Don’t Expect Miracles

We all know that mindless "nothing-has-changed" rhetoric has

replaced the equally pat "this-will-change-everything" blather of the

early Web. But the blindly bearish might look at one surprise: Online mortgages

are slowly catching on. And while no one is going to "Amazon"

old-style banks and take over the $1.5 trillion mortgage market in a rush, signs

of life (even profitability) are unmistakable. The reasons are simple. These

sites provide a valuable service, and they get paid for it.

The dot-com collapse actually helps sites like Quicken Loans, E-Loan, and

LendingTree. Recession fears triggered by the stock market have made interest

rates plunge. Refinancing applications are up fivefold since last year, while

existing-home sales hover near 1999’s records. These sites together did more

than $2 billion in loans in the fourth quarter of last year. That’s up nearly

200% in a year, but it’s still less than 1% of the $262 billion in total U.S.

fourth-quarter mortgage lending. And spring buying season is here.

These companies give consumers two basic ways to borrow online: You can

either borrow from a Web bank directly or use a Web site to connect you with a

traditional lender. Both and are direct lenders, while is a middleman. Sign up

at LendingTree and you can get access to any of more than 100 lenders, up to

four of which will make you an offer.

What does each system do for consumers? First, let’s lay out the standards.

An excellent online loan site should give you the precise market intelligence

you would get from the smartest, best-prepared broker at a real-world mortgage

bank. The idea is to use the Web for quality control. Software delivers

information with less sales pressure and human error than I’ve seen from human

loan brokers in my past, not all of whom were stars. The site should have the

latest data on rates and the financing market, and be able to make fast,

understandable comparisons among different combinations of interest rates,

points, and other loan terms. It certainly should have competitive prices–nothing

is more of a commodity than cash. And it should simplify a hopelessly arcane,

expensive process designed to fit the needs of a pre-Internet property recording

system.

By these standards, all three of these leading pure-play mortgage sites are

pretty good, but none is great. They put a lot of information at your

fingertips, and they’ll save you a couple of trips to the mortgage broker’s

office. But the big disappointment is that shopping for loans online doesn’t

ward off the blizzard of paperwork that comes with financing a home. Limitations

in last year’s law authorizing digital signatures on legal documents, sadly,

mean that you’ve still got to do a lot of your applying for loans the

old-fashioned way–on paper. I’ll give a slight nod to E-Loan for two

reasons. First, they waive up to $1,500 of fees that both Quicken and

LendingTree’s partners still charge, lowering closing costs. But they build

that money back into the interest rate you pay (which they freely admit). So the

real benefit is that the cost of E-Loan’s money is more straightforward–meaning

fewer surprises at settlement–and that more of it is deductible.

E-Loan also does a better job of distilling the information you need to

compare loans and figure out your overall finances. Mostly, this is a matter of

presentation, since all of these sites provide the kind of information that I

think is necessary. The difference is that E-Loan dishes up loan comparisons in

the easiest-to-follow format, with site navigation that makes some of it easier

to find.

That said, don’t expect miracles from any mortgage site. Pricing is pretty

much the same online as offline. And mortgages are a paperwork-intensive hassle,

even on the Internet: At all three sites, the first step after your loan wins

online approval is to send you paper forms, soliciting all the same information.

The surprising thing about online lending isn’t how different it is from other

loans, but how similar it is.

First of all, let’s talk rates. I ran a hypothetical applicant through a

loan application at each of these sites, to avoid detailing my own credit

history when I wasn’t actually in the market myself. E-Loan gave Mr.

Hypothetical a 7.125% rate for a 30-year fixed mortgage. LendingTree countered

with 6.99%. Quicken quoted 7.125%. All assumed a 20% downpayment and good

credit. By comparison, the bank where I have my mortgage was charging about 7%

on the same day, while Countrywide Credit Industries Inc., the nation’s

biggest independent mortgage lender, was charging 7.25%.

Why aren’t online banks cheaper? Because the cost of offices is only a

small part of what you pay. The huge majority of your interest rate reflects the

cost of funds–what the bank pays to borrow the money it lends you. That’s

set by the bond market, and everyone pays pretty much the same amount.

Once lenders approved applications by the various hypothetical characters we

invented for our tests, all three sites promised to close my loan in six weeks

or less. This is pretty much what you expect from any bank.

Although I liked E-Loan the best, most of the attention has gone to

LendingTree, which says its system makes banks compete (even grovel!) for your

business. It’s also closing more loans than the other two. But I wasn’t

overly impressed. Its system is competitive, but no world-beater.

