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OBSERVATIONS FROM THE FINTECH SNARK TANK
In JPMorgan Chase’s recent earnings call, the $3.76 trillion (in assets) bank announced it plans to increase its annual technology budget to $12 billion, 26% more than it spent in 2020. According to Tearsheet:
“Analysts had a hard time accepting the big increase in tech spending. The increased tech budget pushes total expected expense growth to 8%, which could cause the firm to miss profitability targets this year and perhaps in 2023.”
Responding to calls for estimates of the return on the bank’s technology investments, CEO Jamie Dimon said:
“A lot of you want payback tomorrow and stuff like that. We’ll not disclose those numbers, but we are there for the long run. We’re going to add products and services and countries for the rest of our lives. So I doubt, over the long run, we’ll fail.”
Dimon might have said that Chase won’t disclose the payback numbers but his new letter to stockholders in the bank’s 2021 annual report provides insights into where the $12 billion technology investment is going—and what he expects to get back from it.
Below are quotes from the letter and the Fintech Snark Tank’s take on them.
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“Some of these investments [in technology] simply must be done to sustain the company’s health. Investments in this bucket help keep the ship in tip-top shape and touch a broad range of workplace needs: regulatory requirements and necessary improvements for cybersecurity, as well as operational resiliency and security. Some things we have done with no direct revenue benefit, rather simply to maintain our competitive position. I call these table stakes—think of digital account opening for consumer and small business accounts.”
Fintech Snark Tank take: As Dimon notes, infrastructure investments often have no direct revenue benefit. More important, however, is that these investments usually don’t have a cost reduction benefit, either.
This is where many banks waste their time and deceive themselves—they require IT to prepare ROI analyses for infrastructure investments with cost reduction estimates that almost never come to fruition.
This is particularly true with digital account opening, which Dimon refers to as “table stakes.” Many banks still operate under the delusion that providing digital account opening will significantly (or at least, meaningfully) increase account volume. It doesn’t. Thanks for calling this out, Mr. Dimon.
Maintenance & Enhancement
“Other investments are specific improvements to products and services, often with identifiable benefits. Almost all of the $2 billion in expenses are analyzed and studied for their ROI or other significant benefits. Sometimes people refer to these expenses as modernizing or adopting new technologies. The term implies that once you get to a modern platform, these expenses should dramatically decrease—which is rarely the case. In fact, when we analyze these expenses, we incorporate not only the cost to build the product or service but also the cost to maintain it going forward.”
Fintech Snark Tank take: I often wonder how many bank CFOs still don’t grasp this concept, that the development of new systems and applications requires ongoing maintenance which results in additional expenses for IT.
But what Dimon dances around here is that investments in modern platforms should dramatically reduce expenses—in the departments and lines of business that the platforms impact, not in IT.
“On the path to new and modern infrastructure, cloud-based systems will ultimately be faster, cheaper, more flexible and also AI-enabled. We have spent $2.2 billion building new, cloud-based data centers. Our total expensed cost of data centers is higher than in previous years because of the duplicative expense that is generated as we run both the new and older centers.
Thousands of applications (and their related databases) are being replatformed and refactored to run in the private and public cloud environment. We migrated our card mainframe to the new data center and are already seeing approximately 20% faster response times for our major customer-facing applications. This one application will use only 1.5% of the capacity of our new data centers: Of our more than 5,000 applications that will still be in use in two years, 40% will have been replatformed.”
Fintech Snark Tank take: More great detail about where the $12 billion in tech is going—and the benefit it’s producing. Almost as an afterthought, Dimon mentioned that the investments in the cloud include things like “modernizing developer tools and embedding operational resiliency and cybersecurity controls.” Dimon is underplaying the impact here—resiliency is great, but improved speed and agility is the real benefit.
Decentralized Finance (DeFi) and Blockchain
“Decentralized finance and blockchain are real, new technologies that can be deployed in both public and private fashion, permissioned or not. We use a blockchain network called Liink to enable banks to share complex information, and we also use a blockchain to move tokenized US dollar deposits with JPM Coin. We believe there are many uses where a blockchain can replace or improve contracts, data ownership and other enhancements; for some purposes, however, it is currently too expensive or too slow to be deployed.”
Fintech Snark Tank take: The press is going to have a field day with Dimon’s quote that “DeFi and blockchain are real” after his comment “I don’t care about bitcoin. I have no interest in it.” The problem, of course, is that that statement doesn’t conflict with his annual report statement.
“We continue to bring to the market and commercialize innovative products, such as embedded banking; AI-driven fraud controls and forecasting; and account validation and programmable payments on JPM Coin.”
Fintech Snark Tank take: This offhand mention of embedded banking needed more explanation. Does Chase plan to provide a banking as a service (BaaS) offering to fintechs and non-financial brands?
Although conventional wisdom holds that Durbin-protected banks are the best candidates to be partner banks because of interchange revenue sharing agreements, I’ve never believed that will keep out larger banks like Chase.
Offering to take a lower share of interchange is simply a business model decision for the larger banks, and the opportunity to diversify revenue streams will prove to be just as attractive to large banks as it is to smaller institutions. This should be very appealing to many banks as the cost of customer acquisition is significantly reduced since the bank’s partner is, effectively, paying the acquisition costs.
“We have developed over 1,000 application programming interfaces that give various types of customers access to our systems in a controlled way, allowing them to automate our banking systems into their enterprise systems.”
Fintech Snark Tank take: It might have been too much detail for the annual report, but it would be interesting to know what percentage of those APIs are private APIs versus those that are partner or open APIs.
Private APIs are predominantly for internal integration—i.e., cost containment and productivity enhancement purposes—while the development of partner and open APIs could provide some insight into Chase’s future product and service plans.
Artificial Intelligence (AI)
“We are investing more money (think hundreds of millions of dollars) each year on AI. For example, we use AI to generate insights on existing and prospective clients from public information, such as KYC protocols, regulatory filings, social media, news, public websites and documents. Once standardized, the information is then applied to multiple uses, such as generating leads, identifying companies and investors, onboarding clients, and detecting ESG themes. In all of these cases, there are identifiable returns due to lower prospecting costs or improved services.”
Fintech Snark Tank take: It’s interesting that, while much of the industry talks about the future potential for AI to provide better advice to retail customers, Dimon’s examples of AI deployment within Chase are more commercial-focused.
Addressing the Tech Spending Critics
Critics attacked Dimon for not being more transparent about where Chase’s $12 billion tech investment is going—and what it will get from it. Dimon’s letter to Chase shareholders addresses these critiques head on. As Dimon wrote:
“While we measure each of these incremental investments (and there are hundreds of them) as diligently as we can, you can assess the overall results by asking the following questions:
- Do we maintain the competitiveness of our products?
- Are we gaining market share?
- Do we have real wins against some tough competitors, both in the banking world and in fintech companies?
- What are our customer satisfaction scores?
- Have we built new products that may not generate revenue but clearly have improved our business?
- How are our products serving our clients’ needs to access our systems how and when they want?
Finally, also consider: Is the bank sustaining its overall competitive position, growing at pace and still maintaining a very healthy return on tangible common equity while investing for the future?”
Fintech Snark Tank take: Every bank CEO should be thinking about technology the way Dimon does. As it is every year, Dimon’s letter to shareholder is a must read. I do wish he had talked about bitcoin and cryptocurrency, though.