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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2016

Competing In The Cloud

Emerging Web-based technology enhances dealmaking and business relationships

Competing In The Cloud

Hard money is entering the age of cloud technology. Across every industry, business operations are moving to Internet-connected cloud-technology platforms. Even traditionally low-tech companies are moving to the cloud.

As ridesharing company Uber revolutionizes the personal- transportation industry, for instance, taxi operators and shuttle companies that have failed to recognize the power of the technology are being left behind. So how will cloud technology change the private-lending industry?

Conventional wisdom says hard money lending and mortgage originating are fundamentally a face-to-face businesses based on personal connections — the kind that can’t be automated or replicated by an algorithm. This relationship-based business model has, so far, shielded hard money and private lenders from the rampant growth of the cloud — which allows  information-technology services, such as software platforms, to be accessed and shared via the Internet.

But change is unavoidable. Within just the last two years, multiple cloud-based online lending startups have entered the hard money industry. To compete and survive in a rapidly evolving business environment, lenders and originators must combine their core real-world strengths with the dynamic potential of cloud technology.

You probably have already heard about the Silicon Valley-backed online startups that have entered the private-lending market since 2013. With hundreds of millions of dollars in venture-capital funding, these companies are bringing creative disruption to the real estate industry.

Their marketing materials use impressive terms like “peer-to-peer finance,” “marketplace lending” and “real estate crowdsourcing” to describe their business models. But make no mistake, they are private  direct-lending companies, providing collateralized debt financing for rehab and construction projects. To originate loans, these online lenders deploy either their own capital reserves or institutional funding. Once the loans have closed, the online lenders sell fractional securities to individual investors through their websites, replenishing their capital pools.

Ease of investing

Online lenders generate revenue from origination fees and from the spread between the borrower’s interest rate and the interest rate paid out to the fractional securities. The major innovation of the online lenders has been their ability to make the process extremely easy and fast for the individual investor. An online lender’s website will include a list of hundreds of investment opportunities that their users can purchase with a few simple clicks. On the origination side, online lenders are using a combination of automated algorithms and human underwriters to assess borrower applications.

At this early stage, newness is one key advantage for the online lenders, who have enjoyed massive attention from both traditional and online media. Thanks to this free publicity, the online lenders have received a huge number of applications from borrowers and investors. As a result, the online lenders are heavily over-subscribed, and have the luxury of choosing to fund only the highest-quality loans from their pool of applications.

From a hard money lender’s perspective, the online lenders might not seem like much of a threat at this point. The upstarts operate over a wide area and are still very small relative to the overall size of the market for private direct loans. No single lender has yet felt the squeeze from online competitors capturing major borrowers or investors — but that day is not far off. If online lenders are successful, they will control an increasingly large portion of the market and force traditional lenders to compete in the connected world of the cloud.

Connecting data

What is your company’s cloud-technology strategy? If you haven’t thought about that question, the time to start is right now. The key concept to understand in learning about cloud technology is the platform. With conventional software, each computer has its own copy of each program, and data is isolated on that computer. Each computer can handle only one user at a time, and users must move their data from one computer to another (via e-mail, flash drive, etc). Connecting data from multiple computer users is extremely difficult with conventional software.

With cloud technology, programs are replaced by platforms. A platform is hosted remotely and can handle many users at the same time. Each computer needs only a Web browser to connect over the Internet, and all data is stored securely on the platform. A user can work from any computer at any time, and without moving around any data (so no data is ever lost or corrupted).

But the truly revolutionary power of cloud technology is in connected data. Within a single cloud platform, it is possible for any one user to connect with any other user’s data (as long as the other user gives permission). Unlike conventional software programs, a cloud platform is connected to the Internet from day one. When a cloud platform connects with  another cloud platform, this is called an integration. That’s what happens when Instagram uses your Facebook data to connect you to your friends.

With cloud platforms for business, you can use connected data to do serious work executing real-value transactions. Online lenders’ cloud platforms allow them to conduct all of their operations within a single system. From the moment the borrower fills out a loan application, all the way through the loan closing and the selling of fractional securities, all operations are conducted via the online lender’s cloud platform.

Think of your own business as a platform where borrowers submit

their financial needs and investors submit their requirements.

Contrast that with the process used to originate a conventional loan. The lender must use multiple systems to communicate, manage data and transfer money. A single transaction typically involves e-mail, phone, paper documents, spreadsheets and conventional software  programs, and data that must be moved and converted between all of these  repositories and formats.

Cloud-based alternatives

So how do others take advantage of the competitive edge offered by cloud technology? The first step is to move away from paper documents and conventional software, and onto available cloud platforms. Look for areas where cloud technology can provide an immediate performance improvement.

For document management, cloud- storage services have major advantages over sending e-mails with attachments or mailing documents. For financial data, switch from conventional accounting software to a cloud-based accounting platform, which provides integrated invoicing to simplify your billing and collections process. Even basic spreadsheets can be transitioned to the cloud.

One area that most hard money lenders overlook is customer-relationship management (CRM). CRM software  allows you to track every communication with your borrowers and your lenders across all of your team members. Having a complete and orderly history of all communications is  invaluable when dealing with delinquent borrowers, investors and many other types of business associates.

For maximum technology leverage, hard money lenders and other traditional businesses must integrate their core strengths with their cloud platforms. Cloud technology has the potential to make your connections stronger with borrowers, investors and other essential contacts.

Think of your own business as a platform where borrowers submit their financing needs and investors submit their requirements. The goal is to turn your business into a platform that provides compelling, reliable underwriting, loan-origination and loan services, and lets your customers execute complex transactions through a single system. You provide a remote hub with data connections and integrations to other business platforms, such as brokers and financial institutions.

•  •  •

The global movement to cloud technology is a large-scale change that affects all types of industries, including those without a significant Internet presence. It will affect the mortgage business and offers advantages for those willing to move fast and adapt to new opportunities. 


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