Having spent the last 12 months buying a home, a condo to be exact, I want to document and share my experiences so that others may learn from it.
Basics: Condo in Southern California
Previously sold in 2006 for ~$450K; Short-sale.
Buying a home can be a long and complex process. As a perfectionist, I wanted to understand everything. But even with a good head on my shoulder, I quickly found there is too much to read and understand. If you are juggling full-time work plus buying a house, likely, you won't have time to read and understand everything.
Tip 1: Don't try to understand and micro-manage everything. There is simply too much information. Instead, prioritize and get the most important pieces of information correct.
I started the home buying process by doing some general research (e.g., reading a whole lot of "first-time home buyers" type of info. Looking back, I it was an disorganized process and I probably read and re-read a bunch of information that I didn't know exactly how to use.
Thus, to help you, first I'll summarize the key people you'll have to deal with throughout the process.
1. Buyer: YOU
2. Buyer's Agent: The person showing you the homes, "helping" you through the process.
3. Mortgage Broker / Direct Lender: The person(s) giving you the loan to buy the property, unless you are paying all in cash.
4. Escrow Agent: The person helping with the closing process, making sure what the Buyer and Seller are doing is compliant with various instructions and regulations.
5. Title Agent: The person giving you title insurance for the property.
6. Homeowner Insurance Agent: The person giving you hazard insurance (fire, flood, earthquake).
7. Homeowner Association / Homeowner's Association Mgmt Company: If you are purchasing a property in a planned community, the community association.
8. Seller's Agent: The person helping the Seller sell the home.
9. Seller: The current person trying to sell the home.
10. Seller's Lender: The lender(s) that own the loan on the property you want to buy, if there is a loan.
11. General Property Inspector / Pest Inspector / Appraiser / Others: Other folks you'll have to talk to likely at some point in time during he process. More on some of these folks later.
As you can see, there are a lot of people involved in the process. I definitely didn't recognize this until I reflected back on the process a few days before closing. Most likely, when you start shopping for a home with your Buyer's Agent, he or she won't tell you all of the above. He or she will just start asking you about what house you want to buy and show you around. Not the route I'd go, but let me tell you why I think most Buyer's Agents don't tell you the above:
1) tell you all this information takes a lot of time and you might be only a potential client. If I spend all the time educating the Buyer but the Buyer uses another Buyer's Agent, I'd have wasted a lot of time for little gain
2) if most people knew how complex the home buying process is going to be, they'd walk out the door
Tip 2: Learn what role each of the person above will do for you. Research it online. Ask your Buyer Agent. (Some of the folks will be recommended by your Buyer's Agent.) In any case, your Buyer's Agent is there to "help" educate you, but recognize that he or she won't help with everything.
For me, I began by interviewing a bunch of Buyer's Agent (as recommended by several websites) before picking my agent. Good evidence in general, but pretty useless in hindsight. Why? Because even after spending time doing a bunch of interviews, in hindsight, my Buyer's Agent didn't live up to my expectations (perhaps my expectations are high).
Tip 3: Interview a few Buyer's Agent and pay them some money to ask an experienced agent to go through the ENTIRE home buying process with you. For first-time home buyers, the more knowledgeable education you have ahead of time, the better the actual process. While most agents are going to say "I'll be there to guide you when it's time", usually, guidance at that point in time is too little too late. Recognize that once an offer to buy an house is accepted, there is only typically 17 days to get everything done and you likely have a job to balance at the same time.
My first agent: I picked because he had 1) great credentials, 2) good recommendations from past customers that I personally called and 3) lots of experience (been an agent for 10+ yrs). But after I started working with him, he started handing me to his daughter (also an agent) to lead. I didn't mind that at the beginning, but wasn't the excited about the idea.
Perhaps I didn't have the right working style and had asked more questions than typically, but ultimately our relationship didn't work.
My second agent: I picked someone again with experience and specific knowledge of the condo area I was looking to purchase. She's been extremely helpful to getting everything together and pushing me to make decisions. Again, an extremely nice person, but overall, I didn't feel I got everything I had "expected" from my agent.
I think its partly because I couldn't really trust my agent to act in my best interest knowing the incentive structure for an agent (more on this later) and partly because I wasn't always the most communicative with her about all my intentions (again, back to the incentive structure).
Tip 4: Having a Buyer's Agent who is willing to educate you and put you first is the most important. If you are smart and hardworking, you can probably pickup all the other pieces of information. But an experienced agent who can tell you about the pitfalls is key. The fundamental problem for first-time home buyers is that there will be questions you do not know you need to ask until too late. That's where a good Buyer's Agent comes into play.
But recognize most good/great agents probably don't like first-time home buyers. Why? Several reason.
1. First-time home buyers are more needy and require more hand holding, as you can see from this post.
2. First-time home buyers typically buy smaller/cheaper homes => resulting in smaller commissions for the Buyer's Agent.
3. First-time home buyers may talk to multiple agents before either picking an agent or not going through with the process => thus if the first Buyer's Agent spends a lot of time educating the first-time home buyer, he/she would have wasted time with no gain.
Note: Incentive structure for Buyer's Agent. Buyer's Agents get paid by the Seller. It seems odd to me that they get paid by the Seller, because they technical have a duty to put the Buyer's interest first. Inherently, the current incentive model creates a conflict of interest in my mind, but recognize there is probably little way out. While you might structure a different kind of incentive structure (e.g., Buyer pays Buyer's Agent a fixed fee), most Seller's property listing specifically states the commission percentage for the Buyer Agent when the property is sold. Thus, even if you pay your Buyer's Agent and the Buyer's Agent doesn't pick up the typical commission, the Seller's Agent just gets to keep more.
After touring a couple of different properties with my 2nd Buyer's Agent, I quickly knew 1) what I liked and didn't like and 2) the type of property I could afford given my budget. Hopefully, you've already created a budget way before even starting the entire house hunting process. With a set of fixed criterias (e.g., location, purchase price, must haves, nice to have, etc.), searching for the "right" property for you should be simplier. When you finally find that property you want to buy, then comes the offer stage. But one quick detour before I get into the details.
In the Southern California market as of 2011, you will find a large percentage of the listed properties to be either short-sales versus standard sales/REOs. (I am not covering foreclosure auctions, because that's an entirely different ball game.) Let's understand the difference between a short-sale and a standard sale/REO.
Short-Sale: Seller typically still lives in the proerty and holds title (i.e., "owns" the property). However, Seller is trying to sell the property before the bank forecloses on the property because the Seller can't/doesn't want to pay the mortgage. Furthermore, the Seller is trying to sell the property for less than that is owed on the mortgage to the lender and the lender must forgive/write-off the difference (i.e., accept the short-sale.
Standard sale/REO: Standard sales, as the name suggests, are normal transactions. REO (Real Estate Owned) are sales of the property directly by the lender. Typically, the lender has already foreclosed on the proerty and held a foreclosure auction, but no buyers were found. Thus, the lender took control of the property.
