Jamie Dimon’s next act? Wall Street’s tech mogul
The spending came as a shock when JPMorgan announced it in January. Investors have raised questions about Dimon’s cost control. That likely contributed to last week’s shareholder vote against his mammoth compensation package.
Some hoped Dimon might lower his forecast on Monday, but it didn’t. The bank invests so much money in so many areas that it’s hard to know what goes where, let alone what the payoffs will be. After a full day of discussions and details, an analyst was yet to ask why Dimon is spending all that money now. The CEO was exasperated.
What Dimon and his team are trying to do is think like the big tech companies, such as Amazon.com Inc. and Alphabet Inc., which owns Google, and leverage the same principles of “winner takes everything” that helped them dominate in their fields.
At a high level, JPMorgan does two things. First, it is modernizing its IT systems to make them cheaper, more flexible and more adaptable to product or cross-border changes. It’s about moving data and systems from old mainframes to the cloud. Second, JPMorgan builds tools or buys companies to bring together different types of customers and products. The first part makes the second possible, because on cloud-based systems, all its activities can be interconnected, and data and transactions more easily shared.
Think of a bank as managing vast networks of consumers and merchants, investors and businesses, savers and money managers. JPMorgan, I believe, tries to exploit all of these interconnections. The bank is looking for new ways to win customers, as well as new ways to serve them across multiple businesses. It’s cross-selling, but on digital steroids.
Take the example of digital payments. Fast-growing Buy Now Pay Later start-ups like Klarna are built around network effects: winning consumers on a platform means it can deliver more potential sales to merchants, and winning more merchants means more customer offers, including special discounts.
JPMorgan spends a lot on all forms of payments. The field is competitive, but a bank the size of JPMorgan already has a large number of consumers and merchants, it just needs to bring them together better.
A new area where it hopes to stand out from its rivals is what it calls “integrated banking for e-commerce marketplaces”. Think of banking services inside platforms such as Amazon or Etsy, i.e. access to payments, bank accounts, funding and currencies for merchants as part of the listing on a market. The easier these are to use and the more merchants join, the more JPMorgan can entice its retail customers to shop on these marketplaces. In Europe, the bank buys a company called Viva Wallet to help it.
A slightly different example comes from asset management. JPMorgan buys Global Shares, a software company that manages employee share plans for global companies. The idea is that employees with stocks to manage can become wealth management clients, whether on a simpler, low-margin platform like Nutmeg in the UK or up to a private banking client. fully fledged. Goldman Sachs Group Inc. is doing something similar in its workplace wealth management business, Ayco, which will expand further with its pending acquisition of NextCapital.
In investment banking, the biggest players have already seen their market share increase thanks to the advantages of scale and networks. The top five global banks for trading stocks, bonds and other assets hold 45% of the market, up from 39% five years ago.
Larger banks continue to gain share as they can more easily absorb high fixed costs, while the size of their customer base allows them to sell securities faster and more reliably. Technology investments in automated e-commerce and risk management and pricing software further accelerated this trend, as larger banks were able to develop better algorithms and systems, becoming faster and cheaper than their smaller competitors.
JPMorgan could extend its lead as it continues to invest billions in trading technology. Moving its core computing infrastructure for trading to the cloud means it could perform risk calculations 30% faster and at 80% less cost.
The principle of networks and scale will permeate all areas of finance that are routine, low-margin, and automatable. But there are areas where ‘winner takes all’ simply won’t happen – intensive advisory work for corporate takeovers, for example, or for the wealthiest individuals. These customers will likely always want a second, third, or even fourth opinion. Very large loans and complex transactions that involve greater risks will likely also require multiple counterparties.
Retail banking will also be difficult to dominate. Many people have had the same bank for years, even decades, and are unlikely to move their accounts just because a competitor has a better app. But if one or two banks can become the preferred choice for millennials, Gen Z and the next generation, they could hook those customers to all sorts of other services for the rest of their lives. JPMorgan said 45% of its U.S. retail banking and credit card customers now belong to these two generations. That sounds like a lot, but it’s in line with population share, so it doesn’t look like the bank is far ahead of its peers yet.
There were some simple numbers to take away from the Dimon team on Monday: the bank is expected to save 15-20% on IT infrastructure costs per year, and it also expects $1.5 billion in software productivity and cost savings over the next three years. But the main message was that everything he does will increase market share and revenue gains in his longer-term business.
There is a technology arms race in finance, and the banks that can afford to spend the most stand to reap the biggest profits. Governments are already uncomfortable with the market power of companies such as Amazon and Meta Platforms, which owns Facebook. The more JPMorgan looks like a technology company, the more likely antitrust issues will be.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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