leadership to proactively stay ahead of the market Corporate IT Innovate 3. Continuous innovation Business IT (“As a Service”) 2. Agility Drive Efficiency 1. Optimization and simplification Scale 2. Year 2020 Table Stakes Agile Information Technology • Mobility: Extending mobility across the distribution spectrum • Analytics and Data Velocity: Using business intelligence, data analytics and big data to access the right data at the right time by creating a data supply chain • Social Collaboration: Combining customer oriented service and a highly effective capability – Social Enterprise • IT Infrastructure: Could include a private cloud for its loan origination system, a VoIP phone system and paperless underwriting • Electronic Closing Documents: improves customer closing satisfaction 2. Agility Be able to seize opportunities In times of change 1. Optimization and simplification Be as efficient and effective as possible in current structure Building Blocks Copyright © 2014 Accenture All rights reserved. 1. Today’s Table Stakes Optimizing & Simplifying Technology • Digital HR & Finance: Workplace Collaboration, Hyper Change Management and Virtual Learning, Financial Performance Analytics, and Real-time operations performance and cost to serve monitoring • Digital Logistics & Operations: Electronic document management system and a Web-based LOS that includes a module for borrowers to initiate loan applications • Cyber Security & Fraud Management: Data privacy management platform including enhanced email security tools and digital file upload portals. • eCustomer Interface: Loan onboarding processes with automated workflows that collect, compare and route mortgage file data and documents as well as real-time status alerts that give borrowers and their real estate agents real-time status updates on their loans • Imaging Technology: Allows for document collaboration across all departments 22
  • Emerging Lender Business Models
  • A handful of the largest US lenders that did not exist five years ago have emerged to capture >10% origination share from traditional legacy providers. Changing Large US Lender Landscape – 2008 vs. The Present Total Number of Lenders All Companies Big 4 Market Share Emerging Providers Market Share Company Name Wells Fargo & Co. Chase Bank of America Quicken Loans Inc. US Bank Home Mortgage CitiMortgage, Inc. PHH Mortgage Flagstar BB&T SunTrust Bank PennyMac Provident Funding Associates Fifth Third Bank Ally Bank/ResCap (GMAC) Franklin American Mortgage Co. Guaranteed Rate Inc. USAA Federal Savings Bank PNC Mortgage Nationstar Mortgage PrimeLending Stearns Lending Navy FCU Everbank United Wholesale Mortgage NYCB Mortgage Amerisave Mortgage Corp. M&T Mortgage Union Bank Prospect Mortgage Sierra Pacific Mortgage TD Bank NA Regions Mortgage Manufacturers & Traders Trust Co. LoanDepot.com RBS Citizens, NA Fremont Bank Cole Taylor Mortgage -4.6% 2.5% 6.4% 20.6% 0.5% -4.9% 10.2% 5.0% % 5-Yr CAGR % 1-Yr CAGR 12.3% 3.8% 12.0% 26.6% -4.2% 4.8% 68.7% 114.4% 21.1% 18.5% -9.2% 4.3% 22.4% 3.2% 27.4% 30.2% 17.9% 14.7% 9.5% 19.3% -540.4% 30.6% 1.9% 28.1% 8.2% -8.2% -46.8% 20.4% 39.8% -86.2% 20.1% 18.4% 6.2% 35.0% -206.4% 51.4% 29.7% 72.8% 65.1% 28.9% 54.1% 33.1% 50.8% -234.6% -5.9% 7.5% -42.9% 27.1% 41.2% 31.1% 8.2% -20.2% 23.8% 33.9% 75.2% 27.4% 20.8% 15.8% 8.7% 310.6% -99.3% 40.0% -3.8% 55.0% 60.0% -125.2% Copyright © 2014 Accenture All rights reserved. % Declines in Origination New Entrant Since 2008 484 472 611 -4.9% 1.5% 461 454 594 Total Residential Origination Volume Total Residential RETAIL Origination ($US Millions) Volume ($US Millions) 1,941,536 1,424,581 13.0% 28.1% 1,158,456 904,165 627,666 45% 50% 44% 0.0% -3.7% 45% 49% 45% 11% 6% 1% 12.2% 4.4% 13% 9% 1% LTM 2013Q2 LTM 2012Q2 LTM 2008Q2 % 5-Yr CAGR % 1-Yr CAGR LTM 2013Q2 LTM 2012Q2 LTM 2008Q2 490,336 472,407 274,557 14.9% 9.6% 251,883 229,922 126,030 212,735 168,004 120,580 24.7% 8.2% 113,870 105,253 37,758 95,534 91,190 118,519 1.0% 39.0% 95,422 68,660 90,885 94,250 43,952 6,890 68.7% 114.8% 94,250 43,884 6,890 86,946 73,397 33,441 28.4% 18.2% 24,906 21,069 7,144 73,443 70,383 