As the ISA season approaches for another time, many are calling it a watershed for the Innovative Finance ISA. Launched to some fanfare in April 2016, the early take-up has been muted.
According to HMRC, the level of IFISA investment in 2016/17 was around £17m spread across 2000 accounts. This is out of a total of 2.5m active individual P2P funders (as per CCAF) and approximately 8m ISA accounts opened. High interest rates, access to alternative investment classes, a source of regular income, all tax free is still not capturing the imagination of the masses.
Reasons for slow take-up
The main reason given for the slow take-up is the delay in the major platforms achieving their FCA authorisations. Now this has been overcome with Zopa, Funding Circle and RateSetter all having launched their IFISAs in the past tax year, the scene would seem to be set for the floodgates to open. Or will they?
Our expectation is that some growth will be seen - and no doubt encouraging growth when expressed in percentage terms - but there are still several factors that will hold it back from mainstream adoption.
7 IFISA Challenges
- The fact that an investor is only able to invest in one platform per ISA
When taking into account that more than 50% of investors use more than one platform, which rises to 72% for property lending (CCAF), this in-built weakness makes life more complicated than it should be for the investor
- Commentators predicting adjustments and above average losses
Whether the predictions are well founded or not, they get in the way of moving the audience beyond the early-adopters, who understand and accept the risk in the interests of a better yield. The mainstream remains more comfortable with its better understood, but probably equally risky, Stocks and Shares ISAs.
- The absence of an FSCS guarantee
This continues to be highlighted as a warning to investors by the media and even though it makes very little difference in reality, it is another barrier to mass market adoption. The early adopters understand the risk with only 11% of funders believing they would get their money back in the event of platform failure.
- Other ISA options create confusion
Cash, Stocks and Shares, Lifetime, Help to Buy, Innovative Finance - the retail investor is expected to navigate their way through an array of options. And what does IFISA stand for in any event? An alphabet soup of industry designed acronyms does nothing to help or encourage the average consumer that wants, above all, an easy life.
- Basic lack of awareness
AltFi’s IFISA report suggests that public ignorance is the most likely obstacle for widespread take-up of the tax wrapper, with only 23 percent of those surveyed aware of its existence. However, of those in the know, 1 in 6 had already put money into one and platforms with IFISAs almost universally report good results. Property Crowd has announced that 44% of its investment volume in the current tax year has come from ISA money. Assetz Capital has signed up more than 2,000 investors into its IFISA since its launch in December, surpassing the total subscriptions for the whole market in the 2016/2017 tax year.
- Not sponsored by IFAs
Businesses like Goji are doing a great job in educating and bringing on board the more forward thinking IFAs. The creation of a managed bond gives both diversification and overcomes the challenge of one platform per ISA. Changing an industry one firm at a time, however, is going to take time. Interestingly, of existing investors, the CCAF research tells us that the use of advice is minimal and there is little belief that advice serves to mitigate the risk.
- Lack of deal flow to invest in
Investors hate idle money or 'cash drag'. A wall of investment cash could, therefore, be a case of the industry being careful what it wishes for. Origination remains the biggest challenge for peer-to-peer lenders and has led to the closure of about 35 platforms over the past two years. A recent British Business Bank report shows that SMEs are increasingly cautious in their borrowing and consumer borrowing is also slowing with the threat of further interest rate rises on the horizon.
7 IFISA Opportunities
A challenge is just a hurdle waiting to be overcome. Here are seven ways we think platforms can maximise the potential of their IFISAs this season,
- Understand the persona of the investor
There is a significant bias (60%) to the over 55s in P2P lending and half of these are over 65. This is not the same for equity crowdfunding, which attracts a younger investor. Good marketing is about understanding the persona of the target customer and tailoring tactics and messages accordingly.
- Respond to the needs of the investor
69% of investors want to see some form of provision fund - this is less pronounced in business lending - and 73% want auto-invest in consumer lending albeit there is a preference for selecting individual investments in business lending and property. Half of lenders want the option to withdraw their funds before the investment reaches full term. Products need to be developed with these features in mind - not just the tax wrapper.
- Work collaboratively on awareness
According to the Altfi research, of the different incentive schemes applicable to P2P lending platforms, understanding was lowest for the IF-ISA (23%) and SIPPS (21%). Almost a third of respondents stated they were unlikely to be using their personal savings allowance (PSA) on their loan-based crowdfunding investments.
- Work collaboratively on understanding
There is still a lack of good explainer content out there to show what the product is and how it works. Any suggestions on a better name would also be well received!
- Don't believe that the IFISA is the be-all and end-all to investors
Even though the data suggests there is an appetite for greater investment through tax wrappers, only half of P2P Consumer lenders feel that tax wrappers are important. This falls to 37% for P2P Business lenders and 34% for P2P Property lenders. A tax free return on lost capital is still less than zero. The other benefits of the investment need to be marketed e.g. security, speed and deal flow.
- Concentrate on the early adopters, not the mass market
Peer-to-peer lending is growing despite the challenges of origination. CCAF data tells us £10.6bn has been intermediated over the past 6 years and last month's report from the British Business Bank said that the value of peer-to-peer lending was up 51% year-on year in 2017. Even after removing the institutional money from these figures, there is still plenty of retail money to target.
- Put yourself where people will be searching for an ISA solution
If you want to attract new ISA money, then you have to go out and find it. Competing at an advertising level with the big providers of cash and stocks and shares ISAs will be prohibitive for most platforms, but 'always-on', data-driven strategies geared to understanding browsing patterns and understanding when a prospect is likely to be most receptive to receiving a relevant offer across social, mobile and the web will lead to conversions without blowing the marketing budget.
If you need help developing a marketing strategy for your IFISA, please get in touch.