A demographic shift changing the financial landscape forever

The Baby Boomer generation (i.e. the generation born between 1946 and 1964 - so between 55-75 years old) is retiring in record numbers. In the US alone, about 10.000 baby boomers will retire every day.
Such an enormous retirement wave will have enormous impacts on the economy:

• An enormous amount of jobs will need to be replaced, resulting in a vast number of new job vacancies, on an already tight job market (assuming that the relaunch following Covid-19 will happen quickly). The war for talent (or employees in general) will fiercen even more. In Belgium for example, we expect in the coming years for the first time in history an outflow of employees from the labor market which is larger than the inflow. The population of working age will therefore drop from 60% now to 53% in 2040. At that moment (in 2040) there will be only 2 persons working for every person of 65+ in age. Today this is still 3.2, while in 1980 this was 4.

• The departure of this mass of people will of course also lead to a drain in knowledge and skills. E.g. in the financial industry, which is still heavily relying on mainframe based core-banking systems, expertise in Cobol-programming is likely to become problematic in the coming years.

• The pension expenses of governments will increase considerablyin the coming years. This will put even more pressure on already tight government budgets, resulting probably in serious reforms in tax regulation, which is likely to impact the financial services sector (e.g. the introduction or enforcement of wealth taxes impacting the investment industry, more strict regulation to avoid tax evasion to tax havens…​)

• Enormous amounts will be paid out in pension plans and group insurances, as the Baby Boomer generation is the first generation, which has built up large amounts in such insurance and bank pension saving products.

• A radical shift in expenses will occur. The Baby Boomer generation is a large and rich generation (in the US, Baby Boomers control around 70% of the disposable income), having profited of a very successful economic period. When Baby Boomers will have more time, a significant increase in tourism expenses can be expected, but also a large increase in money spent in the health industry, elderly support services and unfortunately also the funeral industry.

• An enormous wealth transfer to the next generation (in media called the Great Wealth Transfer) can also be expected. According to Cerulli Associates, as much as $68 trillion will be transferred over the next 25 years.
  With the Baby Boomer generation being more financially literate, we can expect already large amounts being donated to their children and grand-children in order to limit succession taxes. Baby Boomers are therefore likely to consult financial planners and advisors significantly in the coming years.

For the financial sector, this will give enormous challenges, but also immense opportunities:

• The financial services sector has in most Western countries a relatively old workforce and will therefore be more impacted by the retirement wave than other sectors.
  On one hand this can help to digest easier the enormous employee cuts linked to the increased digitalization of the sector, but a big part of the skills and expertise will need to be maintained.
  As mentioned above the extensive knowledge of the oldest, core legacy systems (still forming the core of the bank) is often situated with employers of 50-plus in age. 10 years ago, all banks assumed that those systems would be long replaced by modern software tools by the time this workforce would retire, but today it is clear that these core banking systems will be there for at least another 10 years. The pressure for more intelligent core banking transformations (via gradual migration strategies or via BaaS offerings) will increase in the coming years.

• Baby Boomers being a rich generation, which is also more financially literate, is already transferring part of their wealth to their children (and grand-children) today. The percentage of parents supporting their children with the acquisition of a house or with student-debt is increasing year after year. Of course, Baby Boomers want to manage this transfer in a correct (i.e. avoiding any legal and fiscal issues), transparent (transparent to the government but also to the different heirs to avoid future conflicts) and most-fiscally optimal way. This gives an interesting opportunity for banks to provide tools to support those transfers.

• Some studies predict an impact on the stock market, as large sums of money will be pulled out group insurances and pension plans to be invested in low-risk investments (like bonds, term deposits and saving accounts). Combine this with studies showing that Millennials (generation born between 1980 and 1994) are investing less money in the stock market than previous generations, there might be a considerable outflow of money from the stock market, resulting in prices dropping.
  With inflation likely to increase in coming years (due to the massive inflow of central bank money) and interest rates which will be kept low (as central banks are forced to stimulate the economy and keep interest on government debt manageable), banks should look for interesting alternatives to offer to their customers. Today most banks already offer structured notes and capital guaranteed funds, but other more tangible (non-liquid) investments should also be boosted, e.g. direct real estate investments, private equity, crowdfunding, peer-to-peer lending, art and other collections…​ A bank can play an important role in offering these alternative investments (i.e. finding offers, doing risk assessment, structuring and documenting…​), taking care of the day-to-day management (e.g. rental management of direct real estate) and providing intermediation in case of customers wanting to liquidate.

• While neo-banks usually focus on digital-natives and incumbent banks trying to catch up, it will be important for banks not to ignore the important niche of the elderly. This group wants digital services, but also has specific needs, like easy possibility to ask advise via a human contact, an adapted branding, adapted usability features (e.g. larger font size, more contrasting colours, possibility to adjust text size, good support of screen readers, subtitles in all video or audio content, sufficiently large buttons to navigate on touch screens…​) and specific functional features (like the above described tools for financial planning and wealth transfer). With this group becoming so large and being a major source of revenue for banks, it would not be wise to ignore this important customer segment.

• As described above, the Baby Boomer generation is likely to consult financial advisors more extensively in the coming years, to discuss safe investments which keep their buying power (i.e. with returns equal or higher than the inflation rate), but also to discuss wealth transfer. This gives a lot of opportunities, but financial advisors should be careful not to ignore the long term. Studies suggest that 80% or more of heirs will look for a new financial advisor after inheriting from their parents. Financial advisors should therefore engage already today, with the heirs of the Baby Boomer generation in order to safeguard the future. Of course, this means an exponential increase in the number of relationships to be managed by 1 financial advisor. A financial advisor should therefore get assisted by efficient digital tools, which allow to cope with this increase, while avoiding a drop in customer service. Advisors will furthermore need to be trained to interact with Millennials, as they have very different expectations of their advisor, i.e. more digital, more ethical and sustainable investment advise, shorter response times ("I want it now") and strong personalization ("It’s all about me").

Banks managing this shift wisely will benefit enormously, while banks ignoring this trend will suffer with higher customer churn. Banks should plan today to ensure they can be in the winners' camp.

Note: the above example, talks about the different generations. Those are typically classified as following:

• Baby Boomers

  • Born between 1946 and 1964

  • Biggest consumers of traditional media like television, radio, magazines, and newspaper (even though 90% has a Facebook account)

  • Prefer still traditional interactions with financial services, like visiting branch and using cash

• Generation X (= MTV generation)

  • Born between 1965 and 1979

  • Still consuming lot of traditional media, but at the same time the generation using Facebook the most

  • Their interaction with banks is typically online, except for important transactions, where they still want a person-to-person interaction.

• Millennials (= Generation Y or Gen Me)

  • Born between 1980 and 1994

  • Biggest consumers of streaming services and typically having multiple social media accounts at different social media platforms.

  • With regards to banks, this generation has the lowest brand loyalty. They seek digital banks, which provide a personalized, fast and frictionless service ("I want it now"). Furthermore, they look in banking, but also for other products and services for on-demand subscription services rather than ownership.

• Generation Z (= Gen Tech, post-Millennials, iGeneration, and Gen Y-Fi)

  • Born between 1995 and 2015

  • This generation has never known a world without smartphones, social media and the internet. As a result, they are even more digital native as the Millennials, meaning they expect even more services to be digital, fast, responsive, personalized and frictionless.