Week 228 in Detroit.
Last night, Supreme Court Justice Ruth Bader Ginsburg passed away. Justice Ginsburg, may she rest in power, was an important person. Her professionalism, her work ethic, and her humility are evidence of how she prepared for and fulfilled her responsibilities.
She is who we’re all trying to be and who we’re trying to raise. Her work, marked with decency and integrity, is the ideal illustration of how complex problems need not devolve into personal attacks on each sides’ morality. RBG exemplifies dignity in character and career. I know I’m shouting into the wind here but I wish those elected to the other branches of government would be more like her.
“The American people should have a voice in the selection of their next Supreme Court Justice. Therefore, this vacancy should not be filled until we have a new president.” — Sen. Mitch McConnell, February 2016 (within an hour of Justice Scalia’s death).
The last couple of weeks or months (kinda hard to tell at this point) I’ve been writing about being reactive versus proactive. This is never more true than in the mortgage industry. The entire industry is reactive, with no end in sight. In fact, the fastest reactor wins further encouraging bad habits. A company’s process — whether technology or people — are literally waiting for a loan application. Until the customer calls or responds, nothing can happen. As soon as the customer says ok, all the functions spin up into activity. Winners are not judged by eliminating the customer’s pain points as much as delaying progress the least.
Banks have long been responsive but not reactive. Technology and competitive markets have challenged banks to be better. Banks are investing in tools but not necessarily becoming proactive.
For instance, most banks have provided a way for clients to apply for a loan online. Yet, many if not all do not make recommendations or offers when a customer’s data shows that it might be a good time for a loan. Still fewer provide an already-approved home loan, for example, without the consumer submitting documents and verifying all manner of personal data (that the bank already has in many cases).
One oft-cited reason is regulation. When fintech companies propose to solve consumer problems, banks often either a). push for greater regulation and/or b). criticize competitors for not being banks. Yet, fintech continues to grow and push banking to be better.
This week the head of the Office of the Comptroller of the Currency (OCC), Brian Brooks, co-wrote an op-ed encouraging a new era of fintech growth. “Two things account for this great unbundling of banking, from the financial supermarkets of the 1990s to the specialty fintech boutiques of today. First, technological changes have created new fintech competitors that can form banking transactions. Second, customer behavior is adapting quickly to the new technologies.”
The OCC will simply regulate fintechs, on par with banks, and encourage competition.
The key will be the proper expansion of tools, to serve the consumer, without losing site of fair treatment and fair pricing.
Reasonable ground rules.
Banks still hold the power and leverage to spin up solutions, but bureaucracy and competing priorities hold them back. For example, expansion into digital mortgage solutions can be limited if the bank has not made mortgage a priority product.
Many banks still don’t see lending as a potential lead generation or customer acquisition tool. Banks underestimate the power of education, visibility and transparency in all lending, particularly the mortgage process.
Ideally, the customer should not need to apply for a mortgage. The consumer’s bank account and financial history would show the customer was approved for a credit limit and the only remaining obstacle is the value of the home associated with the credit limit.
Digital mortgage platforms are racing for that reality.
As the race heats up, there is a lot of confusion about the digital tools enabling fintech success. The two most frequent emails I receive on an almost daily basis are for machine learning tools for retrieving data from documents and artificial intelligence tools for predictive analytics.
In an article in the New York Times yesterday, the topic of digital mortgages highlighted the potential risks inherent in technology innovation. The biggest risk noted is associated with moving from a human review to a digital review. The idea being that systems might discriminate and lenders could “hide” behind the tool, avoiding responsibility.
The article followed a largely balanced approach. Though the author cited the potential risks with online lending, meaning unsecured personal loans, the fact is that digital mortgage process reduces bias overall. Algorithms for credit and pricing decisions remain industry standard governed by mortgage investors and agencies like Fannie Mae, Freddie Mac and FHA. Algorithms and machine learning automate workflow or the speed of processing information but not the information itself. As the articles says, the online platform reduces human interaction where and when possible to reduce human bias.
This is not to say that the industry is not without areas to watch. The systemic, socio-economic outcomes embedded in old FICO models can produce unfair outcomes. Though it is not the lender (but rather the investor) that governs the availability of certain models. There is also the risk that what starts small and focused on workflow does not quickly expand to include problematic targeting or decisioning. Overall it’s a complicated topic and one that will continue to be the forefront of the industry for years to come.
Content is our great export. I assume at one point it was steel. During World War II it was fighter planes. Perhaps at some point after that it was automobiles and then software. Now, our greatest product or at least most popular product is content.
It all started with the original content — the Declaration of Independence. We, the People, …
We’ve been producing content ever since.
Sure, content is entertainment. Some entertainment comes without a larger idea or purpose. Other content, like Hamilton, comes fully baked with ideas on ideas on ideas.
Throughout human history, in fact, ideas spoken out loud or written down have had the ability to change the course of human events.
With that in mind, this last weekend, I read the 50th anniversary of Milton Friedman’s essay in the New York Times “The Social Responsibility of Business is to Increase Profits.” This line of thinking is the basis for the idea that any distraction or spending not directly related to returning value to the shareholders is considered wrong. The preeminence of the shareholder is above all. You may recognize this as shareholder capitalism, or really just modern capitalism.
