Banks are now facing two key market challenges:
- traditional markets service a shrinking customer-base in a saturated marketplace with commoditized 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 others.
Notably, banks do not have the retirement funding space to themselves. Insurers, whilst they may have been ‘asleep at the wheel‘ during the early years of the fintech revolution, are better placed as the world’s largest asset managers, white-label mortgage providers and underwriters of financial risk, life insurance, annuities and longevity risk.
Insurers are now responding to the opportunities presented by ageing population and seek to dominate in the largest inter-generational shift in wealth in human history.
New era of product differentiation
For existing 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 and UI’s to improve the Customer experience
- product strategy – new product to better meet Customer needs
Most fintech , digital challengers & 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, at the end of the day, 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.
When was the last breakthrough banking or insurance retail product in retirement funding?
The ageing 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.
Any opportunity that presents a growth market that is uncontested white-space is a sweet-spot for profitability.
Equity release mortgages
Current equity release mortgages are:
- capital intensive to write
- expensive for Customers
- fiscally irresponsible
- inherently defective in their design being 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’s unethical, it’s poor product design and it’s irresponsible lending.
Fortunately, many banks recognize not only the high capital cost of writing reverse mortgages, but also this associated reputational risk.
For example, from early 2019 no major bank writes these products in our 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
- little innovation
Providers of these products well know that the sales of annuities are not growing despite 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 dollars.
The opportunity is now presented for Financial Institutions to leverage the years of research & development undertaken by Futureproof.
Accessing Futureproof IP
Futureproof is not a competitor of banks or insurers – we do not retail mortgages nor are we a Product Issuer.
Instead, we license regulated financial institutions to write our proprietary mortgages and sell white-labelled Futureproof products, using our Product Platform. Financial institutions retain the Customer, use their own branding and 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™ equity release mortgage:
- develop entirely new products of their own using our 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 in order to pay for your existing products & services
- create new bundled products using our mortgage to pay for or fund co-badged partner products or 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 fixed-term annuity or 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, 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 without depletion of equity 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 one of poor value or too expensive, to something quite different.
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.
Why wouldn’t any prudent Pre-retiree now buy your deferred annuity product in this way in order to better fund their future retirement?
This clever product strategy is not, of course, limited to annuities.
Any goods or service relevant to retirement (such as healthcare, aged care, personal insurances, health insurance, life insurance, investment property & wealth products, etc) can be bundled with our Equity Preservation Mortgage™ to create a new built-for-purpose product offering or to turbo-charge sales of legacy products.
What this clever Financial Institution has effectively done, is to offer a new mortgage product funding option to achieve new product positioning of its legacy products into a much wider market.
Increasing profitability of banks & insurers
There are eight fundamentals to increasing bank or insurer 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 license fee but does require Financial Institution partners to hold a minimum parcel of reserved non-voting shares to qualify for a licence.
We take only a royalty where real economic value is created by Futureproof for the benefit of the Lender or the Borrower. Our royalty per mortgage written is the sum of:
- for Borrower value created = 25 bps loan margin, plus
- for Lender value created = 0.25% average annual balance of FUM
Royalties are automatically built into the retail lending interest rate 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 our new Equity Preservation Mortgage™ equity release mortgage:
- mortgage insurance
- mortgage securitization
Our License Agreement grants the following rights:
- use IP (but not sub-license or assign)
- access to our Product Platform (delivered as PaaS)
- product branding rights
- write an unlimited number of Equity Preservation Mortgages™ on-balance sheet
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™ equity release mortgage are, 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 around 30% 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.
In lieu of any performance obligations being imposed on licensed financial institutions and notwithstanding any exclusive licensing arrangements that may be entered into with partners, Futureproof always reserves its right to use its own intellectual property through licensing of use rights to its related and associated entities and partnering with regulated lenders and mortgage originators.