My experience is with short-sale properties given the market condition. Let me illustrate: The condo I purchased previously sold in 2006 for a little north of $450K to a Mr. K. Mr. K took out two loans, a 1st and 2nd (junior loan to the 1st) from New Century Financial Corp (look them up Wiki...interesting history) to buy the property, basically paying 0% down. At some point, Mr. K couldn't pay the mortgage anymore. Mr. K was therefore in default and the lender started the foreclosure process on the property (i.e., to take the property from Mr. K.). Instead of going through the entire foreclosure process, Mr. K wanted to try to sell the property before the lender foreclosed (short-sale is better than foreclosure from a credit reporting POV). Mr. K put the condo on the market for around $290K. This is a short-sale because to get the sale completed, the lender must forgive/write-off $170K because as the Buyer, I would only pay $290K for the property.
Tip 5: Understand if you are buying a standard sale/REO or short-sale. Next, understand if it is an approved short-sale or not.
Because Mr. K wanted do a short-sale, he has to get the lender to approve this $170K write-off. An approved short-sale means the Seller has already gotten the lender to commit to XX dollar of forgiveness. So, if the Seller is listing an approved short-sale property at $290K, the lender would have already approved at least a $170K loan writeoff if the original loan was $450K.
Knowning whether the short-sale is approved is important for 2 reasons.
1) All Buyer's Agents prefer approved short-sales because they are faster to close whereby the Buyer's Agent can collect his/her commission faster
2) Getting approval for a short-sale can be a time consuming process (weeks if not months). This is also another moment to reiterate why you want an experienced Buyer's Agent to guide you through the process.
Note: Put yourself in the shoes of the Buyer's Agent. Because you get a commission from a sale, you want to generally guide people to standard sales, REOs, or approved short-sales before non-approved short-sales because the time to closing the home is faster. Who doesn't want to earn money faster? You got kids to feed and stuff to buy too.
As the Buyer, you have little influence on the short-sale approval process. In this stage, the Seller, Seller's Agent, and Lender must work out the details. A good Seller's Agent can be very helpful to guiding the Seller to get all the paper work to the Lender so the Lender can approve/reject the short-sale. But again, as the Buyer, its all comes down to luck. Now, if the Seller's Agent doesn't know what to do, the Buyer's Agent can help the Seller's Agent through the short-sale approval process. (Another reason why a good Buyer's Agent is important).
Once you know whether the property is a a short-sale or standard sale/REO and if its an approve short or not, now comes the offer. If it is not an approved short sale, recognize that you will be helping start the short-sale approval process (2 - 6 months) to get the lender to approve/negotiate/reject the short-sale. During that time, recognize that the Seller is in default on the mortgage (i.e., not paying the mortgage), thus the property can be foreclosed by the lender. Also recognize that even if you made an offer and the Seller has started the short-sale approval process, the property can still be foreclosed by the lender and go to foreclosure auction whereby it is either bought or not. Recognize that if it is not bought (i.e, becomes REO), the lender may not relist the property immediately.
I don't know exactly why the short-sale approval process takes a very long time, but I suspect its because
1) Seller has to get all the paper work to lender and Seller is slow getting such paperwork
2) Given the current market, lenders probably have tons of short-sale approvals to review. Recognize that each time there is an approval, the lender is taking a guaranteed loss and people don't like losses.
3. Multiple different lenders maybe involved the there are multiple loans for the property. These lenders have to work together, which isn't easy.
Tip 6: Buying short-sale properties requires patience and options. If you are set on buying a particular short-sale property, recognize that you may not get it, because 1) lender(s) may not agree, 2) Seller's Agent can't get the Seller to complete the short-sale process, 3) Seller may not qualify for short-sale, 4) lender may decide foreclosure is better because foreclosure auction can fetch a better price. Therefore, have backup properties in mind and make offers to more than 1 non-approved short-sale property if you are comfortable living in another property.
Now, after that long detour, we finally get to the Offer or what will be call the Residential Purchase Agreement (RPA). This is basically a long document where you make an offer to the Seller for the property and it lists out a whole set of information.
Tip 7: Find a blank RPA and read it. The California Realtors Association should have a copy somewhere online.
The RPA has all kinds of information, but there are a couple that are key:
1. Offer price and earnest money deposit
2. Loan rate and type
3. Inspection period before you can cancel offer limited financial impact
Most of the other information on the RPA are disclosures and notices of one type or another. I'll talk about one key disclosure in detail that applies specificallyl to short-sales: General Home Inspection.
Because a short-sale requires lender approval since the lender has to write-off some part of the original loan, lenders are very fixed on pricing. Once you make an offer for the purchase price of the property and it is approved, there is generally no room for further negotiations. Don't imagine there are necessarily several rounds of back and forth. Nor do you really want several rounds of back and forth. While it will only take you may a few minutes to come up with an offer price, your offer goes into some pile at the lender for some person to review and get back to you. Likely, you aren't the only offer because there are a lot of short-sales at the moment. Thus, you might wait weeks before the lender gives you an yes or no of an offer or re-offer.
So, let's say you offer $200K for a property and the offer is accepted by the Seller. (By the way, while the Seller will probably accept just about anything offer, its the lender who has to agree to the terms). So, now the offer goes to the lender for approval. In that time, you hire an home inspector to look over the place and the inspector discovers that most of the appliances are bad and the water heater has to be replace at a total cost of $2K. At that point, if your original offer is accepted by the lender, it is very hard to even negotiate a $2K discount. Basically, you'd have to withdrawal your original offer and make a new one for $198K, starting the lender review/approval process of the short-sale all over again.
Tip 8: Find a good home inspector (certified, with years of experience) and hire him/her to inspect the home prior to making an offer.
A home inspection in Southern California runs anywhere between $250 - $350. It isn't cheap, but you'll need to have someone inspect the place anyways. Don't be penny wise pound foolilsh here. Unless you are a general contractor or inspect, you'll need someone.
Note: Most inspectors will give you a report and in it, it'll list some mundane problems and some series problems that require repairs. A good inspector is someone who is willing to speak honestly to you and tell you which are series and which aren't. Many inspectors will simply tell you that he/she thinks there is a problem, but you need someone more specalized to look into the issue. For the general public, that's not very helpful information, but due to lawsuits, inspectors have gotten more and more "conversative" about the advice they'd give. Thus, find an inspector who is willing to do everything by the books, but also speak to you freely and offer advice on the property.
After you've inspected the property and you still likely it, you are ready to make the offer...but before you start, let's take another detour to explore "how to get a loan."
If you are like me, you probably require a loan to buy a house because you don't have tons of cash lying around. Therefore, you will need to speak to a mortgage broker/direct lender to get a loan. Given there is too much information on mortgages, I'm only going to cover the most basic (for more, please google Mortgage Professor).