Friedman’s essay did not start it all but Friedman’s essay made it ok. Made it not just acceptable, but in fact backed by Nobel Prize winning research, to slash spending on employees or manufacturing safeguards so long as it returned a greater profit. Friedman would argue that policy makers and forest rangers are responsible for the climate, not corporate Boards. CEOs do your job — turn a profit no matter way — and others do their jobs — protect the environment — and the market should take care of the rest. It’s not for socially conscious companies to decide.
You do your job and I’ll do mine. That kinda thing.
It changed the game. Legitimized behavior that CEOs were undoubtably looking to legitimize. That’s all we’re ever trying to do. Find someone to confirm our behavior and beliefs.
Lately, however, some companies have been challenging the idea of shareholder capitalism with a concept called stakeholder capitalism.
Critics of stakeholder capitalism love to use words like “social good” as negatives and point to frivolous spending on causes that do not immediate pad the bottom line. These critics tend to be older, whiter and comfortable thinking one way.
Critics of shareholder capitalism use words like “Wall Street fat cats” and point to ballooning CEO salaries and violations of environmental regulations in the name of cost-cutting. These critics tend to be younger, diverse and comfortable living in mom and dad’s house.
It’s the age old struggle aligning the world we want with the world as it is. One reason I love this topic so much is how fundamental it is to the game we’re all playing.
For me the solution is simple and straight-forward.
Shareholder capitalism takes a specific, narrow view of value.
Stakeholder capitalism takes a wide, broad view of value.
As silly as it sounds the thought process that changed my life was Moneyball. I’m as guilty as the followers of Milton Friedman, perhaps, because I’ve extrapolated an entire way of thinking from one simple essay; but to me the core thesis of Moneyball was this — when an industry or market is not looking at enough data or defining value broadly enough, there is inefficiency which leads to an advantage.
Put another way, look broader.
In Moneyball, baseball scouts looked at baseball players and tried to divine which players would hit the most home runs (HR) and runs batted in (RBI). Meanwhile, players who consistently hit singles (H), stole bases (SB) and walked (BB) were just as valuable to a win yet undervalued in the market. Expanding the data set and accounting for more value in more ways lead to innovation. Innovation led to profit.
In corporate America, we’ve dramatically expanded the data sets we’re using to drive profitability — production costs, performance marketing and gain on sale — but we’ve not expanded our view of value as a component of profitability.
Think of it as the lifetime value of the customer analysis for a shareholder, employee, vendor, neighbor, and (oh yea) customer. I’d even be so bold as to include potential customer in that group.
The lifetime value of a shareholder should drive decisions that are healthy and beneficial to the whole economic ecosystem even if the immediate return lacks (full) profitability.
As Howard Shultz the founder and former CEO of Starbucks puts it, “’What is the role and responsibility of a for-profit public company?’ Friedman’s flawed answer is not his legacy. His legacy is the question itself — which today’s leaders must answer with a renewed commitment to balancing moral purpose and high performance.”
To me, it’s not necessarily even balancing moral purpose for morality’s sake (though that would be wonderful) but also because meaningful value is hard to achieve in the short run yet it runs time and time again in the long run…if done well.
As a challenge to the next generation of CEOs, in light of Friedman’s anniversary, I’ll end with a quote from Darren Walker, Chief Executive of the Ford Foundation, “‘We, The People’ grant businesses their license to operate — which they, in turn, must earn and renew.”
Risk of a K-shaped recovery and what that means. The upper half of consumers bounce back from the quick bottom and recover. The lower half of consumers continue down with a longer, perhaps endless, hardship. The income and wealth gaps between whites and blacks continues to grow. For example, 60% of Black households are facing serious financial problems since the pandemic began, according to a national poll released this week by NPR, the Robert Wood Johnson Foundation and the Harvard T.H. Chan School of Public Health.
One major financial strain is housing. Rent in major metro areas was increasing prior to the COVID-19 pandemic. Now, some renters have been given more freedom to telecommute and can afford homeownership…as long as it’s somewhere outside of where they are currently renting. “[P]riced-out renter households make up 4.5% of all renter households in the U.S. Those households now have the opportunity to live in a more affordable market because they don’t need to commute to work.”
According to Zillow, 22% of renters in San Francisco are priced out of renting in the city, but could afford monthly payments on the typical starter home in other areas of the US.
What’s not clear is how likely those transitions are from city to smaller city or suburban America, and how many of those renters are African American. Would the ability to move but keep your job help balance out the housing market a little more and perhaps close the wealth gap between whites and communities of color?
Why aren’t more politicians (or any politicians) talking about innovation?
I have always been a big fan of incentives. Incentivize the behavior that you want. Right?
If politicians claim to have a plan and claim to have the vision for what “we should do,” why not incentivize it better? Or at all?
1. Treat knowledge as a public good.
“Basic research leads to new knowledge. It provides scientific capital. It creates the fund from which the practical applications of knowledge must be drawn. New products and new processes do not appear full-grown.”
2. Help overcome the valley of death.
An “important role government has to play is helping to overcome the gap between the discovery of a new technology and its commercialization, which is so fraught with peril that it’s often called the “Valley of Death.”
3. Act as a convening force.
“When Kennedy vowed to go to the moon, nobody argued that the effort should be privatized. It was clear that such an enormous undertaking needed government leadership at the highest levels. We pulled together and we won.”
What will be our Sputnik moment?
Quote: “Every meeting with the CEO is an ideas meeting.” — Brock Cassidy
Bonus Content: How HUD rewrote the rules on fair housing. Sad misunderstanding of both fair lending and the so-called “big beautiful suburbs.”
Continued success and continue to answer well,