Industry experts: Marcus Tzaferis

Transcript

Video/audio transcript

Meghan Warby

Welcome to Digital Disruptors, I’m Meghan from Say Yeah and this episode of industry experts features Marcus Tzaferis, the CEO of Cannect, which is a FinTech organization based in Toronto. Today’s he’s in conversation with Say Yeah CEO Lee Dale.

Marcus knows real estate. He’s been featured on national media as an expert and a leader in mortgage in home financing. Today, we’ll touch on that. But the really interesting part of this discussion involves how technology can strongly impact and even transform a legacy industry. A bit of context, only two years ago back in 2017, Marcus launched Cannect as an online offshoot of his traditional mortgage agency, more can direct. Since then, he’s essentially become an advocate for Canadian homebuyers and their access to affordable loans through a uniquely automated and unbiased online service. You’ll hear Marcus describe his journey and learn how he leveraged decades of experience in the mortgage and finance industries will follow his path from VP sales and marketing at more can growing a portfolio to over $2 billion becoming CEO, and now finding a path to disruption through technology. Let’s jump right into the conversation with Marcus. Lee, Take it away.

Lee Dale

So, thanks very much for joining us today. We’re really pleased to be here with Marcus from MorCan and Cannect. And we’re going to get into the kind of technology that’s driving and more can and and kind of shaping next phase in your business with Cannect. But let’s get started just talking a little bit about your background kind of what brought you to the place you are now with your career and your motivation and what you’re passionate about.

Marcus Tzaferis

Sure, yeah. I started in mortgages about 15 years ago in November. It’ll be 15 years that I’ve been doing this. And I come from a very short background in investment banking. And I got into mortgages because I liked dealing with people. I liked the finance aspect, but I really liked the real estate and, and helping the consumer. And there’s a huge opportunity in the industry because, you know, our biggest competitors are the banks and clients are definitely underserved. In the 15 years that I’ve been doing it, there’s been, you know, kind of constant change from, you know, regulatory changes to underwriting changes to you know, real estate price changes and different types of borrowers entering the market. And so it’s, it’s, it’s, it’s a constantly changing landscape, which makes it interesting.

Lee Dale

Yeah, I think one of the things that that we talked about off the top there was the idea of the technology side of things as well. And I think 15 years is a good amount of time. That’s longer than say the iPhone has been out. Right. So kind of pre everybody being connected on smartphones and mobile devices other than just cellular conversations. That, I would imagine has had a significant impact as well on on the business.

Marcus Tzaferis

Yeah, it’s, it’s really changed our borrowers and borrowers in general and how they, how they digest information, how they ask for information, how you communicate with them. And, you know, I think that like in any industry, if if you can use the disruptions to your advantage, especially when, you know, as mortgage brokers were relatively small in comparison to these massive banks that we compete with. So anytime this disruption starts entering into any industry and you can use the technology and faster and better than your larger competitor

It’s a huge advantage. You have brick and mortar, your customers you’re dealing with with physical space, you’re dealing with property. But the ecosystem around that is is all about how can we quickly learn and provide service and have data and understand how we can use technology to better connect with customers and to have better insight into the types of funding that you do. And I don’t know if it fully levels the playing field with the Bohemians. I think maybe it levels the playing field in the eyes of some small percentage of our target market. But it’s more than enough for us. And I think that you know that the two major trend trends we saw happening in our industry where, number one if we can communicate better and use technology better, to identify what the needs of our borrowers are, and communicate our value proposition better to them. Better than our competitors, we knew that we would be winning and if we could plug in our own funding mechanism into our brokerage and our value proposition to our consumer, we knew that we’d be ahead of the pack.