119,259 16.6% 64.0% 61,334 37,398 28,508 56,890 55,152 20,704 23.2% 26.5% 49,894 39,434 17,553 53,171 40,829 15,860 17.0% 25.4% 3,233 2,578 1,476 34,729 30,268 15,244 10.1% 12.1% 13,243 11,818 8,187 34,058 28,548 21,613 11.4% 14.6% 18,265 15,938 10,654 33,672 5,258 ------31,964 31,358 8,422 68.6% 21.1% 4,782 3,949 351 27,748 25,646 8,059 25.7% 2.8% 15,555 15,134 4,950 24,786 46,606 37,928 -14.7% -61.4% 4,425 11,477 9,801 23,794 17,024 9,388 34.5% 35.4% 1,037 766 236 18,020 9,676 --86.2% 18,020 9,676 -17,932 15,151 7,189 46.2% 18.4% 17,932 15,151 2,689 17,114 12,675 12,667 7.2% 35.0% 17,114 12,675 12,094 15,416 5,031 --148.9% 7,913 3,179 -14,455 11,145 1,820 51.5% 29.7% 14,455 11,145 1,814 14,436 8,746 938 162.4% 92.7% 2,486 1,290 20 12,048 7,817 3,383 28.9% 54.1% 12,048 7,817 3,383 11,456 7,596 2,742 56.1% 64.1% 6,290 3,834 679 10,953 3,273 --87.9% 1,037 552 -10,258 9,544 13,883 -100.0% -100.0% -3 124 10,062 7,040 --34.2% 8,507 6,340 -9,357 6,626 2,822 37.3% 40.2% 5,523 3,938 1,131 9,232 8,529 2,386 40.8% 0.5% 3,321 3,305 601 8,883 7,389 --19.3% 8,812 7,389 -8,464 6,322 2,913 56.6% 39.9% 2,102 1,503 223 8,296 6,513 503 87.2% 27.4% 8,296 6,513 361 8,088 6,985 3,146 20.9% 16.2% 7,967 6,855 3,082 7,761 1,890 5,107 22.0% 334.0% 4,197 967 1,552 7,704 3,866 --106.7% 7,704 3,728 -7,245 7,532 1,349 40.0% -3.8% 7,245 7,532 1,349 7,158 4,475 801 46.6% 51.0% 5,110 3,383 754 7,114 3,159 --117.3% 1,193 549 -- Sources: Accenture Research analysis using MortgageData.com, 2013 24
  • Over the past five years, emerging Online and Independent lenders, many of whom did not exist during the depths of the Credit Crisis, have stolen market share away from primarily the midsize / regional banks in the US. Mortgage Origination Market Share Change Among US Lender Types Wholesale and Retail Origination Combined 60% 2008 50% 2012 0% 2013 +0.5% % Market Share Change 2008-13 -21.6% 45% 40% 30% +12.1% 20% 23% 17% +3.7% +5.3% 10% 9% 6% 0% Online Small Banks Independents Midsize Banks Big 4 Sources: Accenture Research analysis using MortgageData.com, December 2013 Footnote 1): Market share data comparing each time period at the 2 nd Quarter on a trailing 12-month basis Copyright © 2014 Accenture All rights reserved. 25
  • Over the past five years, emerging Online and Independent lenders, many of whom did not exist during the depths of the Credit Crisis, have stolen market share away from primarily the midsize / regional banks in the US. Mortgage Origination Market Share Change Among US Lender Types Retail Origination 60% 2008 50% 2012 0% 2013 +0.0% % Market Share Change 2008-13 -20.8% 45% 40% 30% +9.9% 20% 10% +5.3% 10% +2.3% 20% 15% 11% 0% Online Small Banks Independents Midsize Banks Sources: Accenture Research analysis using MortgageData.com, December 2013 Footnote 1): Market share data comparing each time period at the 2 nd Quarter on a trailing 12-month basis Copyright © 2014 Accenture All rights reserved. Big 4 26
  • Agility and product commoditization expand the business models for success in the future of the mortgage origination industry. Current Lender Landscape – 2014 C. Emerging Digital Lenders 6% MS Highly Agile • Most business generated through online/digital channels • Highly nimble • Flexible infrastructure • Social media an integral part of strategy • Optimized and simplified • Customer-centric Small Bank Lenders 360+ players ~9% market share* • Most business generated through traditional, physical channels • Less nimble • Heavy infrastructure • Less optimized and simplified Less Agile Emerging Entrants and Adopters (Current Players who Adopt new Business Models) 50+ Players ~17% market share* (PHH, Nationstar) B. Independent Lenders A. Traditional Lenders ~425 Lenders ~77% market share* (US Bank Home Mortgage, BB&T, SunTrust, USAA) Mid-Size Banks 60+ players ~23% market share* Big 4 Banks 4 players ~45% market share* (Wells Fargo, Chase, BoA, CitiM ortgage) Specialized Large-Scale, Commodity Products • • • • • • • • • • • • • • • Focused products or limited geographic focus Highly customer-centric Higher priced Advice-driven Highly nimble Simplified/optimized infrastructure New entrants Compete largely on advice and product depth/differentiation * Market shares are based on enterprise-level revenues Sources: Accenture Research analysis using MortgageData.com, 2013 Copyright © 2014 Accenture All rights reserved. Commodity products (mass market focus) Product and customer centric Low price Low amount of advice Not very nimble Large, often legacy infrastructure Larger foreign entrants, but mostly traditional players • Compete largely on price 27
