FINTECH SNARK TANK COMMENTS
During JPMorgan Chase’s recent earnings call, the $3.76 trillion (in assets) bank announced plans to increase its annual technology budget to $12 billion, 26% more than in 2020 According to Tearsheet:
“Analysts have struggled to come to terms with the sharp increase in technology spending. The increased technology budget pushes total expected spend growth to 8%, which could cause the company to miss its profitability targets this year and may -be in 2023.”
Responding to calls for an estimate of the return on the bank’s technology investments, CEO Jamie Dimon said:
“A lot of you guys want ROI tomorrow and stuff like that. We won’t disclose those numbers, but we’re here for the long haul. We’ll be adding products, services and countries for the rest of our lives, so I doubt that in the long term we will fail.
Dimon may have said Chase wouldn’t disclose payout numbers, but his new letter to shareholders in the bank’s 2021 annual report provides insight into where the $12 billion tech investment is going and what he hopes to get out of it.
Below are quotes from the letter and Fintech Snark Tank’s perspective.
“Some of these investments [in technology] simply needs to be done to maintain the health of the business. Investments in this bucket help keep the vessel in peak condition and address a wide range of workplace needs: regulatory requirements and necessary improvements for cybersecurity, as well as operational resilience and security. We have done some things without generating direct revenue, rather simply to maintain our competitive position. I call these table stakes – think digital account opening for consumer and small business accounts.
Fintech Snark Tank takes: As Dimon notes, infrastructure investments often have no direct revenue benefit. Most important, however, is that these investments usually don’t have a cost-cutting benefit either.
This is where many banks waste their time and get it wrong: they ask IT to prepare ROI analyzes for infrastructure investments with cost reduction estimates that almost never materialize.
This is especially true with digital account opening, which Dimon calls “table stakes.” Many banks still operate under the illusion that digital account opening will dramatically (or at least significantly) increase account volume. This is not the case. Thanks for calling that, Mr. Dimon.
Maintenance and improvement
“Other investments are specific improvements to products and services, often with identifiable benefits. Almost every $2 billion spend is analyzed and studied for its return on investment or other important benefits. Sometimes people refer to these expenses as upgrading or adopting new technologies. The term implies that once you gain access to a modern platform, these expenses should drop significantly, which is rarely the case. In fact, when we analyze these expenses, we not only factor in the cost of building the product or service, but also the cost of maintaining it in the future.
Fintech Snark Tank takes: I often wonder how many bank CFOs still don’t understand this concept, that the development of new systems and applications requires ongoing maintenance that results in additional IT expense.
But what Dimon is dancing here is that investments in modern platforms should dramatically reduce spending, in departments and lines of business impacted by platforms, not in IT.
“On the road to a new and modern infrastructure, cloud-based systems will ultimately be faster, cheaper, more flexible and also AI-enabled. We have spent $2.2 billion to build new centers cloud-based data centers Our total cost spent supporting data centers is higher than in previous years due to duplicate expenses generated by operating new and old centers.
Thousands of applications (and their associated databases) are being reformatted and refactored to run in the private and public cloud environment. We have migrated our card mainframe to the new data center and are already seeing approximately 20% faster response times for our core customer-facing applications. This application alone will only use 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 reformed. »
Fintech Snark Tank takes: More details on the destination of the 12 billion dollars of technology and the benefits they produce. Almost as an afterthought, Dimon mentioned that cloud investments include things like “modernizing developer tools and integrating operational resiliency and cybersecurity controls.” Dimon minimizes the impact here – resilience is great, but the 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 publicly and privately, licensed or not. We use a blockchain network called Liink to enable banks to share complex information, and we also use blockchain to transfer US dollar deposits with JPM Coin. We believe there are many uses where a blockchain can replace or enhance contracts, data ownership, and other enhancements; for some purposes, however, it is currently too expensive or too slow to deploy.
Fintech Snark Tank takes: The press will have a blast with Dimon’s quote that “DeFi and blockchain are real” after his comment “I don’t give a damn about bitcoin. I have no interest in it.” The problem, of course, is that this statement does not conflict with his statement in the annual report.
Integrated banking services
“We continue to bring to market and commercialize innovative products, such as integrated banking services; AI-based fraud checks and predictions; and account validation and programmable payments on JPM Coin.
Fintech Snark Tank takes: This flippant mention of the integrated bank needed more explanation. Does Chase plan to offer a banking-as-a-service (BaaS) offering to fintechs and non-financial brands?
Although conventional wisdom dictates that Durbin-protected banks are the best candidates to be partner banks due to swap revenue sharing agreements, I never believed this would preclude large banks like Chase.
Offering to take a smaller share of trade is simply a business model decision for large banks, and the opportunity to diversify revenue streams will prove equally attractive to large banks as it does to smaller institutions. This should be very attractive to many banks as the cost of customer acquisition is greatly reduced since the bank’s partner effectively pays the acquisition costs.
“We have developed over 1,000 application programming interfaces that allow different types of customers to access our systems in a controlled manner, allowing them to automate our banking systems into their business systems.”
Fintech Snark Tank takes: This might have been too detailed for the annual report, but it would be interesting to know what percentage of these APIs are private APIs versus those that are partner or open APIs.
Private APIs are primarily for internal integration, i.e. for cost containment and productivity improvement purposes, while the development of partner and open APIs could provide insight into future Chase product and service plans.
Artificial Intelligence (AI)
“We invest more money (think hundreds of millions of dollars) each year in AI. For example, we use AI to generate information about existing and potential customers from public information, such as as KYC protocols, regulatory filings, social media, news, public websites and documents.Once standardized, the information is then applied for multiple uses, such as lead generation, customer identification, companies and investors, customer onboarding, and detection of ESG themes, all of which have identifiable returns from lower prospecting costs or improved services.
Fintech Snark Tank takes: Interestingly, while much of the industry is talking about the future potential of AI to provide better advice to retail customers, Dimon’s examples of AI deployment within Chase are more commercially oriented.
Responding to Criticisms of Technology Spending
Critics have attacked Dimon for not being more transparent about where Chase’s $12 billion technology investment is going and what he will get out of it. Dimon’s letter to Chase shareholders addresses these criticisms head on. As Dimon wrote:
“While we measure each of these additional investments (and there are hundreds of them) as diligently as possible, you can gauge the overall results by asking the following questions:
- Are we maintaining the competitiveness of our products?
- Are we gaining market share?
- Do we have real gains against tough competitors, both in the banking world and in fintech companies?
- What are our customer satisfaction scores?
- Have we created new products that may not generate revenue, but have clearly improved our business?
- How do our products meet our customers’ needs to access our systems when and how they want?
Finally, also consider: is the bank maintaining its overall competitive position, growing at a pace while maintaining a very healthy return on tangible equity while investing for the future? »
Fintech Snark Tank takes: Every bank CEO should think about technology like Dimon does. Like every year, Dimon’s letter to shareholders is essential reading. I wish he had talked about bitcoin and cryptocurrency, though.