Kindur And The $0.5 Quadrillion Fintech Opportunity
The biggest market opportunity in Fintech, pensions, has been largely overlooked.
Fintech started with payments, largely because this was the most obvious and tangible link to financial services for a 20+ year old founder. At the other end of the spectrum is retirement — something that few 20 year olds think about for obvious reasons, but which is the single biggest market opportunity for innovation in financial services.
This is a problem space measured not in billions, not even in trillions — but half a quadrillion dollars. That is the size of predicted pension shortfalls (the amount required to top up the gap in funding for future retirees to have the same retirement as current pensioners) in developing countries. This is the market that companies like Kindur are addressing.
Although 75% of this shortfall is public sector liabilities, it is accelerating a switch across the board to pensions that people have to manage themselves and as a result the critical need for tools for them to be able to do so.
This change to the pension status quo arises for multiple reasons that combine together, from the overall population to individual level.
- Populations are changing.
In developing countries, people are living longer and having less children, so the support ratio, the number of people working for every retiree, is dropping. Since people’s retirements are largely paid for from returns on contributions from the current generation of workers this means that pension liabilities are increasing.
2. Pensions are changing in response to population change.
Higher pension liabilities can be dealt with by increasing taxes, increasing retirement age, reducing payouts or changing the way pensions work. The biggest change in countries like the US and UK has been changing the way pensions work via a shift away from defined benefit programs (you get a pension based on your salary) to defined contribution (you get a pension based on your savings).
In 1979, 62% of pensions for US employees in the private sector were defined benefit plans, and approximately 17% were covered by defined contribution ones. By 2009, the situation had reversed reversed to approximately 7% and 68%, respectively. This trend is now happening to public sector employees.
Managing your own pension is becoming the norm.
3. The nature of retirement itself is changing in response to the above pension and population changes, combined with technological advances.
When pensions were first introduced by Bismarck in 1881, they were a reward for exceeding life expectancy. A retirement paycheck wasn’t something to expect but an anomaly. In the post WWII era, in developing countries, as life expectancy increased, much of retirement became a non-working, relatively able bodied phase of life that was more like a vacation, particularly for people working for large corporations or governments who had a guaranteed income for life based on a large percentage of their salary.
Demographic changes and increasing longevity mean that this is not sustainable. Along with changes to the way pensions are funded and increased retirement age, the nature of retirement itself will change.
Employment may not have a set cutoff date, and older people may ease into retirement, working part time in jobs that favour experience and wisdom over physical ability. Phases of retirement itself may also become more distinct as medical advances may mean that people live longer but also require medical treatment for longer. Retirement may change from an extended vacation while able bodied, coupled with the chance of 2–3 years of long term care, to three roughly equal phases: semi retirement, able bodied retirement and long term care. Nobody knows what the long term care economics look like — technological advances could make it cheaper by eliminating diseases like Alzheimer’s or improving remote medicine, but planning for this phase financially will become more important for many people.
And all of this is skewed by the current low interest environment.
On a macro scale, persistent low interest rates have forced pension funds to take more risk (in the UK, more than 10% of the politicians’ pension fund is held in junk bonds) and unfunded liabilities have increased dramatically as funding metrics assume historic returns that are multiples higher than practically achievable today. Because the timescale where these problems have to be fixed by is of the order of 15–20 years, it’s unknown whether this is a slow moving train wreck that can be averted, but it does mean that the push to defined contribution schemes will continue and therefore the need for people to manage pension assets will.
“According to a 2017 report, total unfunded pension liabilities have reached $3.85 trillion. That’s $434 billion more than last year. Amazingly, of that $3.85 trillion, only $1.38 trillion was recognised by state and local governments.
The difference between funded levels under Governmental Accounting Standards Board (GASB) metrics and more realistic expectations reveals a massive amount of ‘hidden debt,’ commonly referred to as unfunded liabilities.
Using that 7.5% annual return, unfunded liabilities for city and state plans are $1.38 trillion. However, when we use a more conservative return of 2.8% based on the Treasury yield curve, unfunded liabilities balloon to $3.85 trillion.”
To get a sense of how truly weird the low interest environment is in terms of finances at the individual level, consider politicians’ salaries in the UK.
A UK Member of Parliament has a salary which is less than half than that required to get a mortgage on an average London apartment, and four times less than that required to get a mortgage on a free standing house, but receives a maximum pension which would be the equivalent of saving $3.3 million.
In summary, the world is changing and is currently not normal, this is forcing a acceleration of the change to a new pension paradigm, based on greater self management.
Below is a summary of all these challenges
The resulting go-to-market in the US, as a result of all these changes, targets the biggest movement of capital in history.
Specifically, as the baby boomer generation enters retirement in the US the decumulation of assets will coincide with increasing dependence on defined contribution schemes.
This change from defined benefit to defined contribution is a change from managed for you to DIY. Unlike DIY home improvements, there are few tools for DIY pensions and a more existential need for them.