  • Today‟s bank lenders could collectively lose ~20% market share by 2020 to new entrants and current independent lenders who adopt new business models. Potential Lender Landscape – 2020 (Status Quo Scenario) Highly Agile B. Independent Lenders C. Emerging Digital Lenders 10+ Players ~15% market share Mid-Size Banks 45+ players ~17% market share Specialized Market Share Emerging Lenders and Adopters (Current Players who Adopt new Business Models) ~100 players ~40% market share Examples of who could steal market share from Traditional Lenders: A. Traditional FullService Lenders 300+ banks ~60% market share Small Bank Lenders 250+ players ~26% market share* Less Agile 90+ Players ~26% market share* Big 4 Lenders 4 players ~30% market share • A handful more pure play online lenders will look to take advantage of Quicken Loan‟s market dynamics • Small/community banks that become highly agile and can now compete with larger banks (e.g., innovative credit unions) • Agile / innovate independent lenders • Retailers that continue to move into the lending space Large-Scale, Commodity Products # of Players Today ~45% 2020 ~30% Today 4+ 2020 4+ Comments Mid-Size Lenders ~23% ~17% 60+ 45+ • Midsize / regional leaders have lost the most market share since the credit crisis and will continue to see runoff as they look to reposition their business models to be more competitive and unique in an increasingly fragmented credit market Small Bank Lenders Online Independents ~17% ~26% 360+ 250+ • Though the number of small banks will continue to consolidate, the survivors (including innovate credit unions) will continue to capture market share for customers seeking high-touch customer service ~6% ~17% ~15% ~26% <5 50+ 10+ 95+ • With Quicken dominating the space, new entrants will emerge, especially from the ranks for independent lenders Big 4 Lenders Copyright © 2014 Accenture All rights reserved. • The Big 4 Lenders will continue to manage through the complexity of increasing regulatory requirements and will be motivated to battle for lower risk / higher margin markets (HNW) • The independent lender model appears to be gaining mind/market share very rapidly 28
  • Through the rest of the decade, traditional lenders will increasingly need to respond to emerging lending disruptors like Quicken, Guaranteed Rate and Goodmortgage.com, which will look to continue to build scale. Emerging Disruptors Banks Disruptors Circa 2020 Circa 2020 3 Optimization and Simplification Market nimble 3 Innovation Scale 2 Agility 2 Agility Innovation 1 1 Scale Optimization and Simplification Copyright © 2014 Accenture All rights reserved. Circa 2013 Market entry Circa 2013 Common Characteristics of the Emerging Disruptors • Emphasize social responsibility • Focus on customer centricity and empowerment • Present simpler fee structure to customers • Provide personal financial management tools and access to other accounts • Embedded with social media, especially Facebook • Leverage Big Data and analytics • Willingness to leverage Cloud and Virtualization 29
  • Courting customers who are fed up with their banks, Costco continue to build out its financial services offering, after first offering mortgages in late 2010. Costco‟s Emerging FS/Credit Business www.costcofinance.com/LoginAndPricing.aspx • Key Membership Metrics: – 39m households – 71.2m cardholders – 90% renewal rate (for US and Canada) – $2.3bn+ in cash fees for LTM • Financial Services Proposition: – Began making mortgages in late 2010 – Sells auto and homeowners‟ insurance – Offers credit card processing for small businesses – Provides financial planning • Credit Value Proposition: Costco does not make money on mortgages, but instead uses it as another incentive to get people to renew their store memberships, where Costco makes a large chunk of its profit. Sources: www.fool.com/investing/general/2013/10/11/10-reasons-why-peterdrucker-would-have-thought-co.aspx#878482 The New York Times, 13 November 2013 Copyright © 2014 Accenture All rights reserved. • History of Innovation: – First with its membership-fee structure – Move into selling gasoline 30
