At the risk of oversimplifying things, life seems to be getting more expensive with each generation. Tertiary education, which was once free, can now result in a lifetime of debt. Buying a house once meant taking out a mortgage that was limited to a three-times income multiplier. That is now laughable. People have to wait longer to get onto the property ladder, get themselves into more debt to get an education, and generally need more financial support. So, when will the financial services industry catch up and create products to help alleviate these challenges?
Many young people are relying on their parents to help them get onto the property ladder and are certainly struggling to start saving for their future. So why is the industry not making it easier to leverage multi-generational wealth? It not only helps the upcoming generations build financial security, but also helps financial institutions strengthen their relationships with their older, more established customers, as well as develop new relationships with their customers of the future.
There are few barriers preventing customers from moving to new banks or wealth managers when there is little product or service differentiation, and banking becomes a commodity. However, creating products that go beyond price and support building long-term relationships, hopefully across generations, would do much to build customer loyalty and retention because the bank would then be proactively meeting customer needs and exceeding expectations.
The proposition is one part of the equation; service delivery is the other. While older customers may have been happy with monthly statements and infrequent meetings, largely conducted in person, younger generations expect to have, as standard, information available to them at the touch of a button 24/7 with the option to communicate via a range of means on demand.
Deepening relationships
The perception has often been that increasing the use of technology will reduce interaction by reducing human touchpoints and weakening relationships. Increasing the adoption of technology can, in fact, deepen these relationships, both by offering a plethora of communications options but also enabling innovation. By harnessing technology to provide solutions to complex problems, wealth managers can increase customer loyalty - going beyond the simple considerations of best returns or cheapest pricing.
While the parents have been working hard and investing wisely to build savings for their future, their children are just starting their journey, entering the workforce, looking for homes and planning for their own future. But how do the children get on the property ladder with house price increases outstripping wage growth?
Reliance on the parents to help out with a deposit is becoming commonplace. This is just one area where banks could leverage technology to do the heavy lifting. Offset mortgages were quite popular in a higher-interest environment but fell by the wayside due to the unprecedented period of low interest rates. For those who are unfamiliar, offset mortgages allow interest earned on your savings to be offset against your mortgage interest, reducing mortgage repayments or payment terms.
Perhaps banks could now create a new version of offset mortgages where some or all of the interest earned on a parent’s savings could be offset against their child’s mortgage. In this way, the parents keep their capital, and the children have their mortgage repayments reduced during the early years. Once the parents need to access their savings in retirement, their children should be in a stronger position to pay their mortgage.
Technology makes it far easier to build these complex products and to provide the data for clear reporting. This type of product also comes with a built-in long-term commitment that combats the shopping around for a new deal that normally takes place at the end of a fixed period or when interest rates change.
Transactional accounts
Current or transactional accounts can easily be seen as the most commoditised of products, but by harnessing technology to provide wallets, innovators can create incredibly feature-rich products to help those in the sandwich generation assist both their parents and their children. Using wallets makes it possible to combine services into one account; for example, a current account with a savings pot, a foreign currency wallet for digital nomads, or simply those who regularly spend in more than one currency, wallets to help manage funds for children at university or for parents who need a little fiscal oversight due to cognitive decline. Juggling all of these needs is incredibly stressful for anyone, and being able to have one account with a single login, cashflows in place to sweep money to accounts as needed, authorisations in place, and visibility of spend in real-time can be revolutionary. For anyone who has had to juggle supporting the needs of multiple generations, a one-stop shop solution for day-to-day finances would be a game changer.
Many of us invest with an investment platform or fund manager following the ‘investing is for the long term’ mantra, and we keep our smaller savings pots and transactional accounts with separate institutions. But why can we not have it all in one place? For pensions, once we commence decumulation, monies are usually moved out of the pension investments at drawdown and put into accounts to cover living expenses, holidays, etc.
Providers should and could offer transactional accounts on the same platform to maximise returns, allowing money to be swept from the high-return investments into the transactional accounts as they are needed rather than moved as phased or lumpsum drawdown into separate accounts based on projected income needs. This approach not only maximises returns for the investor but also enables the wealth manager to maintain the relationship into decumulation and beyond. With an ageing population, providers need to get smarter about creating products that can support investors for longer, well into their retirement, or they will risk a drastic fall in assets under management (AUM) over the coming decades.
Real-time data helping with complexity
Once upon a time, such fluid treatment of pension income and drawdown would have been unthinkable, but with real-time data, it is now possible for financial institutions to monitor real-time transactions and events to support the regulatory reporting that surrounds pension investments, such as annual allowances.
More sophisticated data architecture will also make it possible to employ Artificial Intelligence (AI) for better modelling of behaviours to inform projections for future income requirements and patterns.
But for most existing financial institutions, their legacy technology simply will not be up to the challenge; this is where using the very latest Cloud-native technology to run alongside legacy can drive innovation without compromising existing functionality. These innovations can be delivered using the new technology running in parallel with legacy, and when the time is right, migration to new feature-rich products can be completed in a controlled manner to minimise risk and customer disruption.
Using flexible data-rich technology is key for financial institutions aiming to meet the complex needs of their customers and build brand loyalty. If a customer has to go through the laborious process of opening a new account each time, they need to avail themselves of new functionality as their needs change; what is to stop them from shopping around? If your technology does not allow you to innovate without limits and offer these types of feature-rich products, then perhaps you should be shopping around too, so that your customers do not have to.
Interested in reading the full report? You can read this edition of the Swiss WealthTech Landscape Report 2024 online here.