Mortgage Documentation:
You are going to have to get quite a bit of documentation ready to get a mortgage. Gone are the days of no-doc loans. I had to have at least the following (you may require more if you have credit issues, income issues, or anything else).
-Valid ID (i.e., driver licenses)
-w2 statement
-last two month paystubs
-last month bank statement (front and back)
-last three years federal tax return
With the most basic information, the lender is going to run a credit report on you to get your credit score. This score while influence the interest rate for your loan. Now, I went with the most simple of loans (conventional, 30yr fixed, no points, 20% down, no PMI). Again, because picking a loan type (e.g., fix, ARM, w/points, no points, downpayment %) is an entire topic on its own, I'd suggest you go to the Mortgage Professor website and read up all about it.
Tip 9: If you are doing all the homework regarding the type of loan you want, a direct lender is the best route to do. Generally, they are the cheapest route because a mortgage broker typically buys from a direct lender, who does the underwriting for the loan. However, recognize that as a first-time buyer, you won't get a lot of hand holding from direct lenders. This isn't to say all mortgage brokers are better, but generally, at least brokers can talk to you and educate you about the process.
Once you pick the lender, write down all his information (company, address, contact person, phone). You'll need to provide this information later to Escrow. Now, onto the formal mortgage application process and opening of escrow, assuming your offer has been accepted by the lender.
Note: At this point, I'd like to talk a little bit about paperwork. All this process creates a lot of paperwork. The offer requires a RPA. If there is an counter or amendment to the RPA, there's paperwork. The Buyer's Agent will give you paper notices/disclosures about the Short-Sale process. At this point, most of the paper work, except the RPA, is just that, a notice. It seems all important, but a lot of is really "junk/educational" paper in my opinion.
Once the lender accepts the offer, you as the Buyer have a set number of days to open escrow and being the formal process of inspecting and completing or cancelling the transaction. At this point, things get real! Why? Because if you recall, you signed a RPA and made an offer. In that RPA doc, you stated that if the offer is accept, you (BUYER) will have certain obligations and you signed you stupid name on that piece of paper.
So, first obligation is to give the earnest money deposit to the Escrow Agent. Who is the Escrow Agent? Either you've already stipulated that or more likely, the Seller/Seller's Agent/Lender has stipulated the Escrow Agent. In any case, it's stated the RPA when you submitted it. Now you know why the RPA is important.
Tip 10: Have a personal check ready with the funds for the Escrow Agent written on, but not signed. This will move this process forward very quickly without you having to "wire" any funds to the Escrow Agent, as your Buyer's Agent may suggest (to the detriment of your wallet).
Once you hand the Escrow Agent the earnest money deposit and escrow opens, the clock is now ticking. As stated in the RPA, you have a certain number of days where you can still pull out from the transaction (i.e., walk away). After that day, you may 1) not be able to walk away from completing the transaction or 2) be able to walk away, but forefit your earnest money deposit plus additional compensation. Again, this is why the RPA is important, even though many agents may ask you to just sign and state that it's only an offer.
To open escrow, you will now meet your Escrow Agent and sign opening escrow papers. These documents are very important. Review the documents and compare them to the RPA. If it is a short-sale, in all likelihood, some of the things you listed out in the short-sale has/is not approved by the lender. In other words, that $500 dollars you wanted the Seller to give to you to help pay for repairments, the lender probably said no. Also, those 1 yr Home Warranty plans you wanted is also probably out the window. Why are these things gone?
1. The original lender is doing a large write-off. If the Seller is paying you anything out of pocket, the original lender is basically saying that "I [lender] should be getting that money or the Seller shouldn't have any money because he/she can't even pay the mortgage."
2. If the Seller doesn't have any money, then the Lender is technically paying these other expenses and the lender is basically saying no.
So, review the opening escrow docs carefully.
Note: The escrow doc will also list out certain obligations the Escrow Agent "must" perform. Once you sign the docs, the Escrow Agent will do what the doc says and use the earnest money deposit you in to pay for some of those activities. Example: Notify the HOA for and get HOA incorporation docs and various other information. Start the preliminary title insurance.
Next, you are now also going to formally start the mortgage application with your lender. But before I talk about that, let's take detour number 3 and talk about closing costs briefly.
Note: Most important part of this application is to lock in the interest rate and get a formal Good Faith Estimate for the cost of the loan.
To buy a house, there are various expenses, which I'll call closing costs for this article. I've group closing costs into three categories and provide you my experience.
Mortgage/Loan Costs:
1. Origination Fee - Technically, cost to "originate" start the loan.
2. Underwriting Fee - Technically, cost to research and underwrite this loan.
3. Processing Fee - Technically, cost to get the loan through the "proces."
4. Lender Wire Fee - Technically, costs to wire funds between parties (my lender to original property lender)
5. Appraisal Fee - Technically, cost to hire someone to appraisal the price of the property as part of underwriting
6. Flood Cert - Technically, getting a certificate from a third-party regarding flood information for the property (underwriting related)
7. Tax Service - Technical, cost for tax related expenses, especially to manage an escrow account
8. Credit Report - That credit report you got earlier, you're paying for it.
9. Interest for Partial Month - If you close your loan say on the 25th, this it he interest from the 25th to the end of the month.
With the exception of 9, all of the above can vary and technically, there is room to negotiate with your lender. Obviously, if you put your self on the lender side, you want to make as much money from the Buyer as possible, so you can create or pass through various costs. Another way to look at it, the lender could eat the cost in certain areas by "waiving" or discounting the costs.
For my loan of $200K, I basically paid $2.5K or 1.25%. I'm not sure if that's great or terrible, but based on my research, loan costs should be between 0.5% to 2% of the loan amount.
Escrow Costs:
Courier Services - Technically, cost to send things overnight. A lot of the documents, especially the notarized docs need to be sent to the lenders overnight so you have to pay for this fee.
Notary Fees - Technically, the cost to notarize the various docs, but more likely, source to make some money because your Escrow Agent generally has the notary powers.
Admin Fees: - Got to have an official place for the Escrow Agent to make money somehow for his/her service.
I paid $1K.
Title Insurance Costs:
Owner's Title Insurance - Price for insuring the Buyer
Lender's Title Insurance - Price for insuring the Buyer's Lender
I paid ~$1.5K
Note: Title insurance is ensure that other parties do not have some lien on the title, which will be passed from the Seller to Buyer (you). Lenders require, at a minimum, you buy Lender's Title Insurance so that the loan amount is protected.
Hazard Insurance (Fire, Flood, Earthquake): Insurance you have to buy, various depending on what you buy, but your lender/loan type will tell you the minimum you have to buy to get the loan. This is where you talk to that Insurance Agent.
Government Costs: Various government taxes and administrative expenses. Not much you can do about them, but you should be able to get these figures early on in the process.
