Farner, Fintech And The Future

So if you’re still calling Rocket a mortgage lender 10 years from now, it’ll be like calling Amazon an online bookstore. Not entirely wrong, but not entirely right either.

As you may know, Amazon started off as an online bookstore before expanding into a behemoth company with a large e-commerce business. But the Amazon web store isn’t what made Jeff Bezos filthy rich. The majority of Amazon’s total operating profits — nearly 75% in 2021 — comes from Amazon Web Services (AWS).

AWS, a cloud platform (or, in other words, a collection of hardware and software), offers computing services like storage, servers, and networking to other enterprises that don’t want to spend a ton of money building their own servers. AWS is rented on a metered billing model, bringing in tons of recurring revenue for Amazon.

Now think about Rocket offering its technology and resources to help banks provide services they otherwise couldn’t afford, like mortgages. They’ve already begun doing so with Santander Bank.

“That’s the same exact thing that Rocket is thinking about, but from a financial services perspective,” Farner said. “So yes, we do mortgage, but – and I think you’re picking up on it – comparing us to a mortgage lender will become more and more challenging as time goes on.”

Rebrand & Dominate

Rocket’s journey to Amazon-level success begins with dominating both retail and wholesale channels, as well as rebranding as a fintech company.

During the pandemic housing boom, it became harder for nearly everyone in the mortgage industry to keep up with burgeoning demand. The unprecedented rise in mortgage applications created a need for faster turnaround times, forcing many banks and lenders to make technological improvements. As a result, fintech boomed throughout the course of the pandemic, streamlining appraisals, underwriting, and applications processes.

Rocket has bolstered itself, its brokers, and its correspondent partners with industry leading fintech over the past few years with programs like Correspondent Assist, Pathfinder, Rocket Connect, and Rocket Pro TPO Client Portal.

“So it’s a mind shift from a company that produces mortgages to a company that takes its thousands of technology people and empowers them to build these great projects for our clients,” Farner said.

Don’t be mistaken. You wouldn’t call Rocket a fintech provider — at least not yet. Fintech providers sell their technology for a fee, but Rocket only provides its technology to its partners.

“They recently introduced the rewards program that can only be used if you basically get a mortgage through Rocket,” Argus Analyst Kevin Heal said. “It’s like having airline miles. I’ve got 30,000 miles on United, but United doesn’t fly into this place that I’m going to, so I can’t use these miles. With Rocket, you can only use those rewards for paying down closing costs on your mortgage from Rocket.”

In 2022, Rocket formed an exclusive partnership with Santander Bank to provide mortgages for the bank’s two million customers with “exclusive discounts and dedicated resources” to help them buy a home. Specifically, Rocket Mortgage provides discounts on loan costs and closing costs with enhanced discounts for Santander Private Clients and employees who close loans within the program.

In February 2022, Santander, the Boston-based bank with 650 retail offices in the U.S., had to exit the mortgage business because the cost to originate was too high and it wasn’t seeing enough of a return on its business.

Rocket spokesperson John Perish said Santander was prompted to reach out to Rocket after it announced in 2021 that it formed a relationship with Salesforce to make its mortgage origination technology available to banks, credit unions, and other financial institutions.

In August, Rocket also announced its partnership with Q2 Holdings, provider of digital banking solutions, to enable Q2 banks and credit unions to offer Rocket Mortgage’s digital home loan application experience. Rocket offers perks such as live mortgage assistance inside of Q2’s online banking platform.

Get On Board, Or Not

But, wait. Retail banks are brokers’ competitors, aren’t they? How do Rocket’s broker partners feel about their lender offering its technology and resources to their competitors for a discount?

“The way we think about the brand and the technology that we’ve built is that it is a benefit to the partners that we work with,” Farner said. “We’d like to reach the client everywhere we can and it may be through a broker or it may be through a partner bank.”

“If you’re not partnering with us, then clearly we’re a direct competitor, and we will be using all of the resources we have to go out and win the clients that we’re all competing for,” Farner added.

Who Needs Who?

When it comes to which lender has the best marketing, Rocket blows everyone else out of the water. The everyday consumer may recognize them from their commercials on TV and social media (now more geared towards Rocket Money), the Anna Kendrick 2022 Super Bowl Ad, or if they went to see the Cleveland Cavaliers at the Rocket Mortgage Fieldhouse. Their 2019 commercial “Push Button, Get Mortgage” certainly caused a stir amongst the broker community, making it easy for consumers to submit applications, manage autopay, view loan information, and attain a current home value estimate.

United Wholesale Mortgage, Rocket’s cross-town rival, also has a mobile app for brokers that it rolled out in 2016 called Blink+, providing a point-of-sale, loan origination system, and customer relationship manager all-in-one package. Never heard of it? Well, that’s the point.

