Banking Practice

Infosys acquires Stater

“Digital” mortgage may just have come a step nearer to reality. Complete lowdown on

Infosys’ acquisition of Stater (ABN AMRO’s mortgage processing unit), and what this

portends for mortgage BPO

Anupam Jain

Infosys last week, announced buying 75% stake in Stater, till then a wholly-owned subsidiary of ABN AMRO bank, and providing mortgage servicing. This is a significant announcement, a potential game-changer for Infosys BPM in many ways, as we shall see later. What’s even more interesting to note, is the fact that the acquisition highlights the fact that next growth opportunities in BPM space are at intersection of vertical and technology

Who is Stater? What do they do? Stater, pre-acquisition, was a 100% owned subsidiary of ABN AMRO Netherlands and amongst the largest, if not the largest mortgage servicer in Netherlands and Benelux region. Stater is estimated to employ over 500 employees, providing the whole range of services in mortgage from origination, covering servicing to closure, across Netherlands, Germany and other European markets.

What did Infosys pay for it? And what did it get in return? Infosys reported paying $127.5 million for 75% stake in Stater. 25% stake is being held by ABN AMRO. Stater processes more than 1.3 million mortgages through its systems, generating annual revenue of ~€150 million (~$168 million). Quick calculations suggest enterprise valuation roughly equivalent to annual revenue. Mortgage servicing is a razor-thin margin industry. So, what is Infosys looking for in this acquisition? Access to Stater’s technology platform, which may be the most noteworthy asset in this deal.

What’s the big deal about technology platform in mortgage industry?Mortgage industry is a volume-driven process, comprising 5 groups of activities (See Exhibit A). While, origination and servicing are typically thought of as the only buckets, the mortgage process actually comprises of 3 more buckets!

The capabilities of the platform would determine the extent to which a service provider can play in this space. The sophistication of the platform is crucial to drive faster and efficient processing of applications as well as providing better customer experience. A high-level view technical architecture of a mortgage processing platform can be seen below (See Exhibit B).

The components can be grouped in 3 buckets:

• Core components – Needed to deliver minimum acceptable services in origination and servicing

• Additional components – Used to increase depth of services offered in origination and servicing; as well as increase the breadth of services offered to cover sales & marketing, funding (lender) and securitisation & trading f Some of these components can be

ported for other applications as well (Underwriting support engine can be ported for CLV calculation support)

• Bolt-On components – Can be either COTS or proprietary, and help increase effectiveness of the platform as well as customer experience

Sales and Marketing Origination Servicing and

ClosureFunding (Lender)

Securitization and Trading

Exhibit A: Mortgage Processes (High-level view)

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A look at the US mortgage BPM service provider landscape evidences the importance of having a credible mortgage platform to offer services. Almost, every service provider worth its salt (Accenture, Genpact, Wipro to name a few) acquired a platform, and offer mortgage services around it.

So, how good is Stater’s mortgage processing platform? Extensive research and analysis brings out the following review of Stater’s platform:

• Digitisation engine - Appears to be standard. No great shakes, also no cause for concern. f There exists an electronic application filing

interface as well, which eliminates whole paper to digital conversion

• Workflow management engine – Names i-SHS, the engine is proprietary, and reasonably updated piece of code (Read as, not being coded in COBOL or FORTRAN). First,

Payment Integration

Module

Collections Support Module

RegulatoryCompliance

Module

Core Component Required to offer core and basic services

Additional Component

Help offer additional services

Bolt-On (COTS/Proprietary)

Used to improve quality of services offered

UnderwritingSupport Engine

DocumentManagement

SystemDedicated data connection

WorkflowManagement

System

SecuritizationSupport Engine

DigitizationEngine

Additional Component(Useful beyond Mortgage)

Can be used stand-alone to offer additional services

built in late 90s, as SHS, it has been updated/modified to current i-SHS version. Evidence also suggests that code is written in/supports C#, which is plus point from future updating and modernisation (Older codes are notoriously difficult, expensive and painful to patch and upgrade to current standards!). Originally written for Dutch mortgages, a version of the system was created to work for German mortgages as well, taking into account the variation in German laws

• Document management system – This is based on Hyarchis, an independent document management system provider. Hyarchis touts Stater as one of its success stories and the system appears to be upto scratch!

• Proprietary data linkage – Stater led the industry to create a data-link with HDN (HDN is Dutch Mortgage Network, a non-profit cooperative, setting up a repository of mortgage related information)

Exhibit B: Mortgage Processing Platform Architecture

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• Underwriting engine – Named Capstone, the system has capabilities to recommend credit decisions based on pre-programmed rules and existing models. The system also has the ability to work with risk models for different banks, and enables a very high degree (upwards of 75%) of automatic loan offers

Overall, Slater’s platform is robust, reasonably modern, fairly automated and very highly adapted to Dutch, German and Benelux jurisdictions.