Grant & Deed
Property Tax
Summplemental Property Tax
Other
Most of these costs various significantly between state to state and even county to county. Also, property tax depends upon the size and state you live in.
HOA Costs/Community Association Costs: To be honest, this is all administrative fees to the HOA management company. I have no control over the fees, but basically, it is a way for the HOA to make money.
Upfront Demand Fee
Move in / Post Closing Fee
Transfer Fee
I paid close to $1K to my cringe.
Inspection Costs
1. Pest Report - Technically, a report to discover if you had some fungus problems or rodent eating through the drywall
2. Home Inspection Report - Cover prior
3. Others - You can get a ton of different type of inspections (Radon, Heating, Roof, etc.). The sky is the limit, but you have to ask yourself, what's the risk/reward trade-off at some point.
I paid close to $400, to my delight.
Other Costs
HOA Dues - You pay dues for the following month to the HOA + any penalties that the Seller may have incurred if the Seller is late or owes money.
more to this later....
Friday, November 25, 2011
Thursday, November 10, 2011
Tuesday, August 10, 2010
Multi-Sided Platforms Using non-pricing to influence
Two Step: max value for entire ecosystem created by platform -> max value extracted for platform.
Besides using pricing as a way to regulate and influence platform participants, platform owners have a range of non-pricing tools.
1. Increase/decrease affiliation barriers (entry barriers)
a. Restrict participant access [promote growth, reduce negative externalities to find the “right” type of affiliates]
i. Pricing (set a fee)
ii. Non-pricing (group, industry, category, invite-only)
b. Improve documentation and usability
i. Additional information
ii. Easy to navigate [Website refresh]
c. Define competition among affiliates
i. Winner-take all approach [market concentration of winner or only-one policy]
1. Funding awards
a. Ex-ante (participants submit an idea, the best idea get’s funding)
b. Ex post (participants all work on the same idea, the best execution get’s the funding)
2. Certification programs
3. Certification applications
4. Information share:
a. Ranking of developers [based on number of applications, number of kudos drive incentives on how they work]
b. Ranking of best application
5. Setting rules for facilitating interaction between affiliates (seller/seller, buyer/buyer, and seller/buyer)
d. Limit/Encourage interaction between participants [smaller network groups]
i. Community events
ii. Platform specific benefits for affiliates [differentiation from stand along channel where seller affiliates interacts directly with buyer affiliates]
iii. Encourage exploration rather than find and go [Where to implement this in a developer community]
e. Management of reputation and former affiliates
Developer motivations [Thus a cash prize may only affect on aspect] Thus need to non-pecuniary incentives.
• Intrinsic
• Learning from work
• Career concerns
• Status
• Community recognition
• Community affiliation
Extreme competition is itself a great motivator for developers.
Source. Platform Rules: Multi-sided Platforms as Regulators Kevin Boudreau and Andrei Hagiu.
Besides using pricing as a way to regulate and influence platform participants, platform owners have a range of non-pricing tools.
1. Increase/decrease affiliation barriers (entry barriers)
a. Restrict participant access [promote growth, reduce negative externalities to find the “right” type of affiliates]
i. Pricing (set a fee)
ii. Non-pricing (group, industry, category, invite-only)
b. Improve documentation and usability
i. Additional information
ii. Easy to navigate [Website refresh]
c. Define competition among affiliates
i. Winner-take all approach [market concentration of winner or only-one policy]
1. Funding awards
a. Ex-ante (participants submit an idea, the best idea get’s funding)
b. Ex post (participants all work on the same idea, the best execution get’s the funding)
2. Certification programs
3. Certification applications
4. Information share:
a. Ranking of developers [based on number of applications, number of kudos drive incentives on how they work]
b. Ranking of best application
5. Setting rules for facilitating interaction between affiliates (seller/seller, buyer/buyer, and seller/buyer)
d. Limit/Encourage interaction between participants [smaller network groups]
i. Community events
ii. Platform specific benefits for affiliates [differentiation from stand along channel where seller affiliates interacts directly with buyer affiliates]
iii. Encourage exploration rather than find and go [Where to implement this in a developer community]
e. Management of reputation and former affiliates
Developer motivations [Thus a cash prize may only affect on aspect] Thus need to non-pecuniary incentives.
• Intrinsic
• Learning from work
• Career concerns
• Status
• Community recognition
• Community affiliation
Extreme competition is itself a great motivator for developers.
Source. Platform Rules: Multi-sided Platforms as Regulators Kevin Boudreau and Andrei Hagiu.
Wednesday, August 04, 2010
Payment Basics 101
Recently, I've taken a position working in the payment space. As part of bring myself up to speed on payments, I've had to perform quite a bit of research.
To help others, I've decided to aggregate some of the best articles written about the payment space (see source). Below is my quick summary, which helped me remember all the stuff I had to read.
Payments 101
Payment Defined
To understand payments, it is important to have a standard definition. According to the Federal Reserve Bank of New York, payment is defined as “a transfer of value. ” But what does this transfer of value mean?
Celent, a division of Oliver Wyman expands upon this by stating that payment is a transfer of value between two parties using a value token or payment instrument. First, it is important to point out here that without another party, there can’t be a transfer of value (e.g., moving money from your pocket to your desk doesn't equate to a transfer of value). Second, the value token or payment instrument is important because it facilitates the transfer of value.
Payment Instruments
There are many payment instruments. In barter economies, the payment instrument is the good or service exchanged. For modern economies, money is generally the accepted payment instrument . However, other payment instrument exists such as check, credit cards, bank transfer, and stock transfer. Generally, these other payment instruments must be linked to money for the payment instrument to be “broadly useful.” Otherwise, the payment instrument will only be limited in usability and acceptance (e.g., Monoploy money is only good in the game of Monoploy for buying property and houses. You couldn't use the paper money to as a payment instrument for other goods or services outside the game.)
Credit Card as a Payment Instrument
The idea of a credit card “dates back to the early 1800s. While plastic wasn’t used then, merchant and financial intermediaries did extend credit on durable goods.” Thus, in the early days, the credit card was primarily a credit instrument rather than a payment instrument .
“In 1950, Diners Club launched the first general merchandise charge card. It was primarily used for travel and entertainment expenses for a more well-to-do customer.” This card did not have a revolving credit feature because all bills had to be paid by the end of the month. The first general credit card, the BankAmericard, was launched in the 1950s by Bank of America. “At the time, banking regulations limited the geographic reach of individual banks, so Bank of America found it difficult to compete with Diners’ nationwide access. To overcome this limitation, Bank of America licensed their card to other banks. Initially they were successful but soon became overwhelmed with the administrative task of processing all of the paper slips from member banks. In effort to address the growing needs, Bank of America decided to spin off the organization and it eventually became known as Visa. In light of Bank of America’s success with their card, a competing network of banks launched a third network in 1966 known today as MasterCard. American Express was launched in 1958 and Sears, Roebuck, and Co. launched the Discover Card in 1986.” (Braintree)
How Does a Credit Card Work?
