Crowdstacker’s CEO Karteek Patel reveals why investors have opted for the Innovative Finance ISA over the past two years.
When the first types of ISA launched in 1999 the country was still in the first flush of a much feted Blair Government, the economy was buoyant, and the outlook rosy.
It was the end of a decade that saw average base rates of around 8%. Inflation meanwhile may have started at 9.5% in 1990, but it rapidly fell to a more manageable 1.5% by 1999.
In this environment investors looking to expand their portfolios could be forgiven for assuming a steady rate of return would be par for the course, even if they simply put their money in a standard cash ISA. And the temptation to dabble with a Stocks and Shares ISA was equally strong.
But eighteen years on with a Global Financial Crisis and uncertain political and economic environments in most major markets, the original types of ISA are arguably losing popularity. Rates of return on cash ISAs in particular have been woeful for the last few years.
Enter the new Innovative Finance ISA which launched in April 2016 with the aim of enabling retail investors to take a tax efficient stake in the increasingly popular and potentially more lucrative (with some double figure returns offered) alternative finance sector.
Some IFISAs, such as our own, also came with the added bonus they were helping to boost funding for British businesses. In fact, recent data from the British Banking Association implies the P2P business lending industry now supplies about 6.56% of all new loans to SMEs across a wide range of industries – a small but increasingly important source of funding for home grown businesses.
Things can only get better
Alongside our colleagues at Crowd2Fund, Crowdstacker was one of two platforms to offer the Innovative Finance ISA from the very start. Gradually over the past two years other platforms have secured the correct permissions from the FCA and license from HMRC to also offer an ISA. So today there are several Innovative Finance ISA products on the market for retail investors to choose from.
However, over this time questions have been asked by the media and analysts, as well as inside the industry, about the performance of this new type of ISA, and the potential it has. If you take a look at data from nearly two full tax years of offering the new investment, some interesting patterns and insights emerge which show just how much potential it has.
A welcome addition to a balanced portfolio
Not only is the IFISA an important source of income for British businesses, it also provides exposure to a range of industries for investors.
The 4th Alternative Investing Industry report is hot off the press, and this indicates peer-to- peer business lending is the largest alternative finance segment, at a value of over £1.23bn in 2016.
This is a huge achievement in a short period of time, but is still dwarfed by the value of the mainstream British banking industry.
To compare IFISA subscriptions with stocks and shares ISAs or cash ISAs must be done so in this context.
Despite the disparity in size, the same report reveals IFISA investors have been given the opportunity through P2P business lending to invest in sectors as diverse as construction and real estate, as well as leisure and manufacturing.
Male investors are a key target market
We can also see some interesting differences between male and female investment patterns.
The difference between the numbers of male and female IFISA investors on our platform has remained steady with something in the region of three men to every one woman investor. Across the industry this data is similar with more than twice as many men as women engaging in peer-topeer business lending.
This compares, however, to overall figures for all types of ” ISAs where slightly more women than men invest.
This is possibly because P2P lending is considered in a similar risk category to stocks and shares investing, compared to low-risk products such as cash ISAs or cash savings accounts. The latter are clearly preferred by women with more than twice as many men as women telling us in our most recent research they intend to invest in stocks and shares, either as part of their ISA or other investments.
IFISA investors happy to invest more, and get more
Take a look at the amounts being invested however and Innovative Finance ISAs are clearly considered worth this slightly increased risk.
2016-17 average ISA subscriptions were £5,558. Average subscriptions for our Innovative Finance ISA were above £11,000 – probably indicating early adopters of the IFISA are more seasoned investors, who are investing larger sums. Of course, as we know from other innovations such as smartphones and social media, where early adopters lead, the masses will follow, as long as the proposition is attractive.
And the overall proposition of the IFISA is very attractive. Our own investments over the past two years which are eligible to be held in an ISA have offered up to 7% returns. That’s still nearly four times even the best rates on offer from cash ISAs at the time of writing.
We took some time to understand what investors are looking for from their investments, and the three key responses were tax efficiency, the ability to understand where and how the money is being used, and a fixed income. The Innovative Finance ISA offers all three of these key investment traits.
What will it take to go mainstream?
More work needs to be done by the whole industry to educate businesses and retail investors about the possibilities and opportunities presented by alternative finance, as well as the tax-free Innovative Finance ISA options. Average returns from our own platform have remained steady around 4-6% beating inflation and consistently beating many better known, but less risky investment products such as cash ISAs. Investors need to be educated to not only create better awareness of this type of investment, but also a better understanding of how they can be used as part of a well-balanced investment portfolio.
Once this greater momentum of understanding is achieved the Innovative Finance ISA could easily command its fair share of the entire ISA market.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.