Who sells the best point-of-sale technology?John Walshloan origination system, point-of-sale technology
In the world of mortgage lending, there are basically two types
of core systems. For most mortgage brokers, the technology product
that is at the core of their business is their point-of-sale tool.
For most mortgage lenders, the core solution is the loan
origination system.
Point-of-sale tools enable brokers to do everything that they
need to do with a loan application, i.e., originate, process and
issue disclosures, as well as interface with vendors. Frankly,
brokers have limited liability with the loan, so their workflow
requirements are not that strict.
Mortgage lenders, on the other hand, manage more of the loan
process and carry all of the risk when funding a loan. The added
responsibility of being the lender introduces a technology gap that
needs to be addressed with tools that automate the workflow for
closing, funding, shipping, secondary marketing, interim servicing
and a variety of other tasks, hence the need for a complete loan
origination system.
In a purely conceptual world, these descriptions make sense. In
the real world, however, there are a myriad of opportunities for
lenders to mix and match products that meet their unique business
needs. Many mortgage lenders begin as mortgage brokers. They start
with their incumbent point-of-sale system and then have to face the
decision of how to automate their back-office operations, create a
database of records, increase user and data security and handle a
number of other issues that are not adequately managed via their
point-of-sale technology.
A broker becoming a lender or a lender looking to swap out of an
existing loan origination system basically has two choices in
upgrading his core technology. First, he can replace all of his
existing technology with a loan origination system that includes
point-of-sale functionality. Until recently, this option included
nearly every major loan origination system on the market (there are
about 25 available). Alternatively, he could retain his existing
point-of-sale and automate his other lending functions with a
best-of-breed back-office solution.
For the last 15 years, very few vendors have promoted the
benefits of this best-of-breed approach. The best-of-breed message,
however, has clearly resonated with most lenders. As an example, in
2005, approximately 200 mortgage bankers bought new loan
origination systems. Some of these were replacement systems and
some of these were to augment existing point-of-sale-based mortgage
banking operations. Of those 200 lenders, more than 130 chose a
best-of-breed solution, while the remainder chose a solution from
one of the other 25 vendors.
Despite the clear dominance of best-of-breed solutions, there
clearly are advantages to buying a loan origination system that
includes integrated point-of-sale functionality (often referred to
as an end-to-end solution).
So, which is the better option: best-of-breed or end-to-end? The
following outlines some of the most critical issues to
consider:
Cost
The simple fact is that the leading point-of-sale technology
providers offer very, very inexpensive solutions. Most of us have
spent more on our children's video games than what it costs to buy
a point-of-sale license. A loan origination system license from any
viable loan origination system vendor is much more expensive, and
most vendors do not differentiate between originator licenses and
back-office licenses.
Round 1 - Buy your point-of-sale technology from a
point-of-sale vendor.
Training
Every lender knows that the worst people to train in a lending shop
are the originators. Almost every originator in business today
knows Calyx Point, and a very sizable minority has experience with
one of the Ellie Mae products. Why retrain the un-trainable,
especially if introducing a new point-of-sale tool can cause a dip
in your production or, worse, can cause some of your top producers
to switch to a lender that will let them use the tool they already
know?
Round 2 - Buy your point-of-sale technology from a
point-of-sale vendor.
Implementation
Most end-to-end loan origination systems take a minimum of nine
months to implement. Some systems can literally take years.
According to a recent industry survey, 50 percent of all end-to-end
loan origination system implementations fail or are seriously
delayed. The hard and soft costs associated with a failed
implementation can be staggering, putting some lenders out of
business altogether. The long roll-outs and high failures of
end-to-end systems is due to the breadth of technology required to
be implemented and the massive amount of training that goes along
with a new system. Furthermore, many lenders make changes to their
business model at some time during that long implementation period
(start a wholesale division, for example) that causes a restart
with the roll-out before they even go live. Implementation of
best-of-breed solutions are relatively straightforward, simply
bolting a back-office solution to an existing broker
point-of-sale.