To understand how a credit card facilitates the transfer of value (i.e., exchange of money) as a payment instrument, “it is important to first understand the participants and the models under which they operate.” There are two distinct models: open-loop and closed-loop. Visa and MasterCard operate in the open-loop model while American Express and Discover operate in the closed-model. (PaymentsRus)
Open-Loop Model Participants
There are at least five distinct parties involved in an open-loop model that work together to enable credit card. They are the following: Cardholder, Merchant, Card Issuing Bank, Acquirer (i.e., Acquiring Bank, Non-Bank Acquire, Acquire Processor), and the Card Network (i.e., Visa or Mastercard)
1. Cardholder: End-consumer (Party typically procuring a good or service from the merchant) who has been issued a credit card
2. Merchant: Provider (Second party typically selling or providing a good or service to the customer) who accepts credit cards
3. Card Issuing Bank: Financial institution that issued the credit card to the cardholder
4. Acquire: Financial institution that provided the merchant with the capability to accept the credit card and ensure the Merchant is paid
5. Card Network: Organization responsible for setting the payment scheme (e.g., rules that define the rights and obligations of all the involved parties, technical and operating standards, settlement framework, liabilities and dispute procedures, and other key, aspects of a payment transaction) and managing the physical payment network.
Typical Transaction
1. The Cardholder uses the card issuing bank’s credit card to pay for goods or services provided by the merchant
2. The Merchant submits the card transaction to Acquirer for processing
3. The Acquirer submits the information to the appropriate Card Network
4. The Card Network routes the transaction to the appropriate Card Issuing Bank for approval
5. The Card Issuing Bank either approves or denies the transaction based on various factors and passes the information back to the Card Network
6. The Card Network relays the information to the Acquirer
7. The Acquirer Bank relays the information to the Merchant and thus Cardholder
Above is the most basic example of a transaction using a credit card in a open-loop model. It should be noted that additional parties are often also involved. These parties may include a processor (i.e., acquire, acquire processor, payment gateway) or a reseller (i.e., Independent Sales Organization: ISO, Merchant Service Provider (MSP). Furthermore, it is also possible for the Acquirer and Card Issuing Bank to be the same for any given transaction. This type of transaction is called an “on-us” transaction, but still passes through the card network.
Closed-loop Model Participants
The fundamental difference in the closed-loop system is that the Card Issuing Bank and the Acquirer are effectively the same. With closed-loop systems, we will discard the term Card Network because there is no independent organization like Visa or MasterCard arbitrating between an Acquirer and a Card Issuing Bank. In this case, the simple term Bank will do and the primary Banks in the U.S. are American Express and Discover. The typical transaction process is similar to the open-loop except the Acquirer, Card Network, and Card Issuing Bank are the same party. Thus unlike Visa and Mastercard, American Express and Discover also issue credit cards and enable merchants to accept their cards.
Merchant Discount Rate/Merchant Service Charge
To accept a credit card as a payment instrument, Merchants must pay a Merchant Discount Rate/Merchant Service Charge (i.e., Discount Rate) to the Merchant Bank. This fee is typically calculated as a percentage of the transaction amount plus a small fixed fee. The fee varies anywhere from 1 – 5% + $0.10 - $0.50 . [This data is applicable only to the United States. Merchant Discount Rates may differ significantly in other countries.]
The money collect from the Merchant Discount Rate/Merchant Service Charge is then split among the Card Issuing Bank, Acquirer, and Card Network. According to Braintree, the Card Issuing Bank captures anywhere from 70 – 85% of the fee and the Acquirer (and its processor if it is outsource) and the Card Network split the remaining 30 - 15%. The first fee that is collected by the Card Issuing Bank is called interchange. To be precise, this interchange fee is not paid by the Merchant directly. Rather, the Card Network take a portion of the Merchant Discount Rate that is the Interchange and transfers it from the Acquirer to the Card Issuing Bank.
Interchange
The calculation of interchange is dependent upon various factors. Four main factors, according to Visa/MasterCard are: type of card (e.g., general, commercial, reward), merchant size (e.g., processing volume > $xx), processing mode (e.g., swipe, manual key in, card-not-present), and merchant category (e.g., retail, grocery, software).
Acquire
Now that we are a little more familiar with the terminology, it is really more appropriate to understand that there are actually two categories of Acquiresr: traditional banks (e.g., Fifth Third Merchant Services and Wells Fargo Merchant Services and non-banks (e.g., Chase
Paymentech, Heartland Merchant Services). While both are required to be licensed as a member of the Card Network, they differ in that the non-banks focus specifically on merchant acquiring business. Since I mentioned earlier that the Card Issuing Bank captures the majority of the revenue, banks have traditionally focused more of their effort on issuing cards rather than signing up merchants. Thus, according to the Aite Group, the non-bank acquires make up the majority of acquires.
Sources:
1. CREDIT CARDS: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges (Nov. 2009 by GAO) http://www.gao.gov/new.items/d1045.pdf
2. Taxonomy of Payments: Part I and Part II - (July 2010 by Zilvinas Bareisis: Celent, a division of Oliver Wyman)
3. Theory of Credit Card Networks: a survey of the literature (2001 by Sujit Chakravorti:FRB-Chicago)
http://ideas.repec.org/a/bpj/rneart/v2y2003i2n1.html
4. AN INTRODUCTION TO THE ECONOMICS OF PAYMENT CARD NETWORKS - [2003 by Robert M. Hunt:FRB-Philadephia] http://ideas.repec.org/a/bpj/rneart/v2y2003i2n3.html
5. Merchant Acquiring An Overview - (Feb. 2008 by Adil Moussa: Aite Group, LLC)
6. Where do credit card fees come from - (June 2008 by Bryan Johnson: Braintree)http://www.braintreepaymentsolutions.com/blog/where-do-credit-card-fees-come-from-cc
7. How payments work http://www.paymentsrus.com/additional-articles/credit-card
8. Various other sources:
http://www.virtualschool.edu/mon/ElectronicProperty/klamond/credit_card.htm
http://en.wikipedia.org/wiki/Payment
http://money.howstuffworks.com/personal-finance/debt-management/credit-card1.htm
http://en.wikipedia.org/wiki/Credit_card_number
http://en.wikipedia.org/wiki/Payment_card
To help others, I've decided to aggregate some of the best articles written about the payment space (see source). Below is my quick summary, which helped me remember all the stuff I had to read.
Payments 101
Payment Defined
To understand payments, it is important to have a standard definition. According to the Federal Reserve Bank of New York, payment is defined as “a transfer of value. ” But what does this transfer of value mean?