  • While traditional business models can succeed in 2020, two new lender business models could emerge and be highly successful. Potential Landscape – 2020 (Emerging Model Scenario) Possibly Today‟s Largest Digital Lenders, 1 of the Big 4 Lenders, and Large Indies and Midsize Banks Focus on Evolving to a Digital Model With Scale Digital pure plays have to adopt a broader infrastructure to scale and properly manage customer expectations Highly Agile Industries Outside Lending • Most business generated through online/digital channels • Highly nimble • Flexible infrastructure • Social media an integral part of strategy • Optimized and simplified • Customer-centric C. Emerging Digital Lenders 20+ Players ~5% market share D. Digital Hybrids B. Independent Lenders 90+ Players ~15% market share* Possibly a handful of small banks (~10) decide they will be more competitive by assuming a pure play digital approach ; might be conducive for credit unions • Traditionally customer facing • Most business generated through traditional, physical channels • Less nimble • Heavy infrastructure • Less optimized and simplified 10+ Players ~20% market share* E. Retail Correspondents A. Small Bank Lenders ~240 players ~10% market share A. Midsize Lenders ~40 players ~15% market share 5-8 players (Lenders + Large Retailers) A. Big 2 Lenders 2 players ~25% market share ~10% market share (Example: Costco partnering with one of the Big 4) Less Agile Best positioned for global expansion Possibly Large Retailers + One of the Large 4 / Largest Indies / Larger Midsize Banks Specialized Large-Scale, Commodity Products • • • • • • • • • • • • • • • Focused products or limited geographic focus Highly customer-centric Higher priced Advice-driven Highly nimble Simplified/optimized infrastructure New entrants Compete largely on advice and product depth/differentiation Copyright © 2014 Accenture All rights reserved. Commodity products (mass market focus) Product and customer centric Low price Low amount of advice Not very nimble Large, often legacy infrastructure Larger foreign entrants, but mostly traditional players • Compete largely on price 31
  • These new business models have the potential to be highly disruptive to the banking industry. Potential Landscape – 2020 (Emerging Model Scenario) Industries Outside Lending Highly Agile C. Emerging Digital Lenders 1 20+ Players ~5% market share B. Independent Lenders A. Small Bank Lenders ~240 players ~10% market share A. Midsize Lenders ~40 players ~15% market share D. Digital Hybrids 3 90+ Players ~15% market share* A. Big 2 Lenders 2 players ~25% market share 10+ Players ~20% market share* High Performers will be OUTSIDE this box (more agile) E. Retail 4 Correspondents 5-8 players (Lenders + Large Retailers) 5 ~10% market share (Example: Costco, Sam’s Club, Home Depot partnering with one of the Big 4) Less Agile Specialized 1. Emerging Digital Scenario: • Example: Some small banks and independents see a competitive advantage in becoming as a digital pure play • Market Edge: Gaining cost efficiencies and expanding beyond legacy physical footprint 2 2. Hybrid Digital Bank Scenario: • Example: One of the Big 4 banks and a few of the Midsize banks focus on going digital with scale • Market Edge: Gaining cost and process efficiencies vis a vis traditional lenders Copyright © 2014 Accenture All rights reserved. Large-Scale, Commodity Products 3. Digital Hybrid Independents: • Example: A few of the largest indies will see advantage of focusing on a digital value proposition • Market Edge: Could have competitive advantage over most lenders, especially in adjusting to market demand 4. Retail Correspondent Bank Scenario: • Example: One of the Big 4 banks or midsize banks will provide the lending engine behind one of the big retailers • Market Edge: Immediate market share and low pricing across a broad range of products appealing to existing customers 5. Retail Correspondent Indie Scenario: • Example: Large retailers partner with a few of the large independent lenders • Market Edge: The independent lenders who partner with retailers will gain an additional distribution channel and higher customer brand awareness 32
