The years of 2005-2007 saw a lot of activity in the mortgage refinance market, as we know, and a big part of that was the explosion of internet advertising in the US about it including the lead generation market. Here’s a clip from a NetRatings press release in January 2006 showing the top online display advertisers in the US:

Top 10 Advertisers by Estimated Spending

     Advertiser*          Total Estimated Spending     Impressions (000)
     _______________________________________________________________________
     Vonage Holdings Corp       $36,574,400              14,954,696
     _______________________________________________________________________
     Netflix, Inc.              $16,770,200               5,042,750
     _______________________________________________________________________
     United Online, Inc.        $13,588,500               3,383,704
     _______________________________________________________________________
     NexTag.com                 $12,557,100               3,517,763
     _______________________________________________________________________
     LowerMyBills.com, Inc.     $12,470,400               2,580,703
     _______________________________________________________________________
     BellSouth Corporation      $11,593,400               3,139,830
     _______________________________________________________________________
     Verizon Communications,
      Inc.                      $10,346,400               2,979,028
     _______________________________________________________________________
     InterActiveCorp             $9,261,900               2,307,974
     _______________________________________________________________________
     General Motors Corporation  $9,260,900               1,749,433
     _______________________________________________________________________
     Scottrade, Inc.             $8,655,200               1,866,586
     _______________________________________________________________________

Estimated spending reflects CPM-based advertising only, and excludes search-based advertising, paid fee services, performance-based campaigns, sponsorships, barters, partnership advertising, advertorials, promotions, email and direct response. Impressions reported exclude house ads, which are ads that run on an advertiser’s own or related Web property and co-branding relationships.

Numbers 4, 5 and 8 above were mortgage advertisers. NexTag (my former employer), LowerMybills and LendingTree (InterActiveCorp in the list above) were not spending as much as the amounts above, perhaps 40-70% of these numbers would be about right depending on the month – but even if we assume 50% of the $35 million here between these three providers, we’re looking at about $17 million or more in a single month (January 2006). That’s pretty amazing. What has changed since then? Well, some the big spenders in display today are Groupon and LivingSocial, and a raft of me-too competitors. Unfortunately, Nielsen’s AdRelevance is a severely broken product and they don’t put out these kinds of press releases as much any more because the data is just way too unreliable.

Mortgage refinance aggregators like LendingTree, LowerMyBills (“LMB”) and NexTag used to advertise the idea of “four offers from competing lenders” which was a nuance in that the lenders were competing with each other not on how good of an offer they could give the consumer, but really based on how much they would pay the intermediary for sending them the lead. As you can imagine, the vendors able to pay more money were the ones that were making more money and often this was via lower monthly cost sub-prime mortgage deals.

In a nutshell though, here are some interesting similarities between these two sets of online advertising programs as they have existed 4-5 years ago (mortgage) and today (and I would argue these were the first advertisers to use banner/display advertising at real scale include the biggest placements on the Web like MSN/Yahoo! front pages for direct response campaigns profitably):

1. Innovation mostly in marketing, not in product. LMB became known for its very innovative attention-grabbing ads like the “dancing cowboys” and others. LendingTree’s marketing innovation of selling a lead to four different buyers (later many moved this to five) and turning that into a positive marketing spin was powerful as well, and set the stage for lots of others to replicate their success.
2. Lead aggregation of less-sophisticated, often local-based entities. Obvious similarities here: the volume in mortgage came from from the big lenders but many of the customers of mortgage lead generation companies were local or superlocal brokers or small lenders that helped drive lead prices up; in almost all cases the lenders did not have the level of sophistication to do their own online search-, display- or affiliate marketing effectively. That is the extent to an even greater degree for the kinds of merchants using Livingsocial, Groupon and others.
3. Branded and unbranded players with differing distribution strategies. Groupon seems similar to LendingTree in having a brand and focusing on large-scale portal placement deals, having deeper pockets and being able to make bigger commitments, leaving LivingSocial and clones to fight over media placement dollars and having to innovate.
4. A less-intent driven “let me see if there’s something interesting” type of offer. While all the mortgage lead aggregators spent a lot of money on expressed-intent search marketing, they found real scale on the display advertising side because they were capitalizing on curious consumers exercising a low-cost option to “check and see if they could get a deal” by sharing their information online. It is a general offer almost anyone can respond to- with a low commitment level. Sharing your email address to get daily emails sent to you seems harmless enough.
5. Focus on short-term economics. The short-term economics of the market for the lenders were great – and because of the moral hazard and disconnect because they were not exposed to the downstream effects of less-qualified borrowers refinancing mortgages (the mortgages were packaged and sold off to investors) they didn’t care that these were unprofitable sales. The chickens eventually did come home to roost, though, and many of these mortgage lenders got put out of business. Similarly, many merchants in the recession of 2008-2011 have been enamored of the upfront checks they’re getting from the likes of Groupon et al, without having the luxury of thinking how these consumers’ future (un)profitability might negatively impact their businesses. Part of the reason for that is the difficulty in assessing the incrementality of new customers, and the impact of these deals on the existing business and customers, which is the next point.
6. Difficulty of analyzing the true customer servicing costs. This issue applies to both the very complex mortgage products, which typically came with all kinds of hard-to-value embedded derivatives for the end user and then by extension for the sellers and servicers who had to deal with thousands of such complex pieces, and also the deal-driven customers who are filling merchants at 50-90% off and in many cases generating cash but losses for the merchants. It is quite challenging to value unprofitable traffic – and participating merchants have expressed mixed feelings about whether they would do another deal (55% said they would not in a February MerchantCircle survey).