Round 3 - Buy your point-of-sale technology from a
point-of-sale vendor.
Integration
There are limits to how well any software vendor can integrate with
a third party software product. Conceptually, a suite of products
provided by one vendor can be better integrated than products from
multiple vendors, however, there is one important caveat here: In
the last few years, several vendors have bought either
point-of-sale or back-office technology to support an end-to-end
story. Not all of these products have been integrated. Be cautious
when buying an end-to-end solution to ensure that the components
really are integrated or that there is a clear path to
integration.
Round 4 - Buy your point-of-sale technology from your
point-of-sale vendor.
Support
For originating and processing loans, point-of-sale tools are
simple, easy to use and cost-effective. One of the recurring
complaints that we hear from point-of-sale customers, however, is
that the point-of-sale vendors do not provide adequate technical
and user support for a large lending operation. Although I do not
have any personal experience in this arena, economics would seem to
limit the amount and quality of support that a vendor can provide
at the price levels of the point-of-sale products. Clearly the
opposite should be true for the more expensive loan origination
systems.
Round 5 - Buy your point-of-sale technology from your loan
origination system vendor.
Vendor management
Buying both components from one vendor should be easier. Dealing
with one vendor means one contract, one bill and one point of
contact in the event there are problems.
Round 6 - Buy your point-of-sale technology from your loan
origination system vendor.
Who wins?
Frankly, neither the loan origination system nor the point-of-sale
vendor win. Each of the above considerations should be important to
every lender, but different ones will be more important to
different lenders. Minimizing costs will be the critical factor for
some. For others, enhanced integration will be the key. The
important issue is to clearly understand what considerations are
most important to your business and to accurately align those with
the right technology strategy.
In general, the most effective way to sell or buy enterprise
solutions is as optional, modular applications. A single system
with a bunch of functionality that a customer does not need means
that the customer has overpaid for the functionality that he does
need. Depending on a lender's business model, he may or may not
need point-of-sale functionality, document imaging and management,
business analytics or product eligibility, etc.
Modular, optional components allow lenders to buy what they
need, when they need it. They also allow vendors to keep the price
of their core application low and accessible for any size lender.
Also, this approach forces vendors to bring the best solutions to
market. If the vendor's product is not the best in a specific
category, the lender should have the freedom and flexibility to
purchase those components from another vendor and create his own
integrated solution.
However, the optional, modular approach does impose challenges
on the loan origination system vendor, and not all best-of-breed
providers are up for those challenges. For example, from the
vendor's perspective, there are a lot of advantages to just selling
a lender a core system and then locking clients into mandatory
upgrades. Also, providing lenders with the ability to use other
vendors' products requires that the loan origination system vendor
maintain an open technology architecture. This complicates
development and will cost the vendor money. It also means that the
vendor's products will continually be evaluated versus other
solutions in the market. I would argue that these challenges are
ones that a successful vendor must accept and are a benefit to the
lender.
In the end, there is no perfect solution. As a matter of fact,
every software purchase includes a level of compromise from the
buyer. The important thing for a lender to do when considering a
technology upgrade is to clearly understand why he is making the
investment. In other words, what are the most important changes to
his business that need to come out of his investment? Then, he
should evaluate how those needs are being met by the vendors he is
considering. You should never focus purely on the price printed on
the contract, as the actual cost of ownership will always be
higher. If bringing in a new point-of-sale will lower your
production by 20 percent for six months, how much did that software
really cost you? What if your production was not impacted at all,
but your information technology team needed to support two systems
(a point-of-sale and a loan origination system)? Then what is your
true cost?
John Walsh is president of Del Mar Database, a wholly owned
subsidiary of Fiserv Inc. and
provider of technology solutions that automate the mortgage process
for small and medium mortgage lenders. He may be reached at (858)
526-7108 or e-mail
[email protected].
