Two years ago, we explored the growing demand from wealthy clients for a single financial institution to serve the bulk of their banking needs.1 In the intervening period, that trend has gained momentum with 58% of affluent clients expressing a willingness to consolidate their financial assets with one institution.2 For firms themselves, benefits of this trend include ensuring continuity of client relationships and fostering a deeper level of trust.
Securities based lending (SBL) – where lines of credit are secured by assets in an individual’s portfolio – provides another opportunity to foster a stickier relationship between the client and their institution. SBL provides clients and firms with cost-effective financing options through streamlined documentation requirements, lower setup fees and greater repayment flexibility versus traditional loans. With clients looking for more personalized service from their financial institutions, SBL is a valuable tool that banks and wealth managers can utilize – if properly positioned.
Firms need to include securities-based lending in their financial apps
Mass affluent along with other client segments do most of their banking and wealth planning from their phone. The average smartphone owner uses at least two financial apps, but while banks and wealth management firms provide popular applications in both spaces, few allow for securities-based lending (SBL).3
Figure 1: Financial Apps: Features and Shortfalls
This matters more than ever at a time when customer assets have appreciated significantly. To avoid leaving money on the table, financial institutions are now hastening to offer SBL products that cater to the growing mass affluent class in the US (between $100k to $1m in liquid assets).
Figure 2: Number of Mass Affluent Individuals in the United States from 2020 to 2029 4
Leveraging Digital Capabilities to Originate SBL
When considering digital SBL offerings, firms must carefully consider the goals of both client and advisor while also taking into account their own operations. For instance, personalized SBL offerings should be available directly to the customer when they open their online dashboard or mobile app, without the need to consult a financial advisor or banking employee.
Any modern digital offering should also provide the customer with an instant decision. To respond to loan applications in real time, firms must equip advisors and supporting functions with the correct data, risk analytics and straight-through/automated processes if they are to meet the expectations of affluent clients.
The Institutional Perspective
Financial institutions are recognizing the potential of SBL to strengthen customer relationships and generate new revenue streams. Existing customers can be introduced digitally to the product while onboarding for mortgages, for example, while the opening of a brokerage account presents an opportunity to introduce SBL to net new customers.
Once the customer is onboarded, their financial advisor can seamlessly transition into the role of financial coach, guiding them through the SBL process and beyond. The benefits are attractive, including interest-based revenue and stickier customer relationships.
Figure 3: Revenue and Client Stickiness
However, institutions must pay due care to relevant regulations, particularly around Truth in Lending (Regulation Z), when pursuing the mass affluent market.
The Advisor Perspective
Firms should carefully consider the impact of digital SBL on financial advisors. SBL carries inherent risks, including concentration, conflicts of interest and regulatory, so financial advisors must be properly equipped to provide expert guidance when engaging with the customer.
In addition, advisors will want to take into account their fiduciary commitments when offering a lending product that could result in the liquidation of the client’s collateral. For their peace of mind, it important that firms provide adequate resources that explain in full both the client opportunity and the risks.
Advisors also require a streamlined workflow that can quickly establish the likelihood of approval plus the turnaround time from origination to funding – an advisor will wish to avoid offering a product that may be declined at a later stage. Just as important is ensuring a smooth and enjoyable experience for the customer.
The Client Perspective
Peace of mind is priceless when it comes to a client’s finances. This applies just as much to the digital experience as any other interaction with a bank or wealth management organization. Here, consistency is everything. Firms should seamlessly integrate their SBL offer with the existing online dashboard, providing clients with a familiar end-user experience that combines the latest lending products with cutting edge technology.
Clients also prefer to avoid hard credit pulls during the SBL application process. However, this should not be an issue. As the client incorporates all their financial assets and liabilities into one firm, they will need guidance and navigation through the ACAT (Automated Customer Account Transfer Service) process. As a result, the SBL application process will accelerate, including back-end processing (fast-tracking) since the institution already possesses most of the information needed when completing disclosures.
Strategic Considerations
What are your firm’s vision and goals? Firms should confirm what their vision and goals are for digital SBL offerings with a particular focus on:
- target market and demand
- platform design
- client risk parameters
- competitive landscape analysis.
Organizational, financial, risk and business alignment that are properly aligned dramatically increase the likelihood of success.
Where to play and how to assess securities-based lending campaigns? Firms should engage across the organization to define a campaign prioritization framework based on:
- desirability
- viability
- feasibility.
The prioritization exercise will enable financial institutions to make difficult decisions on where to focus their limited resources and time.
What benefits will securities-based lending deliver? Firms must consider and prioritize benefits of change, including:
- revenue growth
- operational efficiency
- client experience.
Institutions that focus attention on advancing technology, leading employee and advisor training and executing strong marketing campaigns stand to benefit the most from this expansion.
How to win? Firms should closely monitor SBL initiatives, and build structure to enable:
- sustainable innovation
- outcome tracking
- continuous improvement.
Prioritizing these benefits will help foster profitability, user, and asset growth.
Digital securities-based lending initiatives offer banking and wealth management firms a prime opportunity to compete and differentiate themselves in the current business environment focused on lowering costs and boosting returns on investment. By acting now, they can also address clients’ demand for a wider range of products and services provided by an institution under whose roof they can consolidate the bulk or even all their financial affairs.
References
1 https://www.capco.com/intelligence/capco-intelligence/the-convergence-of-banking-and-wealth
2 Research and Consulting for Retail Investment Products and… | Cerulli
3 https://www.bankrate.com/pdfs/pr/20180208-Fintech-Survey.pdf
4 https://www.statista.com/forecasts/1165740/hnwi-forecast-in-the-united-states