  • Lenders choosing to remain Traditional Full-Service Providers can also be successful by becoming more agile and/or large-scale. Potential Landscape – 2020 (Emerging Model Scenario) Industries Outside Lending Highly Agile C. Emerging Digital Lenders 2 3 D. Digital Hybrids 20+ Players 1 90+ Players ~5% market share B. Independent Lenders ~15% market share* A. Small Bank Lenders ~240 players ~10% market share Less Agile Specialized A. Midsize Lenders ~40 players ~15% market share A. Big 2 Lenders 2 players ~25% market share 10+ Players ~20% market share* F. Retail Correspondents 5-8 players (Lenders + Large Retailers) ~10% market share (Example: Costco, Sam’s Club, Home Depot partnering with one of the Big 4) High Performers will be OUTSIDE this box (more agile) 4 5 Large-Scale, Commodity Products High Performing Lenders Banks will transform themselves by 2020 to become: 1. More Digital – Focus of applying digital capabilities will be on the sales process/rate shopping and consumer finance education. When it comes to needs analysis and product fit, it will be a very customer / loan officer centric interaction. Digital capabilities can also be used in the back office to exchange data/information and provide transparency into the life of the loan 2. Truly Customer-Driven – All decisions will be made to satisfy customer needs: this requires offering more transparency, ease of doing business, having to request assistance once and setting and meeting expectations 3. Omni-Channel – Over half of business will be conducted through digital channels; although physical channels will still play a very important part in the business, these banks will not rely on them for survival 4. Innovative at the Core – Innovation will be embedded in all levels of the organization to proactively stay ahead of the market; do not settle for anything less than being a leader 5. Partnering With Leaders in Other Industries – Witnessed by the recent moves of top builder-oriented retailers, opportunities will continue exist for lenders to partner with companies in other industries‟ 6. OR Large-Scale – Deliver products to the mass market at lower margins (number of products sold makes up for lower margins); costs must be substantially reduced through reduced product complexity and streamlined technology and operations to make this work Copyright © 2014 Accenture All rights reserved. 33
  • The Table Stakes will be much higher in the Year 2020 no matter what business model is pursued; Lenders must start building the groundwork today 3 Building Blocks for Sustainable Competitive Advantage in the “Era of Convergent Disruption” 3. Year 2020 Leaders 3. Continuous innovation Have the ideas, vision and leadership to proactively stay ahead of the market 2. Agility • • • • • Be able to seize opportunities In times of change Become More Digital Be Customer-Driven Fulfill Omni-Channel Potential (incl. social media) Manage the New Talent & Regulatory Dynamic Employ Optimal and Flexible Financial Strategies 1. Optimization and simplification Be as efficient and effective as possible in current structure • • • • • Channel Fulfillment Streamline and Simplify The Business Manage Regulatory Requirements Manage Enterprise Risk Management Regime Create Capital and Funding Strategies Copyright © 2014 Accenture All rights reserved. 2. Year 2020 Table Stakes 1. Today’s Table Stakes What Must Lenders Do TODAY to Succeed in the “Era of Convergent Disruption”? • Proactively invest in initiatives that will build the business rather than reactively respond to regulations, competitors and industry changes • Fundamentally shift from a product-oriented organization to a customer-driven organization • Rebuild bank reputations • Embrace and integrate new technologies, channels and strategies 34
