Aging societies need new strategies

ZHANG CHENGLIANG/CHINA DAILY

Lenders must reconsider their business as the world will have more old people than young

Much has been written about the impact of Japan's aging population on its economy. But many emerging markets－including China and South Korea－need to brace for some similar issues.

As of 2000, Germany and Italy had more people 60 and above than below 20. And as of 2010, Japan joined that group of countries with more over-60s than under-20s, as did many countries across Europe including Greece, Portugal, Spain, Austria, Bulgaria, Slovenia, Croatia, Finland, Switzerland and Sweden.

What may be less evident is that by 2025, 46 countries or territories are projected to have more old people than young people. For example, China and Russia will join the trend by 2030, Indonesia by 2050 and India by 2070. That is not that far off.

And the demographic shift is significant: The size of the population aged 65 and over is projected to triple by 2050 to 1.5 billion, representing 16 percent of the world's total. Much of this growth will take place in East Asia (China, Japan and South Korea) where 1 billion people aged 65 or older will live by 2050. It is important, therefore, to note that aging affects both developed and emerging markets and has a pan-Asia impact, particularly considering most major banks have operations across the region.

What does this mean for banking?

Clearly these demographic trends will affect banking but they also create opportunities. In our view, an aging population will affect at least three key dimensions:

First, wealth distribution will be weighting more toward this segment of the population. Much has been said about attracting millennials and new generations to banking but developing products for older customers will be a large opportunity for banks. The major Chinese banks have begun thinking about segmenting their offerings to cater to older customers but at the moment the market is open for a bank to take a leadership role.

Second, customer behaviors, product preferences and demands will change: As people retire, their income will obviously drop. The countries with more elderly people will therefore likely have a declining earning and savings rate, which may force banks in those countries to tap into more expensive sources of funds. This has implications for profitability as well as capital adequacy ratios. Therefore, as we describe in our recently published book A New Era in Banking, banks will need to find more opportunities to increase non-interest income, including advisory services, asset management and annuities.

Third, as we live longer and given that women's life expectancy is higher than men's, women will accumulate larger portions of wealth (especially in countries such as India or China). By 2050 there will be 800 million women in the world older than 65 and only 650 million men (and as of 2010, 27 percent of these women were high net worth individuals). These demographic shifts matter to financial institutions given that men and women typically have different approaches to investments and saving patterns.

In any case, larger segments of older customers not only will save less, they will have a lower demand for mortgages and consumer credit, and likely a reduced appetite for risky products. That doesn't just imply a reduced interest in derivatives or structured financial products; individual investors typically reallocate their portfolios away from equities as they approach retirement. Once in retirement, they purchase annuities or simply spend their savings. As a result banks might want to focus on offering certain bundled product offerings, such as annuities combined with life insurance.

Financial institutions should also be on hand to offer assistance with people providing their own retirement and healthcare. This shift is driven in part by the uncertainties surrounding government provision of such services－but also represents an opportunity for banks to find new revenue streams to offset what will be declining ones.

While financial institutions are focusing on responding to younger generations by integrating financial services into their digital lives, financial institutions should not underestimate the power of technology to respond to the challenges of an aging population as well.

Retirees typically move at least once after retirement: first toward a leisure destination such as on the beach in Hainan then back to be close to families. In general, people appreciate care and personal advice as they become less agile and reluctant to move to branches.

Digital solutions that might resonate with elderly customers include remote advice via video connections, intuitive applications and easy-to-use services that smoothly cross their laptops, and mobile phone and ATM options. As tech startups focus on developing phones with braille for the visually impaired and voice recognition that converts audio to texts for the hearing impaired, banks will be able to offer more mobile services to customers with hearing and sight loss.

This trend should lead banks to focus on their customer segmentation further, creating differentiated end-to-end bank services, products and branding for older customers, younger ones, and by gender.

Financial institutions also need to be prepared for regulatory intervention. It is a sweeping generalization, but young people and old people tend to make more mistakes when it comes to banking than middle-aged people. We can already forecast changes: Some of the new regulatory areas under consideration globally include enhancing rules about the disclosure of terms, imposing new fiduciary duties on sales agents, and establishing a system for prior financial product approval－all moves driven by a desire to protect customers who might be prone to mistakes.

Banks, therefore, need to be nimble and flexible: in how they market products, what they sell, and how they are distributed to each of the client segments. Our vision entails a strategic transformation of the banking industry toward "just-in-time banking" where banks assemble the right products and services at the customer's point and time of need.

This vision implies a technology-enabled, real time operating model that is built from a combination of managed service operations, cloud services and analytics together with a modern core banking system, where services and information are aggregated across an ecosystem of suppliers.

The author Juan Pedro Moreno is Accenture's senior managing director of global banking and co-author of A New Era In Banking. Albert Chan is Accenture's managing director of China financial services.