So we raised a $50 million fund at, you know, kitchen tables, where we didn’t use a broker, we didn’t use a bank to raise that money for us. And I think without technology, doing some of the heavy lifting. I don’t know if that’s possible, you know. So how did that come to be that idea of the heavy lifting? What did the technology provide you that you may be worried about access to? So we have a what’s called a mortgage investment corporation at named Cannect. And and what we saw in the landscape of other mortgage investment funds, when we started, there weren’t very many of them was that there wasn’t a lot of transparency. So typically, a mortgage investment corporation make is what they’re called. There’s a special preferential tax treatment for these corps

And what we saw was it was, you know, these kind of base Street firms that would hire an investment bank, or and a broker of some kind, they pay them between three and 7% to raise a bunch of money for them, a bundle all that money together, they would put it into their fund, and then they would solicit mortgage brokers to lend the money out without really an eye towards the, you know, desire of their investor, just other than to provide them with the yield that the investors asking for, or to really pay close attention to the deals that they were originating and funding. So what we did was we created a robust portal for our prospective investors that in real time shows all of the transactions that we’re doing. So you know, if we’re lending on 10 deals in a week, and we’re using the money of our investors to lend on we Immediately upload those deals into our portal that all of our investors can do.

And in addition to just the characteristics of the deal, so where the property is located, who the borrower is, they get a more holistic view of why we lent that person like, what what, what documentation did we get? What made us want to invest in the person or the property that we lent money to. And by opening up that level of transparency, we found that we didn’t need to advertise to people. We couldn’t advertise to people because of our risk certain restrictions under the OSC and, and we didn’t need to because our investors who were already known to us and we were known to them, were simply introducing it to their friends and family. So it grew rather organically because of the transparency. What we’re doing with Cannect.ca together, and is we’re applying that level of transparency To the borrower. So, you know, the landscape in Canada, I mean, I’d say the landscape in the world for borrowing money has always had certain reputation, especially when you get into more high risk lending. And this kind of macro micro situation that we’re experiencing in Toronto and Canada as a whole, in that, you know, we’ve got our really, you know, highly valued real estate market. And we’ve got underwriting rules and regulations being introduced, that are separating borrowers into bankable borrowers and non bankable borrowers. And nothing can ever be that cut and dry in a market. And if you find yourself in the non bankable category, and too many people, it’ll be a surprise. You know, they qualified for their mortgage five years ago, and they don’t now.

So what we’re trying to do is we’re trying to say Listen, this non bankable category has no transparency It is, you know, a couple ads and late night TV from jewelers or whomever, or ads in the newspaper or like this, you know, historically these have been where people go for this, this amount of kind of non bankable, high risk money. And they’ll make a phone call and they’ll hopefully soon realize that the person on the other end of the phone is gaming them, right, like, you know, how quickly do you need the money? How much money do you really need? And not only is it not fair to the borrower, in an in an environment where more borrowers are falling into this non bankable segment, it’s important to introduce a product with transparency to at least collect the high value non bankable clients.

Lee Dale

Do you have a sense that there are other people even in the industry that are focused on their level of transparency in lending?

Marcus Tzaferis

I hope so. I think so. I mean, I think like the market is growing. And I think that the more players Identify that there’s a real opportunity in not only introducing transparency but introducing more fairness and a more efficient risk return offering to both their investors and their borrowers. And I think that the more people understand that that’s it’s profitable to do it. It’s not like we’re not a non for profit company. We’re a company that one of our tenants is fairness. So, and that helps us attract more customers, I believe it helps us attract more customers more effectively than our competitors. So at a certain point, you know, I’m sure that we may not make as much money on a per transaction basis, but that may manifest itself in allowing us to acquire more customers far cheaper than our competitors.

Lee Dale

You and I have talked a little bit about what’s how happening now in Canada, where we’ve got a significant percentage, almost half of mortgages are up for renewal this year. And this idea that changing regulations are leading to people moving out of this bankable bucket into the non bankable bucket. And that surprise that might be coming for some people. What’s the challenge that you see for consumers right now, given this possibly unexpected scenario that they’re going to face

Marcus Tzaferis

50% of Canadians are find themselves in a position where it is time for them to renew their mortgage. And they find that the options available to them now are seriously limited in regulations that have been introduced more recently with you know, forcing borrowers to qualify for mortgages at 2% above whatever the contract on their loan agreements are. And but more Importantly, a change that happened, you know, almost two years ago now, where the federal government abandoned portfolio insurance product that allowed what are called mano line mortgage lenders or mortgage finance companies not at to compete with the banks. So basically the banks offered these lenders, an insurance product and said, Listen, we’ll allow you to compete with the banks, you can ensure the mortgages that you’re providing people with the Canadian government’s guarantee, and as a result, they were able to offer really nice cheap rates to Canadian consumers. They use technology and customer service to get ahead and they built loan books like first nationals.

