"Elective Affinities": Mortgage Lenders, One-Stop Shopping and Partnership.

"Just as each thing has an adherence to itself, so it must also have a relationship to other things."

JOHANN WOLFGANG VON GOETHE,

Elective Affinities 

IN THE 18TH CENTURY, GOETHE TELLS US, chemists developed the theory of "elective affinities": Elements adhere not only to themselves, but have a natural adherence to other elements.

I've chosen this as a metaphor for the strategic partnerships, alliances, affiliations, joint ventures and linkages that increasingly characterize today's business world. As inhabitants of that world, we are working harder every minute to add value to customer relationships while spreading our capital investment, risk management, operational expenses and infrastructure in ways that benefit all of the "elements" concerned.

Elective affinities are clearly key to survival and growth. In an environment of rising rates, consolidation, market volatility and radically changing consumer behavior patterns, we must establish symbiotic relationships with businesses that can offer bundles of value to our customers at the point of sale.

For lenders, there are two bundling models. First is the monolith, in which a provider absorbs companies offering ancillary services into one vertically organized entity. Second is the "big tent" model, in which a lender--Chase, for example-- aligns its brand, data and operational resources with independent businesses to increase profits and share costs.

As I see it, we need a big tent. Until quite recently, business has continued to be very, very good for many lenders, Realtors and real estate service providers. But we are now finding ourselves in what may be a different business cycle-- a period of rising rates and wavering consumer confidence. Adding to the pressure are consumers who define financial services as shopping goods. The only way to reach and keep these customers is to make their mortgage shopping experience not just quick, easy, appropriately priced and informative, but absolutely delightful. In days to come, such differentiation through superb service and customized convenience will determine any lender's credibility and foothold in the marketplace.

So how do we do it? By joining with Realtors, insurers, title companies and other home-financing business partners to delight our customers. Whether in the traditional retail environment or in direct-to-consumer markets, partners with synergistic, branded products and services are finding that they can share customer acquisition profitably. Joint ventures and affiliated business arrangements mutually expand business opportunities and provide for participation in profits and further penetration of key segments and territories. When properly positioned, they also increase the power of each partner's brand.

The wisdom of the elective affinities approach is borne out by numbers. Fifteen years ago, strategic alliances accounted for just 1 percent of all revenue generated by the top 1,000 U.S. firms. The projection for next year is 20 percent. Why? Because alliances are proving more profitable, on average, than a business' regular operations. The average return on investment (ROI) for alliances is 17 percent, compared with 11.5 percent for U.S. companies overall, according to a book by Cyrus Friedheim, entitled The Trillion Dollar Enterprise: How the Alliance Revolution Will Transform Global Business. As we look ahead, we can see that such partnerships will be an essential component of any viable business plan.

At Chase, we are looking for companies that can leverage our infrastructure, data and service platforms, just as we look to leverage theirs. We believe our partnerships will create value for our customers, extend our reach, expand our product set and ratchet up the efficiency of our process--not to mention lightening the burden of risk and expense that comes with the execution of new ideas.

These partnerships increase the demand for bundling of goods and services for home-financing consumers. This means that we need a legislative climate that facilitates bundling. As real estate companies, relocation firms and builders continue to join forces with home-financing providers, travel companies, Web portals and e-commerce retailers to create more convenient and comprehensive value packages for consumers, a simplified Real Estate Settlement Procedures Act-Truth in Lending Act (RESPA-TILA) environment is essential. The marketplace requires an easier process for offering loan packages that increase a lender's access to homebuyers at the point of sale without increasing regulatory risk.

Whatever happens, a new regulatory environment favorable to the bundling and partnership I am describing is inevitable. Consumers are ever more inclined to shop and select services this way, because it is convenient. The result of some bundling for consumers is their desire for more bundling, which puts as much pressure for change on our government as it puts on the marketplace.

Without our elective affinities, we have no defense against Darwinian lending--"Darwinian" because survival of the fittest continues to characterize it. Consolidation will accelerate; the field will stay open only to the most innovative and flexible companies; managers will base winning strategies on diversification and branding, and on the channel opportunities presented by new telecommunications and e-commerce options.

And increasingly, lenders will seek partnerships that help them connect with the new mind-set of the American consumer. These incredibly busy, sophisticated, globally linked people are researching new ways to manage their lives. Technology and the mining and leveraging of our customer data will streamline the mortgage process for them, providing solutions rather than bargains. Holding on to our most valued customers demands that we all get better and better at flawlessly delivering the services they have purchased from us. To do that, we need the right alliances and partnerships.

The easier you make a complex and often exasperating lending process, the more loyalty and wallet share you will obtain. Elective affinities make the process easier. I believe that when you've effectively branded a mortgage process with the help of the industry's best real estate and other settlement services providers, customer loyalty follows as a matter of course.

And the result? I like to think that Herr von Goethe would say, "Plenty of profit to go around."

Tom Jacob is chairman and CEO of Chase Manhattan Mortgage Corporation in New York.