Celent, a division of Oliver Wyman expands upon this by stating that payment is a transfer of value between two parties using a value token or payment instrument. First, it is important to point out here that without another party, there can’t be a transfer of value (e.g., moving money from your pocket to your desk doesn't equate to a transfer of value). Second, the value token or payment instrument is important because it facilitates the transfer of value.
Payment Instruments
There are many payment instruments. In barter economies, the payment instrument is the good or service exchanged. For modern economies, money is generally the accepted payment instrument . However, other payment instrument exists such as check, credit cards, bank transfer, and stock transfer. Generally, these other payment instruments must be linked to money for the payment instrument to be “broadly useful.” Otherwise, the payment instrument will only be limited in usability and acceptance (e.g., Monoploy money is only good in the game of Monoploy for buying property and houses. You couldn't use the paper money to as a payment instrument for other goods or services outside the game.)
Credit Card as a Payment Instrument
The idea of a credit card “dates back to the early 1800s. While plastic wasn’t used then, merchant and financial intermediaries did extend credit on durable goods.” Thus, in the early days, the credit card was primarily a credit instrument rather than a payment instrument .
“In 1950, Diners Club launched the first general merchandise charge card. It was primarily used for travel and entertainment expenses for a more well-to-do customer.” This card did not have a revolving credit feature because all bills had to be paid by the end of the month. The first general credit card, the BankAmericard, was launched in the 1950s by Bank of America. “At the time, banking regulations limited the geographic reach of individual banks, so Bank of America found it difficult to compete with Diners’ nationwide access. To overcome this limitation, Bank of America licensed their card to other banks. Initially they were successful but soon became overwhelmed with the administrative task of processing all of the paper slips from member banks. In effort to address the growing needs, Bank of America decided to spin off the organization and it eventually became known as Visa. In light of Bank of America’s success with their card, a competing network of banks launched a third network in 1966 known today as MasterCard. American Express was launched in 1958 and Sears, Roebuck, and Co. launched the Discover Card in 1986.” (Braintree)
How Does a Credit Card Work?
To understand how a credit card facilitates the transfer of value (i.e., exchange of money) as a payment instrument, “it is important to first understand the participants and the models under which they operate.” There are two distinct models: open-loop and closed-loop. Visa and MasterCard operate in the open-loop model while American Express and Discover operate in the closed-model. (PaymentsRus)
Open-Loop Model Participants
There are at least five distinct parties involved in an open-loop model that work together to enable credit card. They are the following: Cardholder, Merchant, Card Issuing Bank, Acquirer (i.e., Acquiring Bank, Non-Bank Acquire, Acquire Processor), and the Card Network (i.e., Visa or Mastercard)
1. Cardholder: End-consumer (Party typically procuring a good or service from the merchant) who has been issued a credit card
2. Merchant: Provider (Second party typically selling or providing a good or service to the customer) who accepts credit cards
3. Card Issuing Bank: Financial institution that issued the credit card to the cardholder
4. Acquire: Financial institution that provided the merchant with the capability to accept the credit card and ensure the Merchant is paid
5. Card Network: Organization responsible for setting the payment scheme (e.g., rules that define the rights and obligations of all the involved parties, technical and operating standards, settlement framework, liabilities and dispute procedures, and other key, aspects of a payment transaction) and managing the physical payment network.
Typical Transaction
1. The Cardholder uses the card issuing bank’s credit card to pay for goods or services provided by the merchant
2. The Merchant submits the card transaction to Acquirer for processing
3. The Acquirer submits the information to the appropriate Card Network
4. The Card Network routes the transaction to the appropriate Card Issuing Bank for approval
5. The Card Issuing Bank either approves or denies the transaction based on various factors and passes the information back to the Card Network
6. The Card Network relays the information to the Acquirer
7. The Acquirer Bank relays the information to the Merchant and thus Cardholder
Above is the most basic example of a transaction using a credit card in a open-loop model. It should be noted that additional parties are often also involved. These parties may include a processor (i.e., acquire, acquire processor, payment gateway) or a reseller (i.e., Independent Sales Organization: ISO, Merchant Service Provider (MSP). Furthermore, it is also possible for the Acquirer and Card Issuing Bank to be the same for any given transaction. This type of transaction is called an “on-us” transaction, but still passes through the card network.
Closed-loop Model Participants
The fundamental difference in the closed-loop system is that the Card Issuing Bank and the Acquirer are effectively the same. With closed-loop systems, we will discard the term Card Network because there is no independent organization like Visa or MasterCard arbitrating between an Acquirer and a Card Issuing Bank. In this case, the simple term Bank will do and the primary Banks in the U.S. are American Express and Discover. The typical transaction process is similar to the open-loop except the Acquirer, Card Network, and Card Issuing Bank are the same party. Thus unlike Visa and Mastercard, American Express and Discover also issue credit cards and enable merchants to accept their cards.
Merchant Discount Rate/Merchant Service Charge
To accept a credit card as a payment instrument, Merchants must pay a Merchant Discount Rate/Merchant Service Charge (i.e., Discount Rate) to the Merchant Bank. This fee is typically calculated as a percentage of the transaction amount plus a small fixed fee. The fee varies anywhere from 1 – 5% + $0.10 - $0.50 . [This data is applicable only to the United States. Merchant Discount Rates may differ significantly in other countries.]
The money collect from the Merchant Discount Rate/Merchant Service Charge is then split among the Card Issuing Bank, Acquirer, and Card Network. According to Braintree, the Card Issuing Bank captures anywhere from 70 – 85% of the fee and the Acquirer (and its processor if it is outsource) and the Card Network split the remaining 30 - 15%. The first fee that is collected by the Card Issuing Bank is called interchange. To be precise, this interchange fee is not paid by the Merchant directly. Rather, the Card Network take a portion of the Merchant Discount Rate that is the Interchange and transfers it from the Acquirer to the Card Issuing Bank.
Interchange
The calculation of interchange is dependent upon various factors. Four main factors, according to Visa/MasterCard are: type of card (e.g., general, commercial, reward), merchant size (e.g., processing volume > $xx), processing mode (e.g., swipe, manual key in, card-not-present), and merchant category (e.g., retail, grocery, software).
Acquire
Now that we are a little more familiar with the terminology, it is really more appropriate to understand that there are actually two categories of Acquiresr: traditional banks (e.g., Fifth Third Merchant Services and Wells Fargo Merchant Services and non-banks (e.g., Chase
Paymentech, Heartland Merchant Services). While both are required to be licensed as a member of the Card Network, they differ in that the non-banks focus specifically on merchant acquiring business. Since I mentioned earlier that the Card Issuing Bank captures the majority of the revenue, banks have traditionally focused more of their effort on issuing cards rather than signing up merchants. Thus, according to the Aite Group, the non-bank acquires make up the majority of acquires.
