In a January 2015 study, the FCA found that the savings market can often be confusing for customers; with over 100 saving products, over 10 different forms of saving (from easy access accounts to fixed term bonds) and 7 different types of ISA. The market appears far more confusing when compared to 1999, the year in which ISAs were launched – there were only 2 product types!
So, what is driving this increase is it related to innovation or is it simply a ploy to attract consumers in a landscape with ever decreasing returns?
The UK BoE base interest rate has remained ‘flat’, at 0.5%, since March 2009, with the most recent amendment coming in August 2016, revised down 0.25%. As a result, it would be reasonable to imagine that the interest rates offered on savings and investment products, over this same period in time have equally remained ‘flat’, in line with the BoE base rate. However, the reality is that interest rates have actually decreased significantly in this period. This supports the idea that this differentiation could be a strategy for banks to attract new customers, with ever changing, ‘new’ offers. It may be the case, but let’s take a better look at the products to understand.
What do these ‘new’ products offer?
These products generally provide consumers with an opportunity to earn a higher rate of interest than traditional cash savings products due to a proportionately higher element of risk, often offering as much as 8 times the rates offered on cash savings accounts.
Peer-to-peer (P2P lending) is an example. Simply put, P2P platforms act as intermediaries and offer individuals with surplus cash the opportunity to lend to borrowers, directly. There are even instances where with either party can dictate the interest rates they want to borrow or lend at - rather like being your own bank manager!
As a borrower you can often receive lower rates than you would at your high street branch and as a lender you can get far higher returns on your investment, a ‘win-win’. As a result P2P lending is quickly becoming a popular choice for investors who want more than traditional savings accounts can offer. One of the most well-known examples of a P2P lender is Zopa, the world’s oldest and Europe's largest peer-to-peer lending service began linking lenders and borrowers. This innovation could be equally linked to innovation as it could to the decrease in interest rates, with the latter providing the perfect opportunity to former.
The true impact of P2P can be seen in 2016 through the partnership of a leading high street bank and a P2P Platform provider. By Q3 2016 P2P platforms had facilitated a cumulative value in excess of £6.2 billion in loans. P2P products are also getting formal recognition and, as a result, are becoming increasingly popular; earlier this year a new Innovative Finance ISA was launched, enabling lenders to earn their interest free of income tax for the first time. Outside of the innovation, the success of P2P is built on higher returns and lower interest rates for savers and borrowers, respectively.
Are older products benefitting from innovation?
From one of the newest ISAs to one of the oldest ISAs, the ‘Stocks and Shares ISA’ was introduced as a tax efficient savings mechanism in 1999 alongside the Cash ISA. In spite of the limitations of Cash ISAs, they hold 52% of the £518 billion ISA market fund value compared to the 48% held in Stocks and Shares ISAs in 2015-2016. Consumer reluctance to save through this method may be attributed to a perceived complexity and the greater risk associated with investing in ‘stocks and shares’. Innovation does not seem to be driving and increase in uptake of ‘Stocks and Shares ISAs’, if anything, this product previously associated with higher returns is being eclipsed by products such as P2P which offer higher returns, with less perceived risk.
So is this innovation or just the same products repackaged?
The Stocks and Shares ISA and P2P lending were both in existence prior to the events leading to the decrease in interest rates. The core substance of both products has always been the same, however adapting certain product elements to reflect forward thinking and adaptation; through access, management, fee structures and incentives such as lenders earning their interest free of income tax as mentioned above.
Due to the current economic uncertainty as a result of the June 23 referendum, we are unlikely to see a rise in interest rates. As such drastic changes or innovative ideas in savings and investment products will not be easy to come by. However, this stagnation could be a driver for repacking of existing elements of said products in other aspects such as interactivity, access and robotics advice..