The mortgage refinance business is very different today, as we know, driven largely by a lot of macro factors. I don’t believe the local deal/merchant game will see the same degree of fall-out, because it’s more diverse and there is more depth and variety compared to the banks and brokers, but certainly there will be fall-out and consumer burn-out. The valuation and prospects of companies like Groupon are almost certainly overhyped, as these businesses are more about being marketing engines today than having truly innovative products… but they are still creating some meaningful new consumer value — which I believe is a lot different (for the most part) compared with the lead aggregators who were mostly just masterful at marketing.

I used Square this weekend for a small moving sale. Square is (in my case) an iPhone app with a little credit card reader you plug into the earphone jack of the phone that you can then use to swipe credit cards. There were a couple of categories of potential transactors as you might imagine:

• People I knew, who trusted me (neighbors)
• People I’d never met, who were tech savvy
• People I’d never met, who were not as tech savvy

So, the neighbors also were fairly tech savvy and it didn’t seem a stretch that something like this might be possible. They may have seen such an application e.g. at the Apple Store where wireless PDA-type credit card readers are commonplace. They were also quite happy to give it a try and have me email them a receipt. The other types of people were more interesting.

The responses were fairly predictable – one person asked how does this thing work? Though really, most people seemed to think the technology made sense and it was possible; credit card swipers in stores are understood by most to be a telecom-like device. One older gentleman asked me if I was going to store his credit card number – a good question, of course I said I never see the number it gets sent straight to the processor, and if anything bad happens he can call the credit card company of course. (Not something the merchant really wants to be talking to the buyer about though at the best of times) This same person wasn’t sure if they should sign their name or something else, but I said just use your finger to sign your name and that was okay. The email receipt worked well, though another person asked if I was going to send them some email later — I said no. Etiquette about who enters the email address remains unresolved though mostly it’s me except in just one case where they typed it in.

Overall, a good experience for me and the buyers – some issues that will clearly come up from these initial observations: as is usual with payments, there will be issues around trust of the payment mechanism as distinct from trusting the merchant (and especially if that is an unknown). Credit card safeguards already have a lot of mindshare so that helps – but as Square extends to less tech/finance-savvy customers it’s likely they will have to get their name out there to be seen as a trusted payment brand as well.

Good luck to Jack Dorsey, Keith Rabois and the rest of the Square team with that – it’s a very cool concept and as usual the payments space could use some more disruption.

I just received a letter from a Financial Advisor at Merrill Lynch Wealth Management (part of Bank of America Corporation). In it, it says that “Mortgage rates are at some of their lowest historic levels” and that “For over 25 years, we have been offering innovate refinancing solutions and one of the broadest product spectrums in the industry. We have [my emphasis added] distinct options such as interest-only payments and 100% financing, as well as great rates on traditional fixed-rate mortgages.”

Yes, please promote the kinds of teaser programs that caused the huge subprime mortgage mess which in turn pretty much destroyed your company and lost you (and the American taxpayer unfortunately) over $50 billion in 2008. Cognitive dissonance is alive and well, and living in financial America.

“Smart solutions that make the most of your total financial situation – that’s the Merrill Lynch Advantage.”