Jamie Dimon’s UK startup is truly a global story
Chief executive Jamie Dimon received rare criticism from analysts and investors for giving limited details about rising technology costs. The bank’s shares fell sharply after its annual results in January, when it said spending in 2022 would be higher and returns lower than expected, in part due to $3.5 billion in additional investment .
With two decades of success behind him, Dimon has earned the right to expect the trust and patience of shareholders, analysts say, although some fear he will build an empire in his later years. Chase UK, launched last September, is a small item. JPMorgan has also invested in things like a 40% stake in Brazilian digital bank C6 and the takeover of restaurant review site The Infatuation.
Acknowledging the unease, the bank promised more details at an investor day next month following its first quarter results on Wednesday.
Dimon sees competition everywhere — from Citadel Securities in the financial markets to payments company Stripe, and even Apple Inc. He wants to spend what it takes to win. Many of these competitors are attacking JPMorgan in their own backyard, so battling for a slice of UK banking against companies like Monzo or Starling Bank feels like a distraction from defending its core business.
But Chase UK is not about the UK. Its importance will be that of a laboratory – a testing ground for infrastructure, technology, products and ideas. What JPMorgan learns there can be used to modernize its main Chase US retail bank and form the basis of a series of digital-only offerings elsewhere. Chase UK is ground zero for an international consumer business.
To make money in the UK alone, a traditional bank needs a market share of 20% or more, like Barclays Plc or Lloyds Banking Group. But the scale of a digital-only Chase bank to generate meaningful profits in multiple countries is perhaps only a few percentage points in each.
The UK is a good place to create and test new ways of doing things: it’s a dynamic market where people are comfortable managing their finances on their phones and where the regulator understands the benefits and risks of the use of cloud computing.
The cloud is at the heart of what banks like JPMorgan are trying to do. Analysts focused on the savings available once the difficult and risky task of moving outdated mainframe operations is complete. Mike Mayo, an analyst at Wells Fargo & Co., for example, estimated that banks could reduce their IT costs by 20 to 40 percent.
But that’s half the story. Modern banking needs to be on customers’ laptops and smartphones, just like shopping, media, and your social life. It is relatively easy to create banking applications; the real challenge is getting them to interact with legacy accounting and general ledger systems. To do this, banks need to hire software engineers to create middleware – a catch-all term for everything you need to communicate between the new world and the old. To launch new products or change what the customer sees, banks often have to rewrite all the middleware that also needs to be rewritten.
This makes updates slow and means they are done in large, irregular deployments, always with the risk that a bit of coding error could hurt stability. Bank customers – and more importantly, regulators – have minimal tolerance for failure.
Chase UK is completely built in the cloud. It’s doable now because companies like Thought Machine, founded by a former Google software engineer, and 10x Banking, started by former Barclays CEO Anthony Jenkins, have developed cloud-based tools for customer-specific problems. banks, such as instant update of deposit balances.
Experimenting like this in a dynamic but – for JPMorgan – relatively inconsequential market is much safer than doing so where millions of American customers rely on Chase running smoothly every minute of every day. Infrastructure that works in the UK can then be industrialized more quickly in the US. And what doesn’t work can be quickly and easily abandoned.
The same goes for products: what type of savings account, what reward card, what layout of the banking application with what button of what color and what size on the screen…? In a fully cloud-based bank, these questions can be quickly tested with different users at the same time, all on real accounts. Like testing different memes to see which go viral and which disappear into the infinite void. This is not possible on older systems. Again, the know-how gleaned on what to test and how will be useful at home.
Finally, Chase UK is designed to accommodate different regulatory and reporting requirements and different payment systems in different countries. For a traditional bank, only 20-30% of its existing products and systems might be usable when opening in another country. For a cloud-based bank, this is more like 70%. In his recent shareholder letter, Dimon said that once banks move to the cloud, they may be able to add products and services at no additional cost.
So what does the price look like? It will be some time before we know. In five years, Goldman Sachs Group Inc.’s digital startup Marcus has landed 10 million customers and $110 billion in deposits. But its consumer banking revenue was just 2.5% of the group’s total in 2021, and the consumer and wealth management division as a whole achieved a return on equity of just 4%.
After years of watching fintech startups try different products and approaches, many big banks now know what they want to do and how they want to do it. Chase UK is just one of many JPMorgan labs and rivals are getting off to a slow start right now. The payoffs aren’t certain at all, but the need to experiment and improve technology is now a cost to staying in the game.
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Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
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