The online opportunity: a new survey of mortgage borrowers by Deloitte Consulting reveals why some apply online--and others don't.

Most everyone in the mortgage industry would agree that these are tough times for lenders. While some are asking, "What's next?" and "Who's next?," many lending executives are asking themselves a different question--namely, what's the antidote they need to survive the credit crunch and emerge stronger than before?

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Naturally, one solution common to almost every financial institution is to look for way to cut costs. In my opinion, one cannot do that blindly. The key is to consider strategies targeted at optimizing costs without sacrificing service quality, and even improving service and customer satisfaction. Focusing on this balance of cost and service can result in greater competitive advantage, stronger customer loyalty and more repeat business.

To provide insight into how lenders can strengthen themselves in this environment, Deloitte Consulting LLP surveyed 604 consumers who had applied recently for mortgage and home-equity products. The survey was supplemented by in-depth interviews with several senior banking executives, an assessment of the Web sites of 12 lending institutions and an analysis of recent reports and media coverage.

The findings suggest to lenders that, while they can't ignore the current situation, they must also think about how to achieve the promise of lowering costs while simultaneously improving service quality and revenue.

I believe a key opportunity for lenders to address this challenge resides in the potential of exploiting the online lending channel.

The consumer experience

Via work with clients, Deloitte has found that originating loans online can reduce origination costs by up to 80 percent compared with traditional application methods such as call centers or branches. At the same time, this process offers the potential to drive increased service quality, improve customer satisfaction and strengthen customer relationships--creating a critical opportunity to gain market share.

Not only are costs lower, but most consumers who apply online find the process faster, easier and more convenient than traditional methods. As a result, our study shows, these customers are more likely than applicants using traditional channels to recommend their lender to friends and relatives.

Persuading more consumers to apply online will require lenders to streamline the application process, provide customized product recommendations, and deliver responsive customer service and quality. The lenders that do this will differentiate themselves in the marketplace. The first lender that does this exceptionally well will set the pace for others to follow.

The survey results indicate that those who apply online for mortgage or home-equity products are typically more satisfied with the experience. In fact, 61 percent of online applicants reported their experience with the application process had made them very likely to recommend their lender to friends and relatives. Compare that with only 53 percent for in-person applicants and 48 percent for telephone applicants, according to the survey.

Most consumers who applied online have become online "believers." Among online applicants in the survey, 73 percent reported online applications were more convenient, 66 percent reported it was easier to submit information online, 58 percent felt the process was faster and 59 percent felt more comfortable with the process overall than they were with traditional methods.

But while those who eventually applied by telephone or in person relied on the Internet to gather information, these traditional-method applicants remained doubtful when it came to the advantages of actually applying online.

For example, 47 percent of traditional applicants in the survey reported it was easier to understand the application requirements when applying by telephone or in person. In addition, 41 percent reported being more comfortable overall with such traditional loan application methods.

Gaining competitive advantage

Online lending provides institutions with an opportunity to gain significant competitive advantage, in that it helps resolve the traditional quandary of the tradeoff between lower costs and higher service quality.

So how can lending institutions increase the comfort level of online-channel doubters and persuade them to join the ranks of online believers? The survey results indicate it's not a question of targeting select demographic groups such as younger or wealthier consumers. In fact, online applicants were broadly spread among all age and income groups in the survey.

Realizing the potential of online lending will require institutions to compete on service by doing the following:

* Make their Web sites more user-friendly. Only 19 percent of those who applied using traditional methods reported their lender's Web site was very easy to use. Even among online applicants, only 48 percent rated them as very easy to use. Most lending institutions need to improve their Web site navigation, offer product-comparison tools and calculators, provide the ability for consumers to save a partially completed application, and prominently display customer service telephone numbers.

* Offer customized advice online. Consumers who preferred telephone and in-person applications did so because they sought personal advice on which product best met their needs. Yet only 30 percent of online applicants reported their lending institution offered an online tool that provided customized product recommendations.

* Encourage interaction. Consumers reported they needed to be given easy options to speak with someone live during the application process so they could have their questions answered. But while 75 percent of online applicants reported their lender offered the ability to speak with someone by phone, only 26 percent reported that the site provided an online chat function. When these options were used, most consumers found them helpful. Lenders should take an active approach with these options. They should proactively invite consumers to speak by phone or use a chat function when there are indications that customers have a serious interest in applying.

* Integrate channels. Study results suggest that lenders need to make it seamless for a consumer to begin an application online, talk by phone to a representative to have questions answered, and then complete the application whenever and wherever they feel most comfortable--online, by telephone or in a branch location. This is only possible if a lending institution tightly integrates data across channels. That allows consumers to be recognized when they switch channels, so they will not have to provide the same information again and again and will receive consistent product information.

While virtually all institutions have an online presence, some are only dabbling and not making the commitment necessary to be effective. For both large lenders and mid-tier institutions, excellence in the online channel will be a key differentiator for service, cost and market share.

Service and operations excellence in online lending offers mid-tier lenders their best chance to make gains on industry leaders, because there is little opportunity to increase market share through such strategies as new mortgage products or branch expansion.

Large lenders, on the other hand, have the ability not only to meet this challenge from niche players, but also to leverage online lending to gain new customers and increase customer satisfaction. They can also reduce costs--not just by originating loans online, butmore importantly, by working to automate the entire loan process.

The online opportunity

The Internet has become a pervasive part of everyday life for most Americans. In its fourth-quarter 2007 survey, the Washington, D.C.-based Pew Internet & American Life Project found that 75 percent of all adults in the United States used the Internet.

Consumers also have become more comfortable with conducting banking transactions online. A 2006 analysis by Boston-based Celent LLC, a research firm, estimated that close to 40 percent of U.S. households conducted some banking transactions online--double the rate in 2000.

A 2007 survey by Rochester, New York-based Harris Interactive Inc. and Norcross, Georgia-based The Marketing Workshop Inc. found that, the first time, the number of bills paid online exceeded the number paid by paper check among households connected to the Internet.

Online lending activity is growing as well. In 2006. 7.3 percent of retail mortgages were originated online, according to Inside Mortgage Technology. In a December 2006 report, Up closeClose and Personal with Online Lending, Celent predicted this will grow to 12 percent of total retail originations by 2008.

Some banks find that online customers maintain larger deposits and loan balances, making active online customers more profitable.

And, of course, as noted earlier, lenders can also significantly benefit from reduced online origination costs. According to the Mortgage Bankers Association's (MBA's) 2007 Cost Study, the average cost to originate a mortgage was $2,476 in 2006 a cost that, according to Celent in 2003, could be reduced by up to two-thirds by using online applications.