Where does Stater fit in Infosys’ plan?This is where this gets very interesting. Stater, is reputed to be good service provider in Benelux region. In that sense, this gives Infosys a good launch-pad for launching mortgage services’ in Benelux region. However, the Dutch mortgage market is widely expected to see a moderate to severe correction in the next 12-24 months.So, if Infosys, is unable to expand beyond the core Dutch-Mortgage market, there may only be limited gains from this acquisition and this may turn out to be a costly dud!

So, how big and important are the Benelux and German mortgage markets? This is an interesting question to look at. Netherlands and Benelux are end-user driven mortgage markets, with a strong societal preference of self-owning homes. Germany, though with a larger population base, is a rental-majority market, in view of strong tenancy-protection laws and societal preference of being generally frugal. So, both the countries offer sharply varying takes on mortgage market participation. That being said, both the markets are reasonably stable, but expected to slow down in home price growth in next 12-30 months scenario, in view of tightening affordability and general slowdown of economic growth. Netherlands has actually witnessed 15% fall in sales numbers in H1 ’18, though home prices spikes sharply!

Why is Netherlands a good location to build “Digital” mortgage solution? Netherlands could turn out to be a smart location choice to do a couple of different things for the following reasons:

• Netherlands is away from the usual competitive mortgage markets like US and therefore in some ways, Infosys can have this market to themselves for reasonable time

• Netherlands and Benelux, by extension are somewhat more controlled set of environment, from a legal stand-point (No multiplicity of federal and state rules and authorities, like the US). This gives Infosys a more stable environment in which to design and roll-out “Digital” mortgage solution

• Tech-savvy Dutch may take well to “Digital” mortgage experimentation that Infosys could do with this. Infosys BPM can design a new “Digital” mortgage suite, test it in this “petri-dish” environment, fine-tune it before taking it global

So, how realistic are plans to go from a beachhead in Netherlands to broader European continent?If Infosys is targeting to dig in continental Europe and banking industry for its next wave of BPM growth, this acquisition may be a good starting point. However, the challenges to achieve that ambition are significant, as the European market requires considerable investment in time and people, to develop meaningful and successful commercial relationships. Nonetheless, this acquisition has the potential to give Infosys a core around which to build its European Banking BPM sales strategy

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What can Infosys do at a product/technology level with this acquisition?In the short run Infosys can extract some efficiencies by deploying RPA, but the blowout gains may happen only in one or combination of these scenarios playing out:

• Take the engine beyond Mortgages and Dutch region - Think of adjacencies in lending in addition to mortgage and adjacent countries to Benelux. Suitably modified, mortgage processing engines can turn out to be good engines for other lending products as well

• Opening up the platform through APIs – This can enable build-out of next generation of solutions to drive better customer experience. This can potentially allow customers to access, as well as input data from a variety of devices amongst other things and real-time visibility on mortgage application progress

• Creating building blocks of CLV (Customer Lifetime Value) engine - CLV engine is a critical tool which banks are increasingly using to better target their offerings to customers. While the static data processing (likes of which are done by mortgage processing engine) is the core, this engine can benefit massively from integration with social media feeds, and infusion of advanced analytics and AI/ML techniques. Done well, Infosys, can even think about developing a CLV (Customer Lifetime Value) engine as a standalone offering of sorts as well

In other words, “Infosys has the opportunity here to build “Digital” mortgage solution for the future”

What is “Digital” Mortgage? Think of “Digital” mortgage as cheaper, faster, better version of current mortgage platforms process. What would be the blocks needed to make it happen?

• Electronic Application Interface – Moving away completely from current paper-based process. The customer can directly fill up the application electronically

• Product Selection Engine – Set of pre-selected choices are offered to the customer, based on his personal, financial data (in others words, CLV-like data) and the property in question

• Approval and underwriting Engine – Quick and transparent underwriting and approvals, alongwith real-time visibility into application progress

• Digital closing and disbursement Interface – Digital signatures help quick closing of paperwork and processing, followed by near real-time funds transfer

• Customer Support – Only when needed, in exceptional cases

Each of these blocks has a place and needs next-gen Technology tools – Automation, AI and Analytics. Infused thoughtfully and properly, they can make the entire process more efficient, effective, and customer-friendly!