Because of its retail business, Rocket has the power to market to consumers directly — and it does a mighty fine job doing it.

“Within the pandemic, they had very high margins relative to the peer group,” Barker said. “And they weren’t as competitive on prices, which told me that customers would go to Rocket, not necessarily looking for the best rate, but just because they knew who Rocket was.”

However, Rocket’s successful marketing tactics do not negate the amount of business their broker partners bring in — roughly 42% of their mortgage originations come from their partner network. Homebuyers, making the biggest financial decision of their lives, like to work with real estate agents, brokers, and lenders they trust. They appreciate guidance from a professional who will get the loan closed and on time.

“I think it’s part of Rocket at this point and the brokers are essentially Rocket’s distributed sales force, right?” Barker said. “Who do you trust to get this loan done at the right time and get all the paperwork ready? Because, let’s say, I’m moving my family halfway across the country to get this done. So trust and relationships are much more important, and that requires a localized sales force,” Barker said.

So, the success of Rocket’s direct-to-consumer channel and these partnerships with banks does not mean they’ll be ditching the wholesale channel. The partner network is an integral part of Rocket Mortgage’s business, but there are other, less expensive ways to get customer leads, than through brokers. Rocket Money has the potential to do just that.

Rocket Money

You may have heard this piece of advice before: Be careful who you share your dreams with, not everyone shares your enthusiasm.

As a public company, your goals and dreams are no longer private. Shareholders with a vested interest in the company need to be convinced they’ll come to fruition, and how profitable they’ll be.

When Argus Analyst Kevin Heal came out with a report in November that downgraded RKT’s stock from “hold” to “sell,” he cited a number of difficulties the company is facing, though they are not much different from what other companies across the industry are facing. Although Rocket has a long list of ancillary services, like Rocket Solar, Rocket Auto, Rocket Money, etc., Heal’s report states, “We believe that these acquisitions and expansion into other financing and partnerships will not generate enough revenue to substantially move the needle.”

Rocket Money, formerly known as Truebill, was acquired last year for a hair under $1.3 billion, and has generated a little over $84 million this year. Heal calls these earnings “inconsequential” compared to the amount of revenue from mortgage business.

Rocket Money is an important acquisition if the company wants to succeed in becoming a one-stop-shop for consumers to manage their finances. It’s essentially the mouthpiece to their funnel, working as a lead generator bringing in consumers who will eventually need auto loans, mortgage loans, and maybe even solar panels for their house.

“Subscription revenues from Rocket Money were $32.6 million (for the third quarter),” Heal said. “That represents 2.5% of Rocket’s total revenue. To me that is inconsequential when you are deriving well over 90% of revenues from the mortgage business.”

Sure, at this point Rocket Money’s revenue is no match to their mortgage business, but the app was just acquired last year and seems to be performing well.

When Rocket first acquired Truebill in December 2021 it expected the service to generate $100 million in annual recurring revenue, so generating $84 million in premium subscription revenue by the third quarter puts them well on track to reach their goal. TechCrunch also speculates that since Truebill was acquired in all cash, Rocket may have gotten a discount of sorts, making this a very cheap deal.

Other analysts, Barker and WedBush Analyst Jay McCanless, believe that Rocket’s acquisition of Truebill was a wise move.

“Gen Z’s almost as large as the millennials, almost as large as the baby boomers,” McCanless said. “And so having an asset like Rocket Money that people are gravitating to is very beneficial. It seems like the subscriber growth is headed the right way as long as those young people still have jobs and the job picture doesn’t fall apart for them.”

McCanless said when the market is healthy and business is looking good, that’s the time to make long-term strategic investments and acquisitions that will carry the company through future market downturns. Rocket Money is one of these acquisitions.

“Rates will go up and rates will go down, and that will impact the short-run growth of your business,” Farner said. “But if you’re focused on the long run engagement and acquiring of a client, then you’ll stay on the right path to grow your organization regardless of what interest rates are.”

Moreover, Rocket Money is a viable alternative to generating leads at a lesser cost, Barker says.

“It’s a tool to be able to keep their customers happy. It allows services and creates stickiness to the customer base,” Barker said. “What it also creates is a significant amount of leads for customers. I believe (Rocket Money) has over two and a half million customers at this point, growing at about a hundred percent rate. So if you run that out a couple years, you’re gonna have over five to seven million customers within Rocket Money.”

‘Very Cheap Leads’

Furthermore, Barker said if you convert 5% of those leads into Rocket Mortgage customers — the typical margin that they generate — that will generate a couple billion worth of earnings.

For now, the service exists to please customers and make the company “stickier” as analysts like to say, but ultimately what it generates are very cheap leads.

