Sheep on bridge

Micro-investing: from small acorns…

25 July 2018. Published by Katie Fry-Paul, Trainee Solicitor

With the number of card payments overtaking cash for the first time, spare a thought for the piggy-banks of the nation. Where once they were full to the brim with coppers, they now lie forgotten and unused. So what are people now doing with their spare change? Not investing, it would seem…

The problem

In October 2017, the Financial Conduct Authority (FCA) published its Financial Lives Survey which showed that only 5-10% of under-35s have any investments.  This is no great surprise, with millennials reportedly spending three times more of their income on housing than their grandparents did.  The average 18 to 34 year-old in the UK reportedly has £325 spare cash at the end of each month, so after paying for essentials such as bills, rent and food, they are unlikely to be able to save the lump sum required to invest through "traditional" investment vehicles.

The solution?

In an increasingly cash-less society, micro-investing platforms can provide a mechanism whereby users can save their spare change, and then invest it.  With minimum investments starting at just £1, these platforms provide an "in" for investors who don't have a lump sum to invest. 

Some smartphone apps will even track a user's spending, rounding-up purchases to the nearest pound, and moving that spare change into an online account to be saved or invested.  That £2.40 coffee means 60p in your account.  Add another, and you've got enough to start investing.

There are currently only a few providers in the UK offering these round-up services.  However, the introduction of Open Banking in the UK, as discussed in my previous blog, will allow consumers to require their current account providers to share data with authorised third-parties, making such services easier to provide. In fact, since the launch of Open Banking on 13 January 2018, the FCA has received, and more importantly approved, applications from a number of new FinTech companies wishing to provide round-up services. 

Why now?

Whilst being assisted by Open Banking, these platforms have been made possible by the rise of robo-advisers: essentially automated investment management systems which buy or sell investments through an algorithm, on a platform such as a smartphone app.  These robo-advisers have low overheads (they don't require wages, for a start) meaning that providers can accept lower initial outlays. 

Robo-advisers are subject to the same regulatory constraints as human financial advisers are: the FCA states that its rules are "technology neutral".  That said, the regulator is monitoring developments in this area, recognising that automated advice creates different risks to more traditional models. 

Conclusion

Investing through a micro-investing service may be an attractive proposition: it's easy and, dare I say it, fun.  Being able to see investments change on a daily basis provides a degree of interaction, which might just be the spark needed to ignite an interest in investment more generally.  And the low threshold for starting means that anyone can get involved.  

As with all investments, the value can go down as well as up and investors will still probably have to hold investments for the long-term to see them outperform savings.  In a society where payments and investments are made at the tap of a finger, it remains to be seen whether these platforms' target market has the patience to watch their acorns grow.