  • Appendix Links to Additional Information Business Model Profiles
  • The US Mortgage Lender industry is managing a $18.5 trillion balance sheet. US Household Balance Sheet – $US Billions Residential Real Estate = $18,453 Homeowner’s Equity = $8,585 Mortgage Debt Outstanding = $9,868 Agency Balance Sheet = $5,830 GSE MBS = $4,490 +4 QoQ -$102 YoY Ginnie MBS = $1,340 +$ 18 +$102 Bank Balance Sheet = $2,957 1st Lien = $2,051 -$17 +$60 Non-Agency MBS = Other = $886 $195 -$1 QoQ +$819 QoQ -$9 YoY +$2,077 YoY 2nd Lien Other* Prime Alt A Option Sub- Dramatic increases in home equity = = = ARM Prime could support the issuance of = $748 $158 $188 $288 = $117 =$293 HELOCs, increase the amount of -$22 -$84 -$2 -$12 -$11 -$7 -$8 -$11 -$47 $56 -$25 -$46 loans able to refinance and improve the mobility of homeowners. Includes life insurance companies; pension funds, retirement funds, finance companies and REITs Sources: Federal Reserve, Amherst Securities, Compass Point Research & Trading LLC analyst Kevin Barker, 11 July 2013 Copyright © 2014 Accenture All rights reserved. 36
  • As customer satisfaction continues to improve steadily, mortgage lenders are still seeing some inconsistent performances year on year with their origination cycle times. Trend for Residential Mortgage Origination Cycle Time & Customer Satisfaction Total Cycle Time in Days Cycle Time • The time from application to approval averages 17.8 days for Quicken Loans customers, which is 8.5 days shorter than the industry average (26.3 days) Customer Satisfaction • In late 2011, CitiMortgage had been adding staff, streamlining its processes in effort to cut its refinance time from 77 days to <50 days 65 60 55 Customer Satisfaction On Scale of 1,000 780 61.0 53.0 52.1 760 50.0 50 46.9 45 40 740 35 30.0 30 25 720 2006 2007 2008 2009 2010 2011 2012 2013 Sources: JP Power & Associates‟ annual US Primary Mortgage Origination Satisfaction Study, November 2011; http://online.wsj.com/article/SB10001424052702303459004577364102737025584.html; http://www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm; PNC investor presentation Copyright © 2014 Accenture All rights reserved. 37
  • Half of the complaints received by the CFPB are related to mortgages. Consumer Complains Received by the CFPB – Through June 2013 Consumer Complaints by FS Product Consumer Complaints Related to Mortgages Between July 1, 2012 and June 30, 2013, the CFPB received ~122,000 consumer complaints. Source: http://files.consumerfinance.gov/f/201312_cfpb_report_financial-report.pdf Copyright © 2014 Accenture All rights reserved. 38
  • Appendix Gain on Sale margin assumes a mortgage is originated at going market rate, a guarantee fee paid to GSEs, servicing fees are paid and a mortgage is sold in the secondary market. Gain on Sale Margin Index Decomposed 1 Inputs 4Q12 Average 1Q13 Average HARP Notes Duration (years) 7 7 8 Assume mortgage duration Coupons per yr 12 12 12 Monthly mortgage payment Mortgage rates 3.43% 3.55% 4.00% Primary rate Guarantee-fee 0.40% 0.48% 0.48% Paid to GSE Servicing free 0.25% 0.25% 0.25% Paid to servicer Other 0.10% 0.10% 0.10% Hedging, fall-out, etc. Net Yield 2.68% 2.72% 3.17% MBS Yield 2.18% 2.46% 2.30% Yield in MBS market Net Spread 0.50% 0.26% 0.87% Secondary Market Price $1,032.43 $1,016.70 $1,063.52 Price of bond in market Face Value $1,000.00 $1,000.00 $1,000.00 Original value of mortgage Priced-in Margin 3.24% 1.67% 6.35% Diff between secondary $ and mortgage balance Capitalization of MSR 0.90% 0.90% 0.90% Initial value of MSR created (noncash) Total Gain on Sale 1 4.14% 2.57% 7.25% MSR capitalized at 90 bps, 30-year fixed retail originations only Sources: Compass Point Research & Trading LLC analyst Kevin Barker, 11 July 2013; chart sources include Bankrate, Bloomberg, FHFA and Compass Point Copyright © 2014 Accenture All rights reserved. 39