One example as a loan book of 100,000,100 billion dollars. m cap financial probably has $80 billion when portfolio insurance gets removed and portfolio insurance is for a segment of the market where most Canadians falling where they have an equity position have in their home so they own or they have at least 20% equity in their Anyone that has a relatively stable equity position in their home and is looking to refinance their home is now not only subjected to more rigorous underwriting standards and higher income requirements for the same mortgage they would have previously had, but they’re also not going to get the same interest rate that they would have got. And although interest rates are increasing, you need only look at the difference between a five year fixed rate and a government of Canada bond yield five year Government of Canada bond yield five year fixed rate mortgage should have a relationship of you know, between one and one and a half percent. We’re seeing that those spreads are now widening. So the banks have realized they don’t have competition. So they’re increasing interest rates to their customers and they’re reaping the benefit in their net interest margin. Canadians fine now they’re, they’re probably even willing to pay the inflated rates that are being offered from the banks but they can’t get them anymore. And the banks are happy with tighter under Writing rules because in their earnings calls to weary investors in Canadian banks, they’re responding to questions like, you know, are you overexposed to the Canadian Real Estate Market? And what how did your loan origination increase?

And have you reduced the cost of your underwriting like they their constant looking for these efficiencies. So by having introduced first, a program that eliminated a lot of their competition, and second, a program that forced more rigorous underwriting standards on the majority of the market, the banks are now able to respond to those earnings calls and say, our net interest margins are higher. We are not taking on new as many new loans in our portfolios. And our underwriting costs have decreased because we don’t need to replenish our portfolio with as many mortgages because not as many our department right we if you 50% of all mortgages are renewing in 2018. And 35% of those people probably don’t qualify for the same mortgage they already had. So they’re just going back to their bank and saying, Please, can I have the same loan that I had? And what’s the rate you’re going to give me because I can’t go anywhere else. So it’s it’s a triple win for the banks, right? They’re reducing the costs because they don’t have to solicit as many new mortgages to replenish their books. They’re reducing their underwriting costs, and they’re making more net interest margins for the consumer, it leaves more of them. In this non bankable position, there’s costs associated with any move you make. What we hope to do with the technology, and you know, we believe it’s resonating with the consumers that we’re speaking to, is simply show them what the options are.

Lee Dale

When we look at the technology with Cannect, there’s the online component of that which is backed by the expertise that the brokerage has. But the online component there’s an interesting facet, as we’ve talked about transparency, but we are you also talk a lot about being unbiased. And this idea that when you’re a consumer, and you get on the phone, especially with secondary lender, they’re trying to gauge your level of need your level of urgency. And there’s that there’s that gaming aspect of it. Whereas…

Marcus Tzaferis

It’s not just secondary lenders, banks do the same thing. Right? The bank has a posted rate right now and a five year fixed, that’s probably five and a half percent. And if you can negotiate and play hardball with them, and the bank identifies that you’ve got other options, you’re going to get 3%. Right? So like, that’s a two and a half percent game on a mortgage. That should be a commodity, right? If it’s,

Lee Dale

Well, probably several hundred thousand dollars, which is now a massive amount of right. It’s different, right? Yeah. segmentation is another thing that’s enabled by technology. You’ve been working on a CRM as well behind the scenes so that you can start to obviously build relationship, relationships through touch points and communication and so on, but I think part That as well as just starting to build a profile of that customer, that then allows you to have a more direct conversation with them about what will best meet their needs from a financing. Right. So how is it that that the CRM component, the kind of behind the scenes component that enables those conversations happen? How did that come into play as to be something that you rolled yourself rather than look at an off off the shelf or

Marcus Tzaferis

The origination of Cannect.ca is the CRM, it was never our idea to create a fully automated loan tool for the Canadian consumer. It was our idea to simplify the mortgage process for our employees, the Genesis behind the CRM was, I want to continue to hire whoever I want to hire, regardless of what their knowledge in the mortgage space is. So why don’t I try to create a really great technology a really great tool, not only for coming Education with the borrower, you know before and after a mortgage is closed, but also a tool that will provide as much information as possible to the mortgage agent when they’re speaking to the borrower.

