First Direct demonstrates why it’s a Momentum-Powered Firm
At 8:00 PM on April 1 2008 First Direct, the UK internet and telephone bank featured in The Momentum Effect, gave just five hours notice that it was pulling out of the mortgage market. This wasn’t a bizarre April Fools’ joke – the bank announced that it was “temporarily withdrawing” from offering mortgages to new customers. Given the credit crunch affecting the financial services industry in the wake of the US sub-prime mortgage collapse and recent failure of Northern Rock (one of the UK’s major mortgage providers) this news could have sparked panic. It didn’t. In fact, it neatly demonstrates why First Direct is a momentum powered firm.
Because First Direct funds its mortgages out of deposits from customers rather than by raising capital on the wholesale markets it wasn’t caught up in the credit crunch to the same extent that other banks were. As a result its rates were among the best on the market at the time which, on top of the fact that many other providers are tightening up their lending criteria, meant that it was getting five times as many mortgage applications as normal.
A momentum-deficient firm would try and cash in on this bonanza and attempt to secure as much of the market as possible. Not First Direct.
One of the key elements of First Direct’s power offer is the incredible service it offers customers. The deluge of applications was slowing down the time First Direct was taking to approve mortgages and so, in keeping with their over-riding customer service culture they pulled the product rather than deliver a sub-standard service.
But this story reveals more than just a simple instance of a Momentum-Powered firm executing its power offer effectively. Consider these aspects of the story in light of the TME process.
- First Direct was cash rich at a time when most mortgage lenders were struggling to find funds because of its power-offer. It attracted high income customers who maintained high balances and high savings and investment levels.
- These deposits not only provided its funding but saved it from the expense of employing large numbers of highly paid wholesale bankers to manage its borrowings in the way many other banks do. It also reduced its risk to market fluctuations such as the credit crunch. In other words – it was taking “costs out” and enjoying the “intangible value” of the “compelling equity” it had secured.
- Finally, by continuing to provide mortgages for its existing customers it was maintaining its power offer to those people who clearly represented compelling equity while avoiding the less compelling equity offered by many of those rejected new customers who in some case, after all, had been unable to secure mortgages elsewhere.
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