The digital advantage
(Concluding phase)
In our first piece on this topic, we concluded by mentioning the new champions of today’s business world who we christened undertakers. In this second piece, we will explore the undertakers’ advantage in Mortgaging and Housing models.
For these guys, digital strategy is key to their success as it ensures an efficient and effective marketing. Their firms’ shares are an instant sell, not because of posted figures but its ability to generate
future demand from new ideas. It is a fast paced world, where idea generation and exchange of idea forces the new to become old quickly and technology creates free community where crowd and crowd sourcing demonetizes value.
The best the regulator are able to do about these guys is catch up and react to their strategy for if they attempt to hinder its progress/success, they will suffer a significant social backlash. Also, no politician will dare to be careless with them either given the massive value they bring to the economy.
Let us see how the strategy of the undertakers work the mortgage industry and the opportunities within this landscape and the evolving competitive marketplace. Unlike many industries, the banking industry is heavily regulated, for understandable reasons.
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However, the mortgage banking regulation over the years have become very stringent and insidious. Mortgage banks grope under various restrictive policies that hamper growth, curtail investments and limit operations and to a large extent negatively erode its business model.
In an industry where the tenor of loans is 15 years on the average; a high default risk; and a high cost of fund, it is almost impossible for a bank in this space to remain liquid and profitable after 10 years of active business.
A once sure haven for mortgage banks would have been to increase their risk assets to developers or own subsidiary construction firms so as to partake in the value creation in the value chain, but unfortunately, the regulatory environment is uncompromising on this.
The hurdles faced by mortgage banking is further exacerbated by the freedom granted to commercial banks to trade in the same space beside other compensating risk assets they can offer their customers and ability to attract capital and endless deposits.
You could argue that mortgage banks should increase their capital; but why would anyone invest a sum as high as 25 billion into a mortgage bank with restricted asset portfolios, constrained earnings and limited windows to diversify?
The non-competitiveness of mortgage banks within the housing or banking industry is further amplified by the unwieldiness of the housing industry as a whole. In a market where rivalry is next to nothing, with zero cost of entrance and uncountable substitute, it becomes very difficult to thrive. Today, many of the mushroom constructions, property development firms would easily grant credit to the same consumers the mortgage banks long to serve.
And because these firms share value along the value chain, they are able to offer competitive pricing but shorter tenoned loans to customers. Considering this, one could easily ask why anyone need a mortgage banking license.
And to evident a shift in the licensed business model of players in this space, you would observe that as more mortgage banks are becoming unprofitable, the values of most property development firms are heading north.
As such, many mortgage banks are also adopting this moth model of the substitute firms, with a spiraling surge in risk and pressure for unwholesome practices. I beg to see what regulatory benefit it serves to restrain mortgage banks from creating short-term asset, when they receive deposits which can be withdrawn the next day.
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How do you fund these long-term assets profitably? is this not in itself an invitation to illiquidity and bankruptcy.? But let us examine this more critically.
Although, the regulatory framework remains a bottleneck for the viability of the mortgage banking in Nigeria, the issue is not limited to this. We know that the value of a firm is the present discounted value of its future earnings. This value is the result of the firm’s circumstances and its response to those circumstances. The moth firms in the industry have simply leveraged their circumstances and developed the response
with the most potential for sustained economic profits. The potential for profits is better the more unique the firm is at pleasing its customers or producing efficiently. Customers are fascinated by attributes and whether a product or service is preferred by customers or not is thus a function of the firm being able to forge some uniqueness in satisfying those attributes with high variance to the customers and monetize them.
This is where the mortgage banks business model has failed. The firm can sustain profits if its uniqueness is protected from replication by competition. Unfortunately, mortgage banks have not been able to forge any uniqueness and create positional values since their birth.
An assessment of the emerging competition would see their array of assets; from idiosyncratic values to agility of operations, keenness for lean execution and commitment to switch to understand and create a point of variance that serves the customer’s preference. No wonder they are able to operate with little or no capital and efficiently run with minimal default risk.
Admirably, many executives have done well in choosing the firms’ positioning strategy, hiring consultants to determine if the firm should: serve a few needs of many customers; serve broad needs of a few customers; serve a few needs of a few customers; or whether it should serve broad needs of many customers.
But, in my view, I think that mortgage banks have also fared poorly compared to substitute firms in this regard. In order to earn sustainable profit and protect a firm’s market position, entrants must find it costly to be able to profitably replicate the firm’s position and its complex system of activities. And to this end, the
firm must understand its customer’s preference with the high variance and serve them. The price is having an informed insight about the customer.
Regrettably, most mortgage firms like other firms in the economy have failed woefully in capturing customer’s preferences. There is a false and arrogant dispositions among seniors within our glass houses that the older you are in the industry, the more insight you have about the customer’s needs and how to meet them.
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This belief rests on the hypothesis that the customer’s preference is fixed and endogenous and as such products can be developed without much interaction with the customers, open ideation across the entire workforce, experimentation, validation and testing of key assumptions. The reluctance and defiance against testing this assumptions or against understanding the customer’s preferences is encouraged by the dearth of behavioural data on customers and lack of capacity to obtain them.
No wonder, that there are few firms with value uniqueness in our clime, while innovation is an eclipse that happens in a decade. We engage in short term gains that lacks any semblance of sustenance. You would agree with me that, if the value of a firm is the sum total of its future earning, brought by sales and that sales is largely a function of the customer’s willingness to pay, then spending money to develop competencies to have insight and capture customer’s preferences/behaivour and serve them, is the biggest role executives have. The inability of mortgage banks to deliver this, has been their greatest undoing and an invitation to obsolescence.
