3 March 1999
Amid the mass of over-hyped, over-priced hopefuls scrambling to mine the world's equity markets on the back of the speculative boom in Internet stocks there are clearly going to be some real businesses built.
Equally clearly, given the nature of the Net, some of those businesses will be built at the expense of long-established traditional organisations.
The sheer efficiency of the Net as a mechanism for collecting and distributing information, and the relatively low barriers to entry in Net commerce, gives it the potential to destroy margins in conventional businesses. In some sectors it will completely reinvent the way business is done and radically alter the balance of the relationships between businesses and their potential customers.
The Net is already posing a challenge for traditional business as to whether they facilitate the growth of a medium that could undermine their established operations or seek to delay the apparently inevitable. Most are choosing to at least play on the Net, if only to understand the dimensions and potential of the threat.
Apart from the telecommunications sector, where the visibility of the Net has surged quite abruptly and dramatically, and the success of Commonwealth Securities in grabbing a surprisingly substantial market share through its online broking service, the real impact of the Net on domestic businesses in this market has been relatively modest and shallow. That will change.
Earlier this year Deutsche Bank published some research in the US on an online sector that is growing at a remarkable rate in the US and about to emerge in this market.
The sector is online lending. The key aspect of the phenomenon of the sector in the US is that it is uniquely suited to an online environment. Unlike some of the better-known Net businesses, like Amazon.com, it doesn't involve a physical product. It is purely an information business.
Last year in the US, according to Deutsche, the mortgage industry was a $US1.5 trillion ($A2.38 trillion) business. online sites generated only about $US4.2 billion, or about 0.3 per cent of the market. By the end of 1998, however, they were generating more than $US800 million a month, implying an annual rate of about $US10 billion.
That's an extraordinary growth rate and one that gives Deutsche's broad prediction that online originations could reach 25 per cent of the market, or $US250 billion, within five years, greater credibility than it might normally be awarded. Deutsche is by no means the most optimistic analyst of sector.
Whether or not its bullishness is borne out by experience, the fact that relatively recently established originators such as E-Loan are doing $US130 million a month, QuickenMortgage about $US100 million a month and GetSmart $US70 million or so a month, says that the sector is already an established alternate channel to traditional mortgage originators.
The online originators are, in effect, simple money brokers. They introduce potential borrowers to conventional financial institutions. But they do more than that because they match the requirements of individual borrowers in price and terms to the most suitable product. They perform a searching and screening function.
That exploits the most fundamentally effective aspect of the Net: its ability to empower consumers to search and sift through masses of information to find what they require.
The search engine facility of the Net is particularly appropriate in a financial services environment, where the proliferation of products and suppliers and subtle differences in apparently similar products makes conventional comparison shopping a daunting task for the consumer.
The online originators can search a universe of lenders almost instantly and short-list those who most closely meet the consumer's requirements.
In Australia, the sector has yet to be established and there have already been a few hiccups as some of the would-be online entrants appear to have rushed their entry into the market before their product had been properly developed.
Among the more credible are players such as the local GetSmart, established by the ex-McKinsey consultant David Gibbs and backed by GetSmart of the US and the local IT venture capital group, Allen & Buckeridge, and Lenders On Line, owned by the mortgage broker, Mortgage House of Australia, which has a deal with Telstra to use its Big Pond platform.
The key to their success will be to establish and protect their brands - they have to be able to assure both prospective borrowers and their panels of lenders of their impartiality and integrity - and establish a track record with the lenders of delivering high-quality leads in sufficient volume to make the process worthwhile.
Perhaps because of the environment and the demographics of Internet users, early indications in the US and here are that the online customer is a very attractive customer to the financiers.
For the lenders, the online originators represent both an opportunity and a threat.
The opportunity is to acquire loan volumes that wouldn't otherwise be available or that might otherwise flow to competitors prepared to cooperate with the originators. From that perspective, the originators could be seen as just another origination channel.
The risk is that, if the online intermediaries become as significant a force as the US experience would indicate they might be, they will further commoditise and cannibalise the existing customer base of the larger institutions and devalue and sideline valuable brands and infrastructure.
Having already seen the impact of traditional mortgage originators - mortgage margins have been slashed from about 350 basis points to about 150 basis points in recent years because of the competition from originators like Aussie Home Loans - the prospect of a further Net-imposed margin crunch would be horrifying to traditional lenders.
It is the traditional Net conundrum of whether to cooperate or resist - knowing that the destination is likely to be the same no matter what route is taken. The margins will be crunched.
The US experience suggests most lenders will ultimately co-operate and accept that the basis of competition in an online environment forces them to compete largely on price and terms. Brands might still have some relevance at the margin, but there will be no premium or margin associated with them.
If the online process properly establishes itself in this market, the frenetic pace of change in the financial sector will accelerate even further.
e-mail: bartho@theage.fairfax.com.au