It’s expensive to generate a mortgage customer. If you go to a broker, you have to pay 1.5% on that mortgage, or one and a half points for generating that mortgage. For a $300,000 house you’re paying a broker $4,500 for that customer. But if you get a Rocket Money customer that you’re already servicing, there’s no real incremental cost or it’s very minimal.

Sure, it takes money to operate Rocket Money and there is some technology associated with it. It will take some investments to develop it and update it over time, but these costs are inconsequential compared to what it costs to bring in leads through brokers.

In the third quarter earnings call, Rocket Chief Accounting Officer Brian Browns said, “One of the biggest challenges in the mortgage industry is the cost to acquire a client, which typically runs in thousands of dollars. In contrast, Rocket money can acquire a new client for less than $100, which is a significant difference.”

The beauty of this funnel system Rocket is building where they initially acquire the client through Rocket Money then lead them to use the rest of their services to fulfill financial needs is that it’s a huge money saver.

“Acquiring a client one time for one product or service will cost you a certain amount of marketing dollars,” Farner said. “But if you can engage that client daily, weekly, monthly, and bring them back for another service, let’s say it’s Rocket Solar… you’re able to help the client reduce cost and generate revenue without paying to acquire the client again.”

The whole reason for creating that one-stop-shop is to generate lower cost customer acquisition goals, Barker said. “And no one’s ever done that in mortgage, like from a mortgage lead. It’s all been very episodic. And so when you think about what Rocket wants to do… I think it’s great that they’re doing it,” Barker added.

Can You See It Now?

Imagine one platform where you can manage all your payments and acquire the loans you need throughout your lifetime. You could cancel your Netflix subscription, refinance your auto loan, and apply for a mortgage all in the same day by pressing a few buttons. An app like this could be an absolute game-changer, and especially attractive to the younger and more digitally advanced generations.

“When you think about the engagement that we have with that client on a monthly base basis as they make payments, there’s an opportunity much like Amazon to offer other related services, and that’s exactly what we’re doing as we talk about Rocket Money and Rocket Rewards and Rocket Loans and Rocket Homes,” Farner said.

Once a person graduates college and lands their first job, they’ll have to step into the real world of managing monthly bills, subscriptions, insurance, credit card debt, and begin to take ownership of their finances. They’ll need to gain some financial literacy in order to understand how to apply for their first loan or credit card.

“Every experience is separate and so it’s hard for clients to connect all of those experiences to manage their finances,” Farner said. “And so there’s a huge opportunity to place all of this on one platform.”

By centralizing these transactions into one platform, it eliminates confusion, delays, and costs for the consumer.

“When I think about where Rocket’s headed, Amazon is a great example,” Farner said. “I may later today recognize that I’ve gotta buy a light to install in my garage. I may do it on Amazon. Later today, I may have to buy some Halloween costumes for my kids. I’ll do it on Amazon. It offers many different types of products, but it’s one company that knows me, that can execute on a delivery that I have confidence in.”

Rocket’s goal is to have the same kind of centralized platform that will serve consumers’ financial needs.

“That’s exactly what you’re seeing us do as we grow out these businesses or acquire new businesses, is leverage this great core of mortgage, but wrap it with these financial services and this engagement platform that we’re building,” Farner said. “To allow our clients to constantly keep up to date on their finances, but also allow the company to have the experience and the relationship with the client on an ongoing basis so we can leverage the marketing costs time and time again… So I think Amazon is a great blueprint for where you’re seeing Rocket going.”

New Competitors

But Rocket is not the only company with this vision. There are strong competitors out there looking to do the same thing.

“SoFi is a good one,” Barker said. “I mean, they’re doing it in different ways. They’re growing a lot faster and they’re a bank. They do student loan refinances. They outsource mortgages. They do personal loans, and they have a fintech franchise that does payments processing for neo ads.” NEO is a cryptocurrency often described as a rival or alternative to Ethereum.

In February 2022, Insider Intelligence came out with an article stating that SoFi could be the next Amazon of the banking world, providing a one-stop-shop for all banking services.

SoFi said that its Technisys deal will help it with its ambition to become “a one-stop shop financial services platform.”

Barker emphasizes that SoFi may be in a better position to become a one-stop-shop for consumer finance because they are a bank. Opening a bank account is the first step to becoming financially independent and many consumers begin opening their own account in high school or college, before they even have to manage subscriptions, bills, or debt. The main advantage banks have is being able to see customers deposits and paychecks – that creates stickiness.

“If you have a sticky customer base that wants to utilize your products over and over again, that creates lower customer acquisition cost and the ability to sell more products,” Barker said.

Then again, Amazon had to deal with competitors too. Having an original idea is not what led the company to win.

“Back in the internet heyday, there were plenty of internet shopping malls where they were aggregators,” Heal said. “So, you know, basically Amazon is kind of a big shopping mall. They’re the one that survived. But there were countless others that had the same business model that went by the wayside.