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The AltFi View on the ‘buy vs build’ debate: Nutmeg adds some spice

Big banks have sunk tens of millions of pounds into building fintech challengers, with little to show for it. Now they are willing to pay up for innovation.

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Collectively it’s quite hard to know just how much banks have spent in the past five or so years on fintech projects that ended on the scrap heap. Maybe they would have just been better to buy them in the first place?

This reality came into sharp focus last week with the £700m (allegedly) being paid for the original fintech disruptor and UK robo adviser Nutmeg by JP Morgan, the original Wall Street banking giant.

Just in the robo advice space, we  have had some profile crashes from Investec - Click & Invest - as well as UBS’ Smart Wealth that ultimately were both written off to the tune of tens of millions of pounds. 

Add in Royal Bank of Scotland’s Bó which closed after just six months and JP Morgan’s own digital bank project, the aptly named, Finn which was shuttered in a  similarly sharpish time period. 

There are many more examples of banks trying to ‘do fintech’ and it not working out, and these are the ones we know about. So, what are the lessons? 

With Nutmeg, JP Morgan is still nesting the standalone brand in its own (other) digital banking project ‘Chase’ which is set to launch in the UK in the next few months. It gets 140,000 wealthy customers as well as £3.5bn of AUM on top of a decent technology platform and a well-known brand name.

Therefore, in the age-old buy vs build debate, JP Morgan is clearly doing both. It is still building its own thing unless the project is one big ruse for a neo bank acquisition too. But it is also clearly valuing a standalone fintech start-up very highly. This was no fire sale.

Also, it beggars the question as to whether a fintech brought swiftly in its early days and nurtured within the corporate stable of a large bank would, ceterius paribus, be successful. Put another way, would it have been a more astute deal for JP Morgan to have bought Nutmeg five years ago more cheaply and continued to fund it in the same manner it has raised capital over this period. Probably not. Nae, certainly not. 

Fintechs are successful for a number of reasons but the most obvious one is by doing something new or better for customers - either directly or indirectly - at speed. They are not bogged down by bureaucracy, compliance, political infighting or short-termism. 

This would have been close to impossible with inside a large incumbent. 

The main conclusion, therefore, is that fintech, in the same manner that biotech became the outsourced R&D for the pharma and healthcare industries, is starting to provide financial incumbents with what they can’t build within the city walls.  More M&A to come.

The AltFi Leader is a new weekly view for 2021 from our editorial team. We’d love to hear your ideas, thoughts, feedback and constructive criticism:

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