LendingTree’s software matches each application against the loan criteria

for its partner banks, and sends it to up to four potential lenders. If they see

my credit and figure I’m a bill-payin’ fool, they’ll route it to the

First, Second, Third, and Fourth National Banks for the Virtuous and Punctual.

If LendingTree deduces I’m a fool about paying bills, it’ll go to We

Understand Bank and Trust.

The four banks make offers and you pick. LendingTree then steps aside while

you and the bank do the rest. Their fee comes from banks, not you. Despite ads

promising "When banks compete, you win," LendingTree’s big edge is

that it helps speed up the comparison shopping people do already. Rates are

about the same.

The bottom line: Online mortgages are fine for people who like to do a lot of

business over the Internet. It’s not so much that there’s a compelling

reason to borrow online. It’s simply that there’s no compelling reason not

to.

By Timothy

J Mullaney in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Size matters

Now, these mini-dots are proving they’re an online force to be reckoned

with. Indeed, they’re teaching their bigger rivals a thing or two–including

the value of common sense. Unlike some dot-coms with inexperienced executives,

the mini-dots are succeeding by employing the same strategies that

small-business owners have relied on for centuries: They’re sticking to niches

they know well. They scrimp on expenses, forgoing expensive portal deals and

using Net resources, from e-mail to customer-sharing arrangements, to save

money. And they’re banding together on the Web, presenting a bigger face to

the online world.

So far, it seems to be working–so well that small businesses appear poised

to play a greater role in the growth of e-commerce than anyone expected. Small

companies will see their online sales grow 336% from 2000, to $120 billion by

the end of 2002, predicts ami-Partners, a New York consultant to small and

medium-size businesses. That will outpace overall e-commerce revenue growth of

249%.

Of course, size matters, even in the New Economy. But in some crucial ways,

the Net helps level the playing field for small outfits. For one thing, the cost

savings of selling online and dispensing with store rents or direct-mail costs

makes some businesses viable that otherwise wouldn’t be–say, a home-based

collectibles business.

Moreover, the global nature of the Web goes a long way toward negating one

key disadvantage of the small fry: geographic reach. Now, even a niche seller of

specialty pet supplies can amass enough customers to be viable. Finally, the

easy communications afforded by the Net may make more small businesses,

especially services such as graphic design, attractive to larger businesses

seeking to outsource jobs.

The impact of a mini-dot explosion could have big implications beyond the

Web. By 2004, even the tiniest of these e-merchants–those with fewer than 10

employees and $3 million in annual sales–could account for as much as 10% of

the US gross domestic product, according to e-commerce researcher Keenan Vision.

Maybe so, but big questions remain about how much the Net will boost the

number of small businesses and what impact they’ll truly have on the economy.

For one thing, says William Dunkelberg, chief economist for the National

Federation of Independent Business, it’s possible the Net is simply shifting

existing sales online, not expanding markets enough to support many new

businesses. He adds, it’s likely that the most successful online businesses

will put the other mom-and-pops out of business, lessening the net gain. Most

traditional small businesses fail, and the same may well be true online.

And for all its advantages, the Internet presents a lot of challenges to the

little guys, too. In many parts of the country, pokey Net connections limit how

many visitors these sites can handle. And it can be tough for traditional

businesses coming online to handle both channels at once. Those factors may

explain why, for all the small businesses that have launched online, many more

have not yet moved beyond sites that are nothing more than online brochures.

According to ami-Partners, 22% of small businesses had Web sites in 2000, but

only 8% were engaging in e-commerce.

Still, none of these challenges has stopped a growing number of small

businesses from embracing the Web as a new sales channel and productivity tool.

Many of the online newbies are longtime Main Street merchants or

industrial-goods manufacturers. There’s also a raft of service providers–computer

programmers, graphic designers, lawyers, and such–who have left Corporate

America to hang a shingle on the Internet.

The Web is spawning new breeds of small companies, too. They include tens of

thousands of people who never ran a business before but now make a living

selling collectible ornaments, antique toys, and other odds and ends on sites

such as eBay. About 13,000 stores have sprouted on the Yahoo! Stores section

alone since June, 1998.

What these disparate businesses have discovered is that the Net is less a

magic carpet to a newfound land of riches than a tool to turbocharge an already

sound business model. "The Internet is what the telephone was when it was

invented–a way to further our reach," says Wendy Haig, founder of

Washington (DC)-based Global Strategy, which counsels troubled dot-coms.

