Banks are now facing two key market challenges:
- traditional markets servicing a shrinking customer-base in a saturated marketplace with commoditised products
- disruption from new fintechs, digital challengers & neo-banks offering improved customer experiences, new technology and a laser-like focus on better servicing particular market segments with specific products.
Unfortunately, many banks are too inwardly focused on ‘business remediation’ and ‘tech renewal’ in order to have any hope of remaining competitive, at the expense of business transformation and forward-looking growth strategies for the next three decades.
For these banks it will ‘never the right time‘ to embrace product innovation – but therein lies the opportunity for their competitors and others.
Notably, banks do not have the retirement funding space to themselves. Insurance carriers, whilst they may have been ‘asleep at the wheel‘ during the early years of the fintech revolution, have always been better placed as the world’s largest asset managers, white-label mortgage providers and underwriters of financial risk, mortality risk, sequencing risk and longevity risk.
Insurers are now responding to the opportunities presented by aging population and seek to dominate in the what is now the largest inter-generational shift in wealth in human history.
New era of product differentiation
For financial institutions to retain market share or for new digital challengers to succeed, each requires clear differentiation in order to win.
Real differentiation is, however, a dual strategy:
- tech strategy – digital platform, improved UI and UX to improve the Customer experience
- product strategy – new product to better meet Customer needs and offer real economic value
Most fintech , digital challengers and neo-banks have not fully understood that having a smart mobile or digital platform alone is not enough. No matter how good their tech is – it only buys some catch-up time from existing players when, ultimately, the underlying products being offered (e.g. debit card, credit card, transaction accounts and mortgages) are simply no different from their competitors.
Many traditional banks have not fully understood that their current products have long been commoditised such that they can no longer even compete on price. For them, increasing market share with existing products by competing on price simply squeezes net interest margins and lowers profitability – it becomes a zero-sum game.
But the real problem lies elsewhere – where is the product innovation needed to differentiate from competitors?
In the retirement funding space, equity release mortgages (such as reverse mortgages. shared appreciation mortgages, shared equity mortgages, retirement interest-only mortgages) are decades old and have not changed. They remain inherently defective in the design and products of last resort.
When was the last breakthrough banking or insurance product in retirement funding?
The aging population is now the new uncontested growth market until 2050 (globally), yet there is a lack of responsible financial products for retirement funding.
The financial needs of this cohort of Customers is just not being adequately met by financial institutions.
Futureproof has long recognised that financial institutions simply have no product (other than those still writing reverse mortgages) for the 70% of homeowner Retiress who are under-funded for their retirement. To us, this makes no sense – this cohort are ‘old school’ loyal Customers of the bank or insurance carrier for many years. It is not as if these Customers are poor, they have substantial wealth tied up in the home (plus some savings and investments). Yet their financial needs are simply not being meet.
There is a huge and obvious product gap in the market.
Any opportunity that presents a growth market that is uncontested white-space is the sweet-spot for profitability.
Equity release mortgages
Current equity release mortgages are:
- capital intensive to write
- expensive for Customers
- fiscally irresponsible
- unable to release sufficient equity for adequate retirement funding
- rapidly deplete home equity
Reputational risk also arises since not only do they fail to meet Customer needs, worse still is that they leave the Customer without equity or the financial means to their fund future medical needs and aged care, at a stage in life when they are most vulnerable.
In our view that is unethical, it is poor product design and it is irresponsible lending.
Fortunately, many banks recognize not only the high Tier 1 capital cost of writing reverse mortgages, but also this associated reputational risk.
For example, from early 2019 no major bank writes these products in the Australian test market.
Traditional annuity products offered by the life insurers suffer different issues. They are:
- regarded as poor value
- out of reach of most asset-rich/cash-poor customers
- feature-poor with little innovation
Providers of these products well know that the sales of annuities are not growing with the ageing population.
After decades in the market, the simple fact remains that no one has been able to devise better retirement funding solutions than those offered by legacy products, such as reverse mortgages and annuities.
Disruptive innovation requires a fresh thinking from a different perspective and a total re-build of products from the ground-up, putting Customer needs at the centre of product design – this is where Futureproof has invested million of R&D dollars.
The opportunity is now presented for Financial Institutions to leverage the years of research & development undertaken by Futureproof and the latest best-of-breed SaaS product platform to support this business transformation and product innovation.
Accessing Futureproof IP
Futureproof is not a competitor of banks or insurance carriers – we do not retail mortgages nor are we a Product Issuer.