This is where Kindur comes in. Unlike the recent developments in managing people’s savings, through so called ‘robo-advisors’ which continue the trend since the mid 70s of democratising wealth management for the masses, Kindur is not focused on the accumulation phase but the decumulation one. Kindur manages your money in retirement so you have something to leave to your family, or, more importantly, have enough for yourself. It is building a platform that manages this holistically and simply, across all of your savings, pensions and social security and through different phases of retirement, from active early retirement to possible needs for long term care.
This creates a product design challenge and a platform opportunity.
Building a retirement platform is a product design challenge that involves overcoming complexity and bias, creating an intuitive ‘user interface for money’ in a period of low inflation which exacerbates the problem.
What the product has to do
A retirement platform has to cut a retirement paycheck, manage pools of assets, coordinate drawdown, manage social security with its bewildering array of choices, manage how much of your retirement income you want to insure through annuitization and how much you want to prepare for long term health care. All this has to be done while navigating a complex thicket of tax consequences that are anything but transparent and intuitive.
The product should target a market segment where people are rich enough that the state is not going to help them through services such as Medicaid, but not so well off that asset management is already taken care of or running out of money in retirement is not an issue. The market segment — the goldilocks spot, not too rich not too poor, coincides with a large section of American society who are anxious about their retirement and therefore potentially looking for a solution that helps not just to save enough but to spend wisely.
In addition, the product has to take a long term view and anticipate secular changes driven by both demographics and technology, such as increasing healthcare costs and advances and innovative long term residential care models. With retirement shifting from a binary event, to people easing out of full time work over a period of time, a product needs to anticipate graduated rather than binary choices.
The low hanging fruit
Much of the design of a retirement platform revolves around making sure people do simple things which are boring and bureaucratic but costly, by doing it for them automatically. This is the low hanging fruit and there is a lot of it:
Approximately one-third (35%) of all 401(k) participants cashed out their accounts when they left their jobs in 2013 (rather than rolling them to an Individual Retirement Account), which can cost investors substantially in terms of penalties and taxes.
The deeper design challenge
At a deeper level there is a larger principal at play which has formed the basis of some of the most successful financial services products.
There is an apocryphal story that Albert Einstein once declared compound interest to be “the most powerful force in the universe.” Humans seem unable to intuitively grasp it any more than visualising four dimensions, but it is real and is the underlying principal behind saving which in turn determines the challenge of how to design a good savings product that is understandable and easy to use.
In the accumulation phase of a pension pot, the principal issue is that people don’t understand compound interest in terms of what they need to get. Governments don’t understand how much money you need for a retirement income, let alone individuals, particularly in a low interest environment.
The reverse of compounding interest, compounding fees, is what makes the single best savings product work in terms of how people can get what they need — an index fund. Jack Bogle, the founder of Vanguard understood that a well diversified portfolio tracking a whole index could outperform those seeking better than average returns through stock picking or mutual funds because the management fees for active management would compound and reduce the overall return to not much more than a passive fund, but with higher risk. In turn, by structuring Vanguard as a cooperative he was able to funnel profits back into lowering fees. It was the perfect business model design for a good product that made millions of ordinary Americans’ lives better.
By layering a beautifully simple digital interface and algorithmically controlled management system on top of index tracking ETFs from people like Vanguard (who are the second largest ETF provider), so called ‘robo-advisors’ have produced a digital era version of the entire Vanguard proposition, both product and people. This robo-advice includes tax optimisation and rebalancing a portfolio to maintain optimised allocation ratios between different asset types.
The platform opportunity
Robo-advisor services have the characteristics that are recognisable to people in the Internet industry as fintech versions of the ‘platform’ companies that have become the hubs of Internet ecosystems, in that they sit at the center of marketplaces or transactional flows of information.
Robo advisors with potential platform level scale, are part of the defined contribution pension era story, but they are only one half of it, the savings phase before retirement. Kindur is focused on the other half, the period immediately leading up to and after retirement where people have to manage asset decumulation so that they have enough through retirement, in both health and ill-health, and can maximise what is left to their spouses and children.
This decumulation phase has completely different characteristics from the savings one in that it involves co-ordination of multiple sources of income and assets, from Social Security to pensions and property, and multiple potential scenarios for discretionary spending on things like travel, to necessary but unknown medical and care costs. Similarly, but architecturally different from a robo-advisor, these costs need to be both continually tracked and managed over time and prepared for in advance.
This is what Kindur is in the process of building. With a deeply experienced team from financial institutions including JPMorgan, Fidelity and Capital One, and consumer tech brands including Earnest and Seamless, Kindur has brought together decades of expertise to build a consumer first solution that’s more accessible than ever. Kindur is a graduate of the Anthemis Foundry and has recently raised Series A financing.
When the platform launches, it will help people during the phase of life that is most vulnerable by definition and which is particularly v ulnerable in future due to long term macro changes to society.
Like Vanguard, the aim of Kindur is to make millions of ordinary Americans’ lives better.