Gladly, the entire industry is still evolving amidst a changing customer demography, growing population and the opportunity bought by technology. Also, most of the emerging property development firms which have carted away yesterday’s values that regulation dropped on the laps of the mortgage banks, have simply been lucky.
The values earned so far have no uniqueness and quite very easy to replicate to prevent the emergence of monopolies. As such, I see opportunities and possibilities. Something is happening that the potential market leader and monopolies in this economy must understand and utilize effectively and that is the power of technology. Let me draw your attention to the two leading hotel franchises in the world, Marriott hotels and Airbnb.
Marriott was founded in 1923 and has taken 94 years to create a value worth $300 million while as Airbnb prepares for its IPO just 9 years after establishment, is today valued at over $330 million. Consider Uber as well and the exponential rate of expansion and the manner in which it is redefining transportation. Thanks to technology, as it becomes more accessible to all, it will create abundance from scarcity.
The world and products are increasingly becoming democratized. Technology has not only made it easier for customers to be offered alternative choices but empowered to make and demand, without any cost. If you are not a Steve job with a significant idiosyncratic value, you cannot just throw products at customers and expect to succeed; you would squander lots of money doing so. The marketplace has moved into the customer’s palm.
This has also birthed a dematerialised world. If you are going to reach customers on a large scale and spur adoption, you must be able to transform your product and services to be visual and still retain the feel that physical products offer. See the access to cheaper education, travel, hospitality and health care that technology is offering.
When you observe the exponential innovation ongoing and the attendant production of products at cheaper prices for `lower quality (called disruptive innovation) and for same or costlier quality (signaling an obsolete industry), you would see how obsolete Nigerian the mortgage industry has become. Portending eagerness for opportunities in the mortgage industry.
As I conclude, anyone intending to secure leadership in the mortgage industry must come to terms with the obsolescence of the industry. And in order to come out of this and create sustainable value, such firms must be intent on tapping into changing marketplace, the unmet and rapidly changing customer’s preferences and leverage on technology to create new demands. Innovation must be ingrained into the DNA of such firms.
Its technology hub cannot be a mere operational but developed to deliver predictive analysis and artificial intelligence. They must drive idea exchange and foster a culture of idea interaction proficient in fostering creative solutions to challenges once thought insolvable. Capacity must be built to locate where, when, why and how innovation happens within the ecosystem. And if the dematerialized concept is going to be taken seriously then changing the business model to run as a platform where everyone within the value chain finds value is the winning strategy.
The would-be leader must pursue a collaboration and open innovation. Corporate start-up model must also be encouraged to rapidly experiment and launch products. There is no quick fix to this, but the start-up model should be designed to search for a repeatable and scalable business model. This comes with constant experimentation, pivoting and perfection of value.
We must shift from concentrating on investing chiefly on managing credit and compliance risk to managing the risk and uncertainty that comes with the drive for innovation. Value proposition and business model cannot be assumed, they must be thoroughly tested and affordably. In the words of Jack Welch: “You have to eat, and you have to dream.” As leaders within the industry battle to meet today’s obligations, adequate attention must be paid to the future where the firms’ value lies.
There are lessons to be learnt from the most valuable firms of today, which has inadvertently being the technology firm. For example, Amazon’s IPO was sold for $18 and today a unit of Amazon stock is valued at $698.38 per share. After about three stock split and no cash dividend since incorporation, If I spent $1800 to buy 100 units of amazon in 1997 today same stockholding would be worth $838,056. Very few stocks have performed so well in the market, aside the technology stocks that have posed comparative performances.
The firm of the future that the regulators desire, are those who can stimulate creativity, make life better and affordable. To achieve this, the regulatory environment must be conducive for firms to innovate and
return value to its stakeholders. Our current situation is beckoning for
innovation hence there must be meaningful engagement by the mortgage firms and the regulators towards an innovative mortgage industry. This is the only way to reshape the mortgage industry and foster national prosperity. I have often wondered, why a mortgage bank cannot lend
short term to any of the players along the construction value chain. We live in a new world that requires that we do away with the old axiom to embrace today’s technology. It is no progress if the houses to be built by the Federal government across the nation are still the models and designs that my grandparents built.
On the other hand, the Board and its shareholders need to redefine its expectations to allow for sustainable value creation as against pressuring executives for financials that celebrate or mock the past. Today’s risk, is transcended rapidly and greatly to the greater risk of evaporation of your market the risk that the business model has become inoperable.
The future belongs to those who pay attention to innovation and spur new products developed on behavioral data that feeds well to predict and efficiently meet the needs of customers. These obsolescence presents a great opportunity for national economic transformation, if we dare to take it.
Let me leave you with the quote of John Naisbitt, American author and public speaker in the area of futures studies: “The most exciting breakthroughs of the twenty-first century will not occur because of technology, but because of an expanding concept of what it means to be human.”
– The undertakers are here, the world is not anyone’s backyard. It is a changing paradigm. You would be disrupted if you do not become the disruptor.
Segun Oke, a chartered accountant and innovation mentor, writes from Trium EMBA @ London School of Economics, NYU Stern School of Business, Singularity university and HEC, segetonio@yahoo.co.uk, +14159363980