Instead, provide regulated financial institutions with a product plug-in via our SaaS platform to write the Equity Preservation Mortgage® and to sell white-labelled Futureproof financial products. Financial institutions retain the Customer relationship, use their own branding and leverage their existing distribution channels.
Clever ways of using our mortgages and products
There are four different ways in which a Financial Institution can deploy our nextgen smart mortgage – the Equity Preservation Mortgage®:
- develop entirely new products of their own using our smart mortgage as the funding engine to directly deliver fixed term annuity income
- develop new bespoke built-for-purpose products using our mortgage to fund future deferred retirement benefits
- re-package or re-launch legacy products using our mortgage to monetize the Customer’s home capital to pay for your existing products & services
- create new bundled products using our mortgage to pay for or fund co-badged partner products or embedded 3rd party products sold through your distribution channels
Importantly, each of these strategies are age-independent, enabling a Financial Institution to tap both the Pre-retiree and Retiree market segments.
Let’s say you are a deferred annuity provider experiencing low take-up and poor sales – take a moment to place yourself in the mind of your Customer.
Consider how much more attractive your existing deferred annuity product would become if that Customer could purchase it using their home capital with no depletion of home equity, rather than paying with after-tax cash dollars coming directly from their pocket.
In other words, Futureproof has enabled the customer to secure future retirement funding by purchasing your annuity product in an entirely new way – by using their home wealth and with no adverse impact on their current cashflow.
The result is that the Customer’s perception of your legacy annuity products quickly changes from being too expensive to being great value. The Equity Preservation Mortgage® removes the friction point for the Customer – it costs them nothing to purchase your product.
When a Customer is not being asked to directly pay for a deferred annuity out of his or her own pocket, the barriers to a sale rapidly come down.
This clever product strategy is not, of course, limited to deferred annuities.
Any goods or service relevant to retirement can be bundled to increase sales in this way, including:
- deferred annuities
- in-home care services
- hospital insurance
- critical illness insurance
- aged care
- wellness products
- personal insurances (car, caravan, home, contents, pets)
- life insurance
- investment products
- wealth products
The Equity Preservation Mortgage® enables financial institutions to create a new built-for-purpose product offerings or to turbo-charge sales of legacy products.
A growth-focused Financial Institution is ale to offer a new product funding option to position its legacy products into a much wider market.
Increasing profitability of banks & insurers
There are eight fundamentals to increasing bank or insurance carrier profitability (other than simply cost-cutting):
- focus on growth markets
- better met Customer needs
- differentiate from competitors
- offer new products that are not commoditized
- more efficient use of regulated capital
- increase return on assets
- cross-selling & digital push-through of products
- improve Customer retention
Futureproof does not charge any upfront or annual license fees.
We take only a royalty where real economic value is created by Futureproof for the benefit of the Lender or the Borrower and on a per mortgage written basis.
Futureproof charges a loan margin that is built into the lending rate interest and paid for through the mortgage itself and not by the either the Lender nor the the Borrower.
Accordingly, the only costs to a Financial Institution are:
- On-boarding fee to cover professional services
- Technology fee per mortgage written payable to the SaaS platform hosting partner
- Annual support software and maintenance fee
- Systems integration for non-standard API development
Royalties (in the form of an annual Loan Margin for the life of each mortgage) are automatically built into the annual retail lending interest rate of interest quoted by our Annuity Income & Mortgage Calculator for each Equity Preservation Mortgage®.
Our licence term is perpetual, subject only to payment of a minimum annual royalty.
Futureproof’s related entities or Accredited Partners manage several programs to support the writing of the Equity Preservation Mortgage®:
- mortgage insurance
- mortgage securitization
Where these mortgages are to be taken off-balance sheet, RMBS warehousing & securitization can only be provided by our accredited and licensed investment banking partners.
Lender’s Mortgage Insurance (LMI) and Borrower’s Mortgage Insurance (BMI) can only be underwritten by our accredited and licensed insurance and reinsurance partners.
Financial products built on our Equity Preservation Mortgage®, like all equity release mortgages, are advice-led products required to be sold with appropriate independent financial advice.
That does not render existing distribution channels ineffective – indeed, distribution is no longer omni-channel since a growing number of mortgage brokers are also financial advisers and a growing number of financial planners are now partnering with mortgage brokers.
Futureproof offers product accreditation to professional financial advisers.
Contact us to explore partnering opportunities with Futureproof as a Product Issuer or Program Partner.