Sources:
1. CREDIT CARDS: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges (Nov. 2009 by GAO) http://www.gao.gov/new.items/d1045.pdf
2. Taxonomy of Payments: Part I and Part II - (July 2010 by Zilvinas Bareisis: Celent, a division of Oliver Wyman)
3. Theory of Credit Card Networks: a survey of the literature (2001 by Sujit Chakravorti:FRB-Chicago)
http://ideas.repec.org/a/bpj/rneart/v2y2003i2n1.html
4. AN INTRODUCTION TO THE ECONOMICS OF PAYMENT CARD NETWORKS - [2003 by Robert M. Hunt:FRB-Philadephia] http://ideas.repec.org/a/bpj/rneart/v2y2003i2n3.html
5. Merchant Acquiring An Overview - (Feb. 2008 by Adil Moussa: Aite Group, LLC)
6. Where do credit card fees come from - (June 2008 by Bryan Johnson: Braintree)http://www.braintreepaymentsolutions.com/blog/where-do-credit-card-fees-come-from-cc
7. How payments work http://www.paymentsrus.com/additional-articles/credit-card
8. Various other sources:
http://www.virtualschool.edu/mon/ElectronicProperty/klamond/credit_card.htm
http://en.wikipedia.org/wiki/Payment
http://money.howstuffworks.com/personal-finance/debt-management/credit-card1.htm
http://en.wikipedia.org/wiki/Credit_card_number
http://en.wikipedia.org/wiki/Payment_card
Sunday, October 19, 2008
Back from a long break
After two months of really nothingness, I'm back in the work slot. This actually feels a little different having not worked for such a long time. Tomorrow, I'm slated to wake up early in the morning and go to work. This might sound normal, but this time, I'll have to catch the bus, transfer to the metro and then transfer to another bus. Quite a communte, which is something new to me.
What is also new is the client and business. This will be the first time I'll be working for a resource company. I don't know much about resources, but from what I have gathered, they are slow and conservative. It should be an interesting new change. Now, I've got to figure out what I'll be doing on my 2 hour communte everyday. I have one book already, but I think I'll try to write a novel or short story. What would be an interesting topic?
How about, the death of Mark?
What is also new is the client and business. This will be the first time I'll be working for a resource company. I don't know much about resources, but from what I have gathered, they are slow and conservative. It should be an interesting new change. Now, I've got to figure out what I'll be doing on my 2 hour communte everyday. I have one book already, but I think I'll try to write a novel or short story. What would be an interesting topic?
How about, the death of Mark?
Monday, September 08, 2008
Coming back...with What's a Food Distributor
I've been away from writing for some time. It seems the last time I had a chance to write was prior to my vacation in Hong Kong. That was in May and it is now September...make that October. Time sure flies when you're having fun...or working.
So, what have I been up to recently? Let's talk about my last project and what I learned.
I finished about a month ago at a food distributor in Chicago. What's a food distributor? I'm glad you asked because prior to this project, I didn't even know such a business exist but it is all very logical if you think about it.
It seems that resturarnts needs to obtain food of decent quality and consistent prices. Now, your nice, top of the line famous bistro down the street might have the chef walk around the farmer's market every day at dawn to pick up the freshest and nices produce. However, the reality is that most of resturants in America don't have that luck (I'll touch upon this notion later). Rather, most resturants in America order from a food distributor. Food once order are then delivered directly to the resturant.
As a distributor, the there several very important components to your busy. One of the key is order entry with managing the supply chain usually next. Think about it this way, the orders taken by the company determines demand and supply for products. This in turn allows the distributor to think about routing, delivery, services, promotions, marketing, etc.
I was fortunate enough to get a peek under the hood of this large distributor. To say the least, the ordering processes is much more complex than most people think.
Think about a local resturant that you visit. Think of all the items on their menu. Now, think of all the materials that is required to make something as simple as a hamburger. We need buns, the meat, sauce, lettuce, tomatoes, pickles, etc. Each of these products have multiple choices. You can buy plain buns or maybe french rolls as buns. You can get organic lettuce from your local farmer or a larger supplier three states away. Each resturant, depending on the market it is competing in, will choose different products. Similarly, the distributor much determine which product to have on its order entry list for people to choose. Do you offer the one pound patty or the 1.3 pount patty? What about 90% lean or 95% lean? As choices increases, so does the complexity of offering each of these choices. Each item has to be priced to be sold. Keeping track of the orders, changing prices, and updating the order catalogy for new products becomes challenging very quickly.
This is part of the work that I was able to participate in. By understanding the order entry processes and looking at potential bottlenecks, our team was able to devise solutions to help the company.
So, what have I been up to recently? Let's talk about my last project and what I learned.
I finished about a month ago at a food distributor in Chicago. What's a food distributor? I'm glad you asked because prior to this project, I didn't even know such a business exist but it is all very logical if you think about it.
It seems that resturarnts needs to obtain food of decent quality and consistent prices. Now, your nice, top of the line famous bistro down the street might have the chef walk around the farmer's market every day at dawn to pick up the freshest and nices produce. However, the reality is that most of resturants in America don't have that luck (I'll touch upon this notion later). Rather, most resturants in America order from a food distributor. Food once order are then delivered directly to the resturant.
As a distributor, the there several very important components to your busy. One of the key is order entry with managing the supply chain usually next. Think about it this way, the orders taken by the company determines demand and supply for products. This in turn allows the distributor to think about routing, delivery, services, promotions, marketing, etc.
I was fortunate enough to get a peek under the hood of this large distributor. To say the least, the ordering processes is much more complex than most people think.
Think about a local resturant that you visit. Think of all the items on their menu. Now, think of all the materials that is required to make something as simple as a hamburger. We need buns, the meat, sauce, lettuce, tomatoes, pickles, etc. Each of these products have multiple choices. You can buy plain buns or maybe french rolls as buns. You can get organic lettuce from your local farmer or a larger supplier three states away. Each resturant, depending on the market it is competing in, will choose different products. Similarly, the distributor much determine which product to have on its order entry list for people to choose. Do you offer the one pound patty or the 1.3 pount patty? What about 90% lean or 95% lean? As choices increases, so does the complexity of offering each of these choices. Each item has to be priced to be sold. Keeping track of the orders, changing prices, and updating the order catalogy for new products becomes challenging very quickly.
This is part of the work that I was able to participate in. By understanding the order entry processes and looking at potential bottlenecks, our team was able to devise solutions to help the company.
Tuesday, April 01, 2008
The animal question
Recently, I had a conversation with someone regarding an interview question. She gave a great answer that I'd like to share with others.
The question: If you could be any animal, what would you be and why?
Now, before I give away her answer which I thought was very good, I'd ask you to think about it a few moments and say outloud or use the post below on how you'd answer.
..
...
....
.....
......
Still thinking or are you just trying to find out the answer? Seriously, give it a few moments and try to answer the question.