  • 3. Continuous innovation Additional information about each building block is available in the provided links Additional Information Business 2. Agility 1. Optimization and simplification Technology https://kxws.accenture.com/Repositories/C23/54/24/Acc enture_Banking_2016_v14_PRINT.pdf http://www.accenture.com/us-en/Pages/insight-banking2012-revenue-growth-innovation-summary.aspx http://www.accenture.com/us-en/Pages/insightbanking-technology-vision-reshaping-landscapesummary.aspx Digital https://kxws.accenture.com/Repositories/C25/73/9/Accenture% 20Interactive_Banking_Social%20Engaging_Banking_3_14_13 .pdf https://kxws.accenture.com/Repositories/C25/17/54/Accenture %20Interactive_PoV_Banking_on_Digital_1_8_13.pdf https://kxws.accenture.com/Repositories/C23/82/64/121315_BankingCloud_v5.1_Final_May2012.pdf https://kx.accenture.com/repositories/contributionform.as px?path=C25/89/26&mode=read Customer Centricity https://kx.accenture.com/Repositories/ContributionForm.aspx?p http://www.accenture.com/us-en/Pages/insight-boostingath=C26/36/72&mode=Read relevance-returns-digital-channel-banking-summary.aspx Omni-Channel Potential https://kxws.accenture.com/Repositories/C23/54/24/Accenture_ Banking_2016_v14_PRINT.pdf http://www.accenture.com/us-en/Pages/insight-banking2016-next-generation-banking-summary.aspx New Talent Dynamic http://www.accenture.com/us-en/Pages/insight-going-abovebeyond-banks-optimize-talent.aspx http://www.accenture.com/us-en/Pages/insight-globalanalytics-shortage-banking-summary.aspx Optimal Financial Strategies http://www.accenture.com/us-en/Pages/insight-baselconsequences-summary.aspx http://www.accenture.com/us-en/Pages/insight-cfocatalyst-change.aspx Channel Fulfillment https://kxws.accenture.com/Repositories/C23/54/24/Accenture_ Banking_2016_v14_PRINT.pdf http://www.accenture.com/us-en/Pages/insight-poweronline-banking-channel-summary.aspx Streamline & Simplify http://www.accenture.com/us-en/Pages/insight-banks-riseglobal-transformation-challenge-summary.aspx http://www.accenture.com/us-en/Pages/insight-banking-2016next-generation-banking-summary.aspx https://kxws.accenture.com/Repositories/C25/99/9/WSS 153_CoreBankingTop3Reasons7.pdf https://kxws.accenture.com/Repositories/C22/96/48/Win ningInNewBankingEra.pdf https://kx.accenture.com/repositories/contributionform.as px?path=C25/93/90&mode=read Manage Regulations http://www.accenture.com/us-en/Pages/insight-dodd-frank-actstrategic-tactical-implications.aspx http://www.accenture.com/usen/blogs/regulatory_insights_blog/archive/2011/11/16/inf ormation-management-impacts-of-recent-financialregulation.aspx Manage Enterprise Risk http://www.accenture.com/us-en/Pages/insight-rethinking-riskfinancial-institutions-partnership.aspx http://www.accenture.com/us-en/Pages/insight-acn2012-risk-analytics-study-insights-banking-industry.aspx Capital & Funding Strategies http://www.accenture.com/us-en/Pages/insight-capitaloptimization-summary.aspx http://www.accenture.com/usen/blogs/regulatory_insights_blog/archive/2012/03/19/regulatio n-in-the-news.aspx http://www.accenture.com/us-en/Pages/insightnavigating-complexities-liquidity-risk.aspx Continuous Innovation Agility Optimization & Simplification Copyright © 2014 Accenture All rights reserved. 40
  • Reference Links • www.insidemortgagefinance.com/topics/mortgage_banking_profitability.html • www.mba.org/files/Bulletin/InternalResource/86348_.pdf • www.nationalmortgagenews.com/mortgage-technology/2013-top-tech-savvy-lenders-and-servicerslist-revealed-1038346-1.html?pg=2 • www.nationalmortgagenews.com/mortgage-technology/25_tech_savvy_lenders.html JD Power: • www.jdpower.com/content/press-release/c6oSdyC/2013-u-s-primary-mortgage-servicer-satisfactionstudy.htm • www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfactionstudy.htm Copyright © 2014 Accenture All rights reserved. 41
  • About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 281,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world‟s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page is www.accenture.com. Copyright © 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.