"With its vast reach, the Internet will enhance any small business that

uses it properly."

How so? First, they’re using the Net’s access to a global customer base

to zero in on defensible niches, instead of offering all things to all Web

surfers. Pets.com, for instance, went bust in December partly because it tried

to sell all kinds of pet supplies–even huge bags of inexpensive dog food with

high shipping costs and margins under 10%. By contrast, Massachusetts based

Waggin’ Tails sells scarce items such as Provi-Tabs dog vitamins and Hi-Tor

prescription cat food. That allows the Web store to charge high enough prices to

turn a 30% profit margin on well under $5 million in annual sales.

In some cases, the Web’s global reach has allowed entrepreneurs to offer

entirely new types of narrowly focused services. Patti Glick, a San Francisco

nurse trained in podiatry, makes a living speaking at companies on foot health

and safety. Before, she had to do a lot of personal networking, such as mingling

at Toastmasters meetings. Now, by participating in various online podiatric

sites and women’s portals, Glick has drawn corporate customers intrigued by

her screen name, "footnurse." She expects to earn $30,000 this year

working part-time hours that allow her to spend time with her 10-year-old twins.

Small businesses also are using the Net to save big bucks–enough, in many

cases, to make a pipe dream a going business. Selling Beanie Babies and other

collectibles online out of a bedroom in his Oklahoma home, Perry Calton is

grossing annual sales in the low six figures.

Besides saving money, the Net also provides mini-dots a wealth of new

marketing channels. E-mail and discussion newsgroups can be far less expensive

and more effective than direct mail and print or TV advertising. Carrie Hardy,

founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends

newsletters to 1,100 past customers and posts messages on scrapbooking

newsgroups. Instead of buying $80, three-line ads in trade magazines that never

drove any traffic anyway, she spends nothing and gets a far better response:

After mailing her February newsletter, sales doubled the next day.

No online marketing channel has proved more effective than online auctions,

pioneered by eBay in 1996. Besides spurring the formation of thousands of new

small businesses online, they have prompted existing businesses to branch out.

Some wholesalers are using eBay to go retail:

Andrew Waites took his Mississippi retail overstock business, Inventory

Procurement Services, directly to consumers over eBay–leading to what he hopes

will be a twofold-plus jump in sales this year, to $7 million, and a gross

profit margin online of 50%, 10 times the original business.

Finally, the Net has allowed far-flung small businesses to gang up and pool

their resources against their bigger and louder competition in ways they can’t

do in the physical world. The American Booksellers Association, which promotes

independent bookstores, runs a program called BookSense.com that allows members

to offer amenities only big chains could offer before, such as gift certificates

good at any member store. Moreover, their online customers can order any book in

print from their site, even if they don’t stock it themselves. Kerry Slattery,

owner of Skylight Books in Los Angeles, partly credits the program for a

higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.

Daunting prospect

All that’s not to say the Web can turn any small business into a raging

success. Most entrepreneurs are running into obstacles on the Web that are hard

to overcome with limited staff and resources. One of the toughest jobs:

providing superior customer service. After all, to make up for what they may

lack in product breadth–not to mention customers’ ability to click instantly

to another site–they have to offer much more personal service.

Another challenge is Internet technology itself. Fast broadband connections

are still largely unavailable, especially in rural areas, leaving many small

businesses stuck with snail-like modem connections. And many worry that they

could lose a lot of customers if their connection goes down. Says Deepinder

Sahni, vice-president at researcher ami-Partners: "What we are hearing is

that they are hesitant to put their crown jewels–their companies–on the

Internet."

For many small businesses, the prospect of competing with the online

behemoths is daunting–for good reason. It may be only a matter of time before

the big guys notice how well they’re doing and jump onto their turf. So they

must stay vigilant, even paranoid, about differentiating their offerings.

That, however, is not the main worry of most small businesses that have moved

online. Their problem: too much business. When Jordan Dossett posted her

graphic-design portfolio a year ago on eLance.com, a Web marketplace for

freelance workers, she was buried under an avalanche of work offers from

companies as far away as Russia. So she quit her job as art director for a law

firm and opened The Design Studio in her Washington (DC) home. After hiring

three employees, she expects to rake in $350,000 in sales–and a tidy gross

profit of $250,000. "I had no idea the amount of demand out there,"

she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of

dead dot-coms would love to have had.

Arlene Weintraub–BusinessWeek