Good. Now that we have your answer, please allow me to ramble first on why I think the animal question is bad interview question.
In interviews, the primary objective is to gauge a person through a short period of time using various tests to determine if the person is capable of performing the tasks as demanded for the open position. There might be secondary objectives exists such as would the person fit within the culture of the organization or is the person someone I want to work with, but the primary objective is usually determined by the needs of the open position.
Now, one way to achieve the primary objective is by subjecting the interviewee to questions. The purpose behind such question is again to gauge the capability of the interviewee. With the animal question, I believe the key objective is to prob several areas:
1. personality of the candidate
2. innovative, creative thinking
3. ability to form coherent ideas out of thin air (bullshitting)
4. logic or lack thereof
5. communication style
While the question is successful in tackling several areas, it doesn't do any of the above very well with the exception of maybe number 3.
If you analyze the above areas, each can be tested with a more concise question. Logic thinking ability can be analyzed by asking the person to solve a problem and explain how they reach the solution. Communication style can be analyzed by questioning communication skills and methods. Creative thinking can be analyzed by asking if the person has developed new ideas. Etc. Etc. By tackling each area individually with better tailored question, we can arrive at a better view of the candidate than the animal question. But because most people are short on time and slightly lazy (myself included), the animal question is a tried question and it continues in its existence.
Now, away from my rambling and onto the answer.
She said she would be a snowdog because they work well in a teams (and must work in teams) but also are strong individually in pulling the sled. Was it really what she would be? I don't think so! But she answered it in a creative fashion with logic to boot. She followed by clearly explaining her reasoning (which I shortened for writing sake) along with a demostration of her personality: teamwork and individual strength. In essence, she was good at "form[ing] coherent ideas out of thin air" a.k.a bullshitting.
Don't get me wrong. I'm not writing to by cynical or to badmouth my friend. I know she's smart, a hard-working, creative girl who has a good understanding of what a interviewer wants to hear. Does this make her a great candidate for the job? I don't know, but I believe she should fit well in many organizations. Rather, my point is that because of such uninsightful interview questions, often times interviewing ends up being is less about demonstrating the skills for the job and more about getting the "right" answers.
The question: If you could be any animal, what would you be and why?
Now, before I give away her answer which I thought was very good, I'd ask you to think about it a few moments and say outloud or use the post below on how you'd answer.
..
...
....
.....
......
Still thinking or are you just trying to find out the answer? Seriously, give it a few moments and try to answer the question.
Good. Now that we have your answer, please allow me to ramble first on why I think the animal question is bad interview question.
In interviews, the primary objective is to gauge a person through a short period of time using various tests to determine if the person is capable of performing the tasks as demanded for the open position. There might be secondary objectives exists such as would the person fit within the culture of the organization or is the person someone I want to work with, but the primary objective is usually determined by the needs of the open position.
Now, one way to achieve the primary objective is by subjecting the interviewee to questions. The purpose behind such question is again to gauge the capability of the interviewee. With the animal question, I believe the key objective is to prob several areas:
1. personality of the candidate
2. innovative, creative thinking
3. ability to form coherent ideas out of thin air (bullshitting)
4. logic or lack thereof
5. communication style
While the question is successful in tackling several areas, it doesn't do any of the above very well with the exception of maybe number 3.
If you analyze the above areas, each can be tested with a more concise question. Logic thinking ability can be analyzed by asking the person to solve a problem and explain how they reach the solution. Communication style can be analyzed by questioning communication skills and methods. Creative thinking can be analyzed by asking if the person has developed new ideas. Etc. Etc. By tackling each area individually with better tailored question, we can arrive at a better view of the candidate than the animal question. But because most people are short on time and slightly lazy (myself included), the animal question is a tried question and it continues in its existence.
Now, away from my rambling and onto the answer.
She said she would be a snowdog because they work well in a teams (and must work in teams) but also are strong individually in pulling the sled. Was it really what she would be? I don't think so! But she answered it in a creative fashion with logic to boot. She followed by clearly explaining her reasoning (which I shortened for writing sake) along with a demostration of her personality: teamwork and individual strength. In essence, she was good at "form[ing] coherent ideas out of thin air" a.k.a bullshitting.
Don't get me wrong. I'm not writing to by cynical or to badmouth my friend. I know she's smart, a hard-working, creative girl who has a good understanding of what a interviewer wants to hear. Does this make her a great candidate for the job? I don't know, but I believe she should fit well in many organizations. Rather, my point is that because of such uninsightful interview questions, often times interviewing ends up being is less about demonstrating the skills for the job and more about getting the "right" answers.
Marketing: The Last Job You'll Ever Have?
Recently, I've been searching around the web to understanding the "advertising" industry. This all began with a conversation I had with a friend regarding the industry his works in. After my conversation, I decided to do a little research into his industry. This is where I hit the wall.
I couldn't find an easy to understand article anywhere it clearly describes the advertising space. While I found numerous articles explaining the 4 or 6 major players, the type of services each player offered sometimes number in the 100 if not more. Additionally, the largest players in the advertising space were holding companies such as WPP Group, which held so many companies that I found the following image on their website amuzing.
If I was a non-marketing executive trying to get my feet into the advertising door, I'd be quickly lost in the information overload.
That's when I stumbled upon the following speech given by Seth Godin. If you haven't ever heard of Seth, as I haven't until this video, you can find general information about him here:link
What made the video great was not necessarily what advertising agencies do or how to go about understanding the advertising agency structure. What Seth did for me was made me realize the power of market and how to best leverage that power.
You see, I was asking the wrong question in my quest to understand advertising. I was asking, what did people do? What I should have been asking is, what do customers (customers of advertising agencies) need? If we find out what customers need, we can then work backwards to determine what people need to do to fulfill those needs.
Anway, why not just watch the video. It's much more interesting than my words.
I couldn't find an easy to understand article anywhere it clearly describes the advertising space. While I found numerous articles explaining the 4 or 6 major players, the type of services each player offered sometimes number in the 100 if not more. Additionally, the largest players in the advertising space were holding companies such as WPP Group, which held so many companies that I found the following image on their website amuzing.
If I was a non-marketing executive trying to get my feet into the advertising door, I'd be quickly lost in the information overload.
That's when I stumbled upon the following speech given by Seth Godin. If you haven't ever heard of Seth, as I haven't until this video, you can find general information about him here:link
What made the video great was not necessarily what advertising agencies do or how to go about understanding the advertising agency structure. What Seth did for me was made me realize the power of market and how to best leverage that power.
You see, I was asking the wrong question in my quest to understand advertising. I was asking, what did people do? What I should have been asking is, what do customers (customers of advertising agencies) need? If we find out what customers need, we can then work backwards to determine what people need to do to fulfill those needs.
Anway, why not just watch the video. It's much more interesting than my words.
Subscribe to:
Posts (Atom)