What Does ‘Innovation’ Mean to the Mortgage Industry?


BLOG VIEW: Innovation is a powerful word. In the mortgage industry, if vendors don’t espouse it, they often can’t get past the initial RFP.

Aside from being a checkmark on a form used by buyers to evaluate vendors, what does “innovation” really mean? Is innovation related to turning an idea into a solution? Is it about applying ideas that are novel and useful? Or, is it about staying relevant?

Experts have championed all of these definitions – and many more of them.

Today, as the mortgage industry struggles to deal with the market stress brought on by the COVID-19 pandemic, unlocking the secrets to effective innovation has never been more important. Given the RFPs that our firm has been receiving, it’s clear that many companies don’t fully understand innovation or how it should be applied to our industry.

Let’s take a look at how innovation is relevant in the home finance industry. 

What It Isn’t

Sometimes, it’s easier to define something by establishing what it is not. And, innovation is certainly not a mere buzzword to plug into a vendor’s marketing collateral.

Because technology developers know that lenders are specifically looking for “innovative” solutions, they make certain the word is sprinkled liberally throughout everything they push out into the marketplace. This, of course, does not guarantee they offer anything remotely innovative or even know what the word really means.

Novelty is also often mistaken for innovation. Just because something is new doesn’t mean it’s necessarily innovative – it must be more than that. It must be a game-changer, and that is determined by the customer in terms of the degree to which the problem they have is solved.

And now we are circling in on a true definition of innovation that is pertinent to our industry: An innovation is the application of a new idea such that it provides an excellent solution to an industry problem that a customer is eager to solve.

Innovation Untamed

Because so many lenders have returned to the market over the past few years in search of innovation, vendors have been driven to innovate for the sake of innovation in an attempt to stay relevant, given the new demands of buyers. 

We saw this recently in the new development around non-QM lending. Instead of using the same loan origination technology lenders had been using to originate conventional loans for years, millions of dollars were spent on specialized tools to serve this market. Then, as COVID-19 secured its grip on the world, the non-QM business dried up.

It will return, of course. But when it does, lenders that work with agile technology developers will have an advantage.

We know that users rarely tap all of the power built into modern software platforms, in this or any other industry. There is always more functionality built into these systems than most people use. Therefore, vendors would be wise to provide additional training so users can get more out of legacy platforms, add efficiency to their operations and reduce the total cost of technology ownership.

However, many are driven to appear innovative simply by altering their products and services instead, resulting in over-engineered tools that approach old problems in new ways that are not cost-effective or efficient. They are different, but they are not great.

Often, the simplest approach to a problem offers the most efficient solution. 

Finding Partners That ‘Get It’

So, how can a lender find a partner that truly understands what innovation is and how to employ it to deliver an outstanding solution? The following six attributes will lead buyers directly to vendors that live and breathe innovation: 

Strategic Expertise: The vendor must be experienced enough to understand the lender’s strategy and evaluate it for likely success. This takes industry experience because the prospective borrower’s needs will play into the ultimate success or failure of the strategy. Broader experience is even better because it allows the partner to bring ideas from other industries to bear on the problem.

Holistic View: A vendor that only knows about a point solution or one particular part of the lender’s business is unlikely to be effective at supporting an enterprise solution. But with a holistic view of the lender’s strategy, a partner can see gaps that represent risk and avoid solutions in search of a problem.

Best Practices Approach: The vendor must be fully committed to using the best available tools and techniques with a focus on efficient design. It’s not just about how the developer codes the software. It’s the techniques they use to manage development and the way the software is made available to users. Keeping things simple (KISS), for instance, produces innovations small enough to make complex jobs easier. 

Modern Software Development: Yet, how the developer codes the software is also an important consideration. Quite often the most innovative solution resides in a new approach to the problem and not additional development. Modern methods allow for this possibility and result in good solutions that don’t necessarily require updated technology. It comes down to focus. Vendors that fall in love with the problem, and not the solution, make the best partners.

Agile Approach: Successful vendor partners are agile and have a process in place that allows them to get to market quickly and efficiently with new tools. Agility is not easy to adopt, especially for companies that rely heavily on documented processes. Working with an agile company may be a bit of a struggle initially as it can take time to get a lender’s processes in line. But once they are aligned, development happens quickly and is based more on effective communication than documentation and process.

Relentlessly Customer Focused: Any vendor that develops tools in a silo and then brings them to market for adoption will see disappointing results. We have only seen companies that make the customer the first point of focus perform well in the market.

Alignment: The Ultimate Risk Mitigator

The biggest risk a lender faces when seeking a partner with innovative solutions is a lack of strategic alignment.

When a lender finds true strategic alignment with a vendor, they are sometimes surprised to learn that an innovation partner and a technology partner are not necessarily the same thing. Sometimes innovation is about new development. Other times it’s about a new approach to an old problem using existing tools.

Alignment ensures that the vendor sees the problem through the eyes of the lender customer. This makes it obvious when a tool that was once considered innovative is now not. New development is focused on solving real problems ─ and not just performed in service to a buzzword.

Alignment ensures the partners can scale together and share people and processes to support their joint efforts.

What follows are three clues that a vendor is not strategically aligned with a lender and should be reconsidered:

A Choice Avalanche: When a vendor overloads the lender with choices in the hope that one will hit the target, there is an obvious lack of strategic alignment. This is not a solid approach to addressing actual problems and speaks to an inability to meet the real need or a failure to understand or acknowledge it.

Not Walking the Walk: A vendor should be reconsidered when they deliver a well-rehearsed spiel about innovation backed up by outdated solutions. If the tools they recommend are not fresh out of development, the vendor should be able to explain their continued relevance.

Excuses: A clear sign of a misaligned partner is when excuses are made for not using modern tools and methods. Any suitable partner should be able to offer a strong track record of actual solution development.

When lenders work with the wrong partners, it becomes difficult, if not impossible, to implement effective solutions. And, if implementation does occur, it will take too long, cost too much and fail to solve the original problem. Every lender in the business today has unfortunately had experiences like this.

When Innovation Happens Naturally

Well-aligned partners are far more likely to see organic innovation that springs from the operational experience the lender brings combined with the development and implementation skills of the technology partner. But a true partnership is required for this to happen.

Such a partnership shows real value when market stressors, such as the one occurring now, shock the market into a new normal. The stress tests these partners will have already performed will put them in a good position to weather any storm the market experiences.

Such strategic partnerships can result in lenders receiving an equity stake in the new innovative solutions they help bring to market. There are many other benefits to finding the right partner, but they cannot be realized if a lender is looking for innovation instead of alignment.

This article was co-authored by Jim Freeman, director of software development, at Fiserv Inc.

Richard Novak is vice president of product strategy, mortgage, at Fiserv Inc.

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