What Lenders Need to Know About the Hidden Costs of Technology
by Thomas Lin
The economic scenario has been rather challenging for lenders in the US Residential Mortgage Market. The Federal Interest rates have been consistently high, significantly impacting the demand side for fresh purchases. The cost of issuing loans has been increasing for lenders, which has been hitting their profitability tangibly. As per numbers from a recent study, only 44 percent of mortgage lending firms have reported a pre-tax net financial profit in the last quarter of 2018 .
With little control over external factors, the intuitive answer for lenders to survive lies in cutting down costs and raising operational efficiency. A proven way to get there is by adopting technology.
However, integrating technology in manual processes comes with upfront investment and maintenance costs. This article shares insights into the kind of costs to expect if you decide to use technology. –
1. Upfront Purchase Cost
If you’re looking at technology products (be it a custom-built tech stack or a popular SaaS product) to plug in process efficiency and reduce costs, you’ll have to incur a sizeable amount of initial capital investment and undertake the financial risks involved.
Every software solution, including the ones tailored for your industry, appear helpful before its purchase. However, its actual utility is highly dependent on its fit with your specific organizational needs. No software company highlights drawbacks of its technology, and users figure this part out after the capital commitment is made.
In case the choice you end up making turns out to be a sub-optimal one, this initial cost will be sunk, and you might have to incur it all over again before realizing optimum benefits of integrating technology into your workflow.
2. Implementation & Integration Costs
There’s a certain implementation and integration cost involved with the adoption of almost any piece of technology, and this part is hard to avoid or eliminate.
If you’re building your own custom software, you will have to engage in at least some trial and error before you can gravitate on to a version that neatly aligns with your needs. Alternately, if you’re purchasing an existing solution, you’ll still have to invest in a good amount of time to streamline your existing processes in accordance to that software, before you gain any benefits. Moreover, in either of the cases, you also need to spend time and effort to integrate the new technology with other technical elements that are an existing part of your operational workflow.
In terms of the time required both these approaches translate into substantial charges which you will have to additionally incur, post the initial purchase cost. This would also include the hours your team puts in that could be otherwise used for revenue generating purposes. If you’re going ahead with custom solutions, you’ll also have to account for ongoing development costs that you will need to pay to your software vendor to make desired improvements.
3. Updates & Maintenance Costs
Even if you’re well settled with streamlining the brand-new technology stack into your mortgage business, you need to be aware that the cost of maintaining it in the form of upgrades and maintenance will be an ongoing one.
Technology is known to improve at a very past pace, and previous versions often tend to become incompatible or even obsolete with other technological elements. Being effective and efficient with technology use implies upgrading at periodic intervals to make the best use of its virtues. Hence, you must expect and budget for these costs as well.
4. Don’t Have Big Budget for Technology? Try ‘Pay-As-You-Go’ model
If you’re a mid-small sized firm, these costs might discourage you from investing in and realizing the benefits of technical intervention. However, a unique solution lies in a ’pay-as-you-go’ model that’s ideal firms in the mortgage industry looking for an instant improvement in bottom line.
It allows reaping the advantages of using specialized technology without undertaking any risks by purely working on a variable cost model. You can pay as per your actual usage, with no need to spend on technology at all during lean business period. There’s no risk and no maintenance cost. You can simply plug in the desired efficiency on-demand.