In part 1 of this series, titled "FI Electronification – A Slow, Steady Race to Find Tech Models that Fit (Part 1 of 2)", we discussed the slow path of technology to pervade Fixed Income markets. In this post, we will discuss two other industries that show voice similarities to Fixed Income and explore how technology has effected change-- or not.
(Before we get into the comparison, we want to put a large, bolded blinking caveat: We are not suggesting that Fixed Income will look like either of these industries. Fixed Income is incredibly complex and very different from these in many ways. Instead, our examples are massive markets that have historically been dominated by a high-touch voice model, which in many respects, have *some* similarities to FI.)
For frame of reference, we view the proliferation of technology based on the following TGRDS criteria:
Technology Gap: How large will the improvement be for technology vs. without technology?
Regulation: Is regulation forcing a change? If so, is it a gradual or mandated change?
Data: How easy is it to access data?
Standardization: Are the underlying assets uniform and standardized?
So, what industries can Fixed Income learn from?
The US Real Estate Market and the Travel Industry. Before you groan and click away, please hear us out: Technology has treated these two historically high-touch, voice-dominated industries very differently. Travel agents are largely a thing of the past, while Realtors have maintained their place and even proliferated. But why?
Prior to technology, it was hard to book a successful trip to an exotic locale without getting a recommendation from a friend or a travel agent. Travel agents operated on a commission basis for recommending and booking trips. Historically, the perceived value of a travel agent was to provide validation of a hotel or locale, along with potential better pricing, though the risk was that they were pushing a trip for some larger than normal commission. Their interests were not necessarily in the interests of their customers. Because they 'knew' much about whether a hotel did or did not look like the brochure, they were able to charge a commission. In effect, they were information brokerages for providing intelligence.
There was one issue though-- information access was not good for travelers and travel agents had an asymmetric information advantage. According to a famous 1970 paper called The Market for Lemons, the Nobel Prize-winning American economist George Akerlof pointed out how this kind of asymmetric information – where one party to a potential transaction is better informed than the other party – can lead markets to fall apart completely.
However with technology, the information asymmetry evened out. In fact, the information advantage even shifted toward the consumer. Now, consumers can check reviews, read blogs and benefit from travel companies using big data analytics to direct the right content at the right time - straight to their vacation-finding fingertips . Airlines and hotel companies have cut out the intermediary travel agent, and are able to offer cheaper travel. Travel agents seemingly have been replaced with more efficient marketplaces where you can access a ton of options, reviews and prices to book any magnitude of trips, cars and hotels with incredible ease.
What Made the Travel Industry so Accepting of New Technology?
Technology was able to disrupt this industry, because the technology gap was large, data access was improved to decrease information asymmetry and the entire asset class was uniform (i.e., a plane ride is pretty much a plane ride, and a rental car is pretty much a rental car). Posted reviews, more open pricing, flexibility and ease of use aided technology to pervade this market. If we use the same criteria (TGRDS) to evaluate the market as prior, this market was ripe for change.
On the other hand, realtors have maintained their prominence. The real estate market is massive. Margins are large, with +/- 5.5% average broker’s commissions being the norm. Despite many attempts from technology, realtors have retained an important place--and have maintained high commission rates. Seems odd.
In the early 2000's, several internet companies, including Foxton's, popped up offering ultra-low commissions, around 3%. All failed. Perhaps it was the Internet bubble, however immediately thereafter, there has been a new crop of companies trying to disrupt the space again. These include Zillow, Redfin and others.
How have they fared? Redfin represents about 3% of buyers and sellers in its hometown and a negligible market share elsewhere. Perhaps the transparency in the market and increase in information has emboldened homeowners to transact directly with buyers? It hasn't. According to the National Association of REALTORS® 2015 Profile of Home Buyers and Sellers:
"...only 8 percent of home sales last year (2015) were those in which the seller went through the process without an agent - known as for-sale-by-owner sales or FSBOs - the fewest percentage since NAR began tracking these sales in 1981. In fact, FSBO sales have dropped 5 percent in the last 10 years, down from 13 percent in 2005."
Listen to what Redfin's CEO Glenn Kelman has told of the issues:
“The problem with our original model was that people...wanted advice. At some point we realized that we had to become a service company,” says Kelman. “We thought we could make the business more virtual than it was.”
Further, he admits that “The market needs Redfin [an information provider] and it needs Coldwell Banker [a traditional voice brokerage] — neither are going away,” said Kelman.
Therein lies our problem: Technology has not driven real estate market sellers to cut out the middle-man as they did in the Travel Industry. And despite online listings, buyers have not opted to transact without help from voice.
In Real Estate, people want to pay for advice-- and perhaps in this illiquid market, one size does not fit all. While there were clear improvements to the market to drive electronification, i.e. robust technology value add, strong regulatory backbone and good data access, there was one key missing part: Asset class composition. Real estate is THE benchmark that is used for illiustrating illiquid, esoteric assets. By comparison, Fixed Income is much less liquid. However in Real Estate, giving advice to get the best price possible by pushing together the buyer and seller of illiquid, esoteric assets is a value add.
So if Redfin, Trulia and Zillow aren't making a dent in transacting these illiquid, esoteric assets, then what are they doing?
They are centralizing information and providing intelligence so that buyers, sellers and all market participants are incredibly well informed. The role of the real estate agent now is less about disseminating information. Technology in real estate has been an effective way of doing that. Instead, RE Agents have maintained their place as a local market expert, service provider, negotiator & price setter.
Despite all this, it is very interesting to note a newcomer to the tech scene in Real Estate: Haus. It was founded by Garrett Camp, co-founder of Uber. While the real estate industry is not known for its' transparency, Haus seeks to decrease the opacity in the market by showing all offers on a house publicly in real-time. They think that displaying pricing in real-time will have a positive effect on market opacity and liquidity. Sound familiar? WIll be interesting to see how this turns out.
Why has technology treated Real Estate and Travel differently? While both had asymmetric information advantages that were solved by technology, Asset Class composition is very different. Houses are esoteric assets, while travel is marked by uniformity.
So, is voice dead in Fixed Income? No. Real Estate tells us that. We tend to think that Fixed Income shares some similarities regarding both these industries, however. Depending on the portion of the market, technology may have a very different role for Fixed Income. We are in the midst of finding out the precise role of technology in Fixed Income.
We will discuss this more in depth in future posts.