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.
Though the shape of the world population is changing differently in different countries, the broad trend is towards an aging population. The charts below demonstrate the changing shape of the world’s population:
These charts are snapshots of The Life-Cycle Hypothesis. This was developed in the 1960s by economists Albert Ando and Franco Modigliani, to model the relationships between income, consumption and savings over the life span of individuals based on data supplied over long periods. They suggested that there are three broad phases in the economic life of an individual. In the first phase income is limited or non-existent so savings are largely absent but borrowing, for example to fund education, is present. They did not model this life span for different developmental contexts or for social contexts, for example free secondary and tertiary education. At the heart of this phase in the life span is the reality that the young people are dependent on others in advanced economies. Or they may be already having to provide for themselves and their families in other kinds of economies.
The second stage of the circle is the most productive period of people’s working life in which they generate the income needed to clear debts from the past, take and repay loans to provide the big ticket items of life – houses for example and provide a surplus in the form of tax payments or direct support for dependent children and old people. At the same time, they need to save for their own future old age. Clearly if children are children for longer and dependent through tertiary education and dependent old people are old people for longer the pressure on the middle years is immense.
The consequences of these profound demographic changes are that the third phase of the life circle is being extended further and further. If you live longer then you must work longer. While life might be longer so too are the years of economic activity because you are caught in what is usually described as a double dependency but is in reality a triple bind. Dependent children, dependent old people and provision for yourself. The consequences are to revolutionise the balances between the different segments of the population. If the number of non-economically active old and young people exceeds the active population and there are limits to how long you can work your aging human capital, what will fill the gap – savings? taxation? deficit funded welfare?
Many of these decisions will be made at a macro level through elections and governments. The mechanism for managing the relationship between the economically active and the dependent has traditionally been the banking system. The products the banking system has created – mortgages, savings accounts, private pensions – have been designed around the three phases and generated during an era in which the proportion of the economically active and the rates of economic growth were predictably aligned. The surpluses generated in taxation and in saving provided the liquidity for the welfare systems and the investments that funded the relationships between the generations.
What holds true for products, also hold true for service provision. In the traditional model there was little need for products directed at younger people. But populations with a preponderance of children and young people need to focus on the financial planning and literacy of these populations so that when they enter the workforce, often too young in many places, they can manage their income and expenditure. This kind of engagement is building the human capital of these new generations and these young people are digital citizens, born for the most part, into a world of mobile phones, Fintech is the mechanism for reaching them. It is also important to develop mechanisms for direct payment of young workers so that they can control their own resources. Mobile payment systems are ideal for this but if a child is working, they are not in school so the link between the workplace and school needs to be forged and if need be, schooling needs to move to the workplace. All this innovation for the digital citizens is needed but they are, as we have seen, not the only ones.
Innovation in fintech is all well and good but if your customer base is also aging, do they really want the new style of banks or to bank online. When the Finance Corporation recently asked older people what banks could do to make things easier for them four key issues were raised: being able to do things face to face and not use machines (46%), concern about branch closures (38%), a strong requirement for greater privacy and less open plan space in banks so that they can count out money or discuss matters without being seen or overheard (34%) and a desire for more age‐appropriate ATMs with bigger buttons/bigger screens and greater privacy (29%) ‐ located inside banks or post offices.
Other products such as life insurance, retirement savings, pension plans, mortgage equity release that are based on the assumptions of folks retiring at the age of 65 and living for another 10-15 years will need to be redesigned and re-thought as folks work well into their 70’s and even 80’s and live well into their 90’s and beyond.
This suggests that the future is bespoke. The real innovation in this area of fintech will be the development of platforms, services and products that abandon the model developed in the old demographic world and build innovation that embraces the diversity of the new demographic reality and the increasing age span. That means cutting edge technology alongside personal and individual service. It means a new generation of completely flexible savings and investment products.