JPMorgan Chase’s acquisition of Nutmeg, the UK’s biggest robo-adviser, is further evidence of the seriousness of its UK digital banking project. It also shows that wealth management will be a vital part of the offering.
After much rumour, including of a bid for UK neobank Starling, JPMorgan said in January it had hired more than 400 people for a greenfield digital consumer bank in the UK, carrying the Chase brand.
Sanoke Viswanathan, London-based international consumer CEO, is expected to launch the bank to consumers later this year.
It comes as other UK neobanks have staged more of shift to lending lately. They’ve struggled to reach profitability through premium subscriptions and transaction income alone.
However, because Chase is so big and established in the US, its entry could cause the UK incumbents more worry than the likes of Starling – or other neobanks such as Monzo and Revolut – says John Cronin, UK banks analyst at Goodbody.
“None of the neobanks have a proven ability to scale up in lending,” says Cronin. “JPMorgan has got balance sheet and capital to throw at it, and the experience in credit markets.”
Partly because of the difficulty of making money through deposits in a low-rate environment, Goldman Sachs’ budding UK digital bank Marcus is turning more towards wealth management, as are some of the traditional banks, notably Lloyds Banking Group.
In Marcus’s case, that includes robo-advice. The mass-affluent market is a relatively easy niche for foreign retail banks to target, and in the UK, until recently, the big banks have rather neglected the opportunity due to post-2008 regulatory concerns.
Growth to profitability
Nevertheless, questions remain around Chase UK and the Nutmeg acquisition. Most obviously, Nutmeg is not profitable, like most if not all robo-advisers.
Founded nine years ago, it manages about £3.5 billion for 140,000 clients. Chase will not bring Nutmeg CEO Neil Alexander – who is staying on after the acquisition – the benefit of a large retail customer base in the UK yet.
Ownership by such a large firm can perhaps allow Nutmeg to delay the pivot from growth to profitability, because Chase intends to make it part of its wider offering.
New technology has brought a cheaper, easier and possibly better way to enter new markets
Nutmeg will bring Chase a technologically advanced feature – adapted to the UK regulatory landscape – to add to a range of services plugged into its app. It could, in addition, offer a more recognised and hipper brand than Chase has in the UK today, says Vijay Raghavan, senior analyst at Forrester.
“The way to make robo-advice profitable is to offer premium services attached to it, including hiring financial advisers, so that the robo-adviser is the entry-level solution,” says Raghavan.
Nevertheless, he says a lack of profitability will probably mean all standalone robo-advisers eventually get subsumed into bigger firms.
The reality, of course, is the UK or any other new international retail operations will not make much difference to JPMorgan’s consumer banking revenues any time soon if it proceeds on an organic basis and by buying fintechs such as Nutmeg.
It could buy big banks in Europe on the cheap, but these are cheap for a reason – the same reason why US banks aren’t buying them.
New technology has brought a cheaper, easier and possibly better way to enter new markets. Incumbent banks are fundamentally less attractive, due to legacy networks and systems, especially when coupled with a sclerotic economy, as in Europe. The UK has plenty of economic challenges, too, thanks to Brexit.
The US bank already has a bigger corporate and investment operation in the UK than anywhere else outside the US, employing several thousand people.
Main attraction
Above all, though, Nutmeg is another signal of how the UK’s hot fintech market may be the main attraction. In other words, for now, Chase’s international business may be primarily a way to keep ahead of new tech and try it out, without cannibalizing its core business.
To that extent, it is like Openbank, which Banco Santander has used as a testing site for new tech, such as cloud-based banking, and to grow internationally without buying legacy players.
“The UK has a vibrant and highly competitive consumer banking marketplace, which is why we’ve designed the bank from scratch to specifically meet the needs of customers here,” Gordon Smith, CEO of consumer and community banking at JPMorgan Chase, commented earlier this year.
Now Nutmeg allows Chase to embed a highly successful fintech, further helping teach the group more about how it could successfully fend off future challenges from big tech as well as to compete with traditional rivals.
According to Oliver Wyman fintech partner Mike Harding, UK neobanks have shown they can run a current account at a 10th of the cost of the incumbents.
Realising those sorts of savings could be vital to the longer-term ability of an established player such as Chase to offer competitively priced products, especially in its home market. The real endgame may therefore be to transfer the user experience and efficiency that Nutmeg and UK neobanks enjoy back to the core bank.
In the short term, making the UK venture profitable on a standalone basis may not be easy, but compared with doing international expansion via a traditional acquisition, it is relatively low risk.