After a couple years of working without Excel spreadsheets, we started working on creating a tool to communicate with our borrowers and to to better arm our mortgage agents when they’re speaking to people. And this grew to a point where, you know, now it manages our entire business, you know, and it’s cost way more money than I thought it was going to cost but it does far more than we ever anticipated that it could do. And, and we realized maybe it was a time to start introducing it to other mortgage brokers. The problem we found was that the way that the mortgage brokerage landscape is set up in Canada, it is dominated by a few very large very powerful Super brokers they’re called the one key thing, like I said that, you know, has to connect everyone that works with any of the companies is that their alignment is to be motivated with the motivations of the borrower. So that that once you have that key tenant, everything else falls in line.

Lee Dale

And therefore the more than you can learn and understand the world’s needs, and start to, to find products and services that align with that, right, this is this is the opportunity, right?

Marcus Tzaferis

The technology once we kind of hit that roadblock of Oh, now I’ve got to convince a super broker to let me sell it to a sub agent. And then there’s, you know, discussions where super brokers want to have equity position in the CRM, or they want a piece of what their agents are paying or a discount, or we figured the technology works, why not work to just deploy it directly to the borrower. And the most logical first place to start was we’ve got our own bag of money that we’ve you know, got from our investors. We know the underwriting criteria that needs to be met in order to take money out of this bag and give it to these borrowers. Let’s find the best borrowers we can to lend money to let’s do it online. And we don’t have to ask anybody for any permission.

Lee Dale

Yeah, this is the novelty of, again, technology allowing this right disruption is this this cemented industry that isn’t going to budge until consumers demand something change, or the close partners or brokers and in a sense, demand something to change. And in this case, by enabling the consumers you’re going to start to be able to enable the players within the industry who aren’t mobile or can’t be mobile because they don’t have access to their own data even have their own customers to look at this, these other opportunities through technology

Marcus Tzaferis

Yeah, like I was never really looking to change an industry I’m I’m really just looking at bettering the alignment of motivation. Of the people that are involved in this small space. So you know, if you can align the motivation of the borrower, with the motivation of the broker and the motivation of the lender, you’ve got a perfect, elegant little solution for borrowing money and for lending money, the investor wins because they’re not going to have as many default, the borrower wins because they’re going to get a great rate. And the broker wins because they’re going to develop stronger relationships with their investors and their borrowers.

Lee Dale

Do you have a sense of what the next three to five years might look like?

Marcus Tzaferis
So yeah, I think with where real estate is growing, and with the regulations that we’re seeing, we’re going to continue to see more non bankable borrowers. What we would look to do is probably expand to other cities, and not necessarily even just in Canada, to offer a similar fully automated home equity loan product in the space that we’re operating in as effective. as we can to the consumer Cannect will never be a company that power of sales people’s properties. Cannect is a company that helps people improve their finances and fit back into that bank segment. So, you know, I think that any company that can, like I like the scene, right, like continue to align yourself with the motivation of your borrower, a borrower wants to pay back the money that they have borrowed. a borrower does not want to feel like they’re getting ripped off. And when you enter in a market like this, where it’s really what a lot of people are feeling, and you offer something that’s fair and honest and aligned with their motivations, you can build a ton of goodwill. And you can people that work for Cannect are happy, the borrowers that borrow from Cannect are happy, and the investors are happy.

Lee Dale

Thank you very much for sharing that.

Marcus Tzaferis

Yeah. Thanks for having me. Thanks for all the great work you guys are doing.

Meghan Warby

We hope you enjoyed our digital disruption Industry experts episode featuring Marcus Tzaferis. Be sure to check out our digital insights section at sayyeah.com for event recaps, videos and more transformation and disruption stories.