Previous such attempts have not succeeded largely because of the existing platform being very old, competition, pressure to monetise the acquisition, and investment needed to upgrade. Infosys seems to have landed on the right side of many of the above considerations. Stater’s platform is modern, competition is largely muted (due in part to Stater’s market-share) and pricing of the deal suggests favourable price-revenue considerations. Moreover, Netherlands, may turn out to be a very good location to build a “Digital” mortgage solution.

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Are there any other past experiences of other service providers doing something like this? As a matter of fact, yes! Looking at the timeline of mortgage BPO, it is easy to conclude that it is one of the most active areas to witness M&A/Carve-out kind of activities (See Exhibit C)3 examples of mortgage-related acquisitions to build up Mortgage/Banking BPO solutions portfolios exist. While all of them are from Americas, they still have useful takeaways:

• TCS acquisition of Comicrom – TCS had hoped that that it’d help them launch their ambitions of offering mortgage BPO in US when they acquired Comicrom in Chile in 2000s. It didn’t work out that way. US is a more regulated, and different market. Platform wasn’t capable to be ported and in the end, TCS aborted that line of action

• Accenture’s acquisition of Zenta and Mortgage Cadence – Accenture made 2 acquisitions in the US mortgage BPO space – Zenta (in 2011) and Mortgage Cadence

(in 2013). It combined both of them under Accenture Credit Services, and is today the largest player in US mortgage BPO services

• Mphasis’ acquisition of DigitalRisk – DigitalRisk, is a niche provider of solutions catering to mortgage securitisation. Mphasis acquired it in 2012, but has largely let it run independently. There just doesn’t seem to be enough synergies with other parts of Mphasis banking BPO portfolio to effectively integrate and leverage DigitalRisk. Jury is out, on whether this is a template of a successful acquisition

So, what’s our final take? An ideal front-loaded investment strategy would see more investment on this acquisition to make this “Digital” mortgage solution that Infosys could take to all markets (atleast conceptually, if not in modular code blocks), and have the opportunity of shaking up the order! Indeed, the Dutch-Benelux market provides them with just the right

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2009 2011 2012 2013 2014 2015 20172016 2018

Partnered with MortgageFlexfor technology solutions

Acquired Zenta for mortgage processing (~3700 FTEs)

Acquired HPP, to offer platform-based mortgage offering

Acquired DigitalRisk, a provider of mortgage securitization and trading solutions

Acquired Mortgage Cadence, a provider of LOS

Acquired Opus Capital Market Consultants, provider of secondary market solutions

Carved-out Bank of America’s Home Equity Loan Processing Unit

Acquired ISGN’s BPO division for end-to-end mortgage technology solutions

Acquired Urban Fulfilment Services, for mortgage fulfilment services

Acquired Stater

Exhibit C: Timeline of acquisitions in Mortgage BPO (since 2009)

Our thought bubble: While this is an interesting acquisition, lack of clarity on Infosys BPM’s future strategic direction is where our questions are hitting a wall:

• Is Infosys’ BPM serious about going after Banking and/or mortgage BPO? (While both these spaces are a bit crowded and saturated, in the larger US market, Europe remains relatively under-penetrated) f Is Infosys targeting only mortgage or is it

planning to use the technology platform to make digital-ready solutions (For instance, social-media infused CLV engine)

• Is Infosys’ BPM targeting Europe as the center-point of its expansion strategy? (This may be a smart move, considering that US is relatively saturated and its current political

climate is a bit unsettling) f If yes, then is Infosys ready to invest and

fund local talent hiring? Key to finding success in Europe is hiring local talent, to represent the firm in these markets

f Also, what’s the strategy to build country-specific modules to offer these services beyond the Benelux market region?

• What is Infosys plan technology enhancement to the platform it is acquiring? f RPA, AI, Analytics will be the key and

critical investment areas for making the platform digital-ready. What is the investment roadmap on that?

market size and protection to experiment, iterate and fine-tune such a solution!

At this point, it is not clear on what Infosys is planning to do in the broader BPM space. It remains to be seen and heard on their plans and strategies for expansion in Banking and Europe. If at least one of these is a core area that they want to go after, then this may prove to be a good starting point. If not, this may turn out to be another expensive acquisition with nothing much to show of it, 24-36 months down the line!

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Anupam Jain is the Managing Principal of Exaatto Group

Exaatto Group is a boutique global research, advisory and consulting firm focused on Business Pro-cess Management (BPM). It seeks to help BPM ecosystem (buyers, service providers, and facilitators) make better decisions, through its work. Its unique approach and focus on ‘digital’ and ‘industry’, helps it understand issues in microscopic detail, build the larger picture in telescopic expanse and bring meaningful, forward-looking and actionable insights.

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