Why lending against investments is an underexploited retail and SME market opportunity

Lending against liquid marketable assets like securities and bonds, has been around for quite some time. We could say that the Lombards who conquered Italy in the 6th century, and settled in the northern region that became known as Lombardy, invented this first form of liquid asset based lending (LABL), often referred to as Lombard lending.

Nowadays, we find LABL or Lombard loans mostly in the private banking segment.  High net worth individuals can borrow against some of their assets.

In the corporate space this type of lending facility is also frequently available, offering flexible credit lines and working capital for large corporates.

Finally a great opportunity is available in the retail and SME banking space.

A tier 1 bank in Europe typically has about 3% of its customers in the private banking segment (more than 1,000,000 EUR in investable assets) and about 5-10% in the mass affluent segment (more than 250,000 EUR in investable assets). Currently only the top segment of the private banking customers is targeted for Lombard loans, resulting in less than 1% of the customers being targeted. If we consider that LABL loans can be interesting for any customer with assets, which don’t need to be liquidated in short-term (i.e. in term of less than 1 year), the target group does not only cover all private banking and mass affluent customers, but also a large part of the retail customers. For the same tier 1 bank, this can go to about 30-50% of the customer base, meaning that the target group is multiplied by a factor 30-50 compared to today’s situation. This shows a huge market potential.

For example, a young family with 25,000 EUR in stocks, but struggling with bills at the end of the month (unforeseen fire insurance bill on top of school tuitions), or postponing the acquisition of a new car; would have been happy to block some of their stock for obtaining a temporary credit facility or instalment loan. Normally, that family would have liquidated some of their assets or postponed their acquisition. The former would have resulted in losing the medium-long term investment horizon (for resolving the short term cash shortage) for the retail customer.

And for banks it can also create great new business. LABL perfectly matches innovative offerings that banks are focusing on more and more, embedded as a new service in their PFM / BFM / daily banking app. And it is perfectly compatible and complimentary with their existing business model without cannibalization. Typical car loans in Belgium are sold at ~1% interest rate. Consumer loans without a specific purpose/goal are sold over ~5%. Correctly pricing the LABL loans between these boundaries, for example at 1.5%-2.5%,  does not impact the large car loans market, nor the existing market of consumer loans which are almost never taken by customers with liquid assets deposited at the bank.

And all credits are automatically covered by highly liquid assets, directly taking care of the capital buffer requirements imposed by regulations (Basel II, III).