Nadeem Shaikh: The Future of Equity Release

Nadeem ShaikhThe changing shape of financial lives

People are living longer, saving less, seeing the value of their property fall and becoming used to the uncertainty of Brexit Britain. Longevity means that the shape of our financial lives is changing. We will need to work for much longer. Our children will find it harder to afford property.

The price of property is falling but the availability of mortgages in a low interest world after the financial crash is restricted. The uncertainty of the employment market means fewer and fewer people have the same job for their whole life. We spend a higher proportion of what they earn as they earn it. People borrow more because interest rates are relatively lower and wages are stagnating. They save less for the same reason.

At the same time property prices are falling so the specter of negative equity raises its ugly, hope destroying head. All of this in the context of the uncertainty about the short and medium term impact of Brexit.  Even if, the long term prospects for the UK after Brexit might be good, the immediate future will be disrupted. We used to take it for granted that our children’s lives would be better, more affluent and more secure than our own. We cannot take this for granted anymore. As individuals, parents, partners and providers, we need to plan differently.

The Fintech Industry needs to respond with innovation

In these dark times we need to look at every financial asset in a new way and it is the challenge for the Fintech industry to respond by presenting options for each of these products in new lights. For those who are living longer, retiring later and resisting becoming dependent on their kids, the largest asset is usually property. As close to 70% of home owners are over 55, it is in the equity held in this vast property portfolio that some of the answers to the savings gap and the demographic time bomb may lie.

For the over 55s it is too late.  They mainly stood still in their financial planning while the world changed around them. Now they have to adapt and the fintech industry has to develop the new products that can help them change and educate the new generation of spenders and savings that the assumptions of their parents simply no longer hold true.

Technology, for example smart contracts, could address the problem of consistency of conduct of business rules which at present allow for different customer experiences of equity release, portals and platforms could drive down the cost of advice by offering one stop shops for processing equity release products. Given that the current cost of advice about which is the best equity release scheme is very high, 3-4%, there is plenty of scope for cheaper options. Technology can also help with the process of bringing children through the process of planning for and carrying out equity release in a structured, standardized way.

The Fintech industry is responding to this situation with some innovations but more needs to be done. The aging population creates a new market for products – loans for people who retire later, the FSA has cleared  retirement interest only mortgage products. There also needs to be innovation to allow for the pooling of equity release from extended family members to contribute to specific care costs as they are needed. This might be linked to pay outs from life insurance to return the equity to the pot. It could be handled by a block chained based smart contract.

Such innovation and the need which drives them challenges the more traditional view of equity releases as the means of leaving an inheritance.  The new reality is that the current construction of social care, the NHS and old age care is not designed for the demographic pattern we currently live with. The state pension, for example, is unfit for the purpose of caring for an aging population. More and more people who do retire still have debt. Many have interest only mortgages or have borrowed  to fund life style choices or enforced periods of loss of income.

While none of us want to pay more direct tax or national insurance, the reality is that without higher taxes we need to make very different savings and spending choices much earlier in life.

 

A Selection of Recent Blogs and New Thinking on Fintech

Has Open Banking Failed?

 

It has been two years since the competition authority published its final report on the closed shop of retail banking in the UK. That report promised to open the sector to more competition and drive the costs to consumers down. These changes became known as Open Banking and the Open Banking Implementation Entity (OBIE) was created to roll out the changes. All UK banks were required to standardise the way in which their data was stored so that third party apps could access it. This, alongside the introduction of real time payments, direct from banks to third parties, should have opened the banks to both consumer assessment of their charging structures and much more competition. Continue reading here

The Knock-On Effect of a New Financial Services Model

By most accounts, half of the worlds population will be digital natives by 2020 an entire generation. That means a significant (and rising) proportion of financial services customers around the globe will have grown up with a mobile phone and/or an internet connection. They never lived in the analogue world, and their financial services experiences shouldnt force them to relive pneumatic tubes and paper checkbook registers. Their experiences in one part of their lives: touch payments will make them impatient of legacy technology in other parts of their lives. So the impact of new financial services models will continue to be felt in adjacent industries such as health, insurance, education and real estate. The emergence of products and services covering different aspects of a consumers needs across these industries will accelerate in 2019 and beyond. Continue reading here.

Changing Global Demographics

By 2050, 16 percent of the world’s population will be over 65. Up from 9 percent in 2018, and 5 percent in 1960. The fastest growing segment amongst the over 65s are the over 85s. The pattern is not the same in every country of course. In much of Africa the population remains in what is known as the first phase of demographic transition. People are living longer but there are high fertility rates as well so the both old people and children make up larger proportions of the population. In the second demographic transition phase, greater affluence brings lower fertility levels and further lengthening of lives. The working age population therefore grows. India and Brazil are in this second phase. In the third phase fertility falls further and lives become even longer. Most countries in Europe are in this third phase. Each age profile presents different kinds of challenges for the financial well-being of the population. Each phase demands different kinds of innovations from the Fintech industry globally. Continue reading here

Key elements for the FinTech industry in 2019

Up to the 1990s this absorption was successful. Since the 1990s it has become less and less successful and a larger of number of new players have entered the industry to challenge the dominant position of banks, as well as influencing other sectors by knock on effect or by selling new services to the banks. Continue reading here.

Diversity of talent is the key to the future of the Fintech industry

There are so many myths related to all aspects of diversity. Lets dispel some of them.

The typical successful fintech start-up founder is a 20 something, male. It must be because that is what people will invest in. “Young people are just smarter,” as Mark Zuckerberg, founder of Facebook, put it. “The cut off in investors’ heads is 32…after 32, they start to be a little sceptical.” according to Paul Graham, venture capitalist and founder of Y Combinator.

In fact a recent study has shown that the average age of the founder of the most successful tech start-ups is 47, that a 50-year-old founder is 1.8 times more likely to achieve upper-tail growth than a 30-year-old founder. Founders in their early 20s have the lowest likelihood of successful exit or creating a 1 in 1,000 top growth firm. Of course, there are many start-ups that are created by and for young people. The point is that there are many that are not. The future will be in the diversity of the individuals and teams who come together to shape the future of the fintech industry. Continue reading here.