JOHN MASON: JPMorgan Chase & Co. Is Not Afraid Of FinTech Challenges

Friend of the Peak John Mason: JPMorgan Chase is serious about moving into the new era of information technology

Summary

  • JPMorgan Chairman and CEO Jamie Dimon highlights what the bank is doing in fintech.
  • Data capitalism is spreading to more and more industries as "superstar" tech companies threaten to radically change how business is done throughout the economy.
  • JPMorgan has performed very well coming out of the Great Recession and is forecasting strong, sustainable returns to equity in the future, but must achieve technological leadership as well.

AUTHOR: John M. Mason

Recently, I have been writing about the changing nature of banking that is coming about due to the advances in information technology and artificial intelligence.

Of specific concern is the “superstar” companies - companies like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Alibaba (NYSE:BABA), and Samsung (OTC:SSNLF) - that are threatening to change the very nature of business - let alone, financial business.

On Wednesday, I wrote about how Goldman Sachs Group, Inc. (NYSE: GS), which had just announced the addition of a technology expert that it hired away from JPMorgan Chase & Co. (NYSE: JPM) to help develop a “state of the art” commercial banking division for the company.

The obvious effort on the part of Goldman is to not only get into commercial banking, but to get into this business with an information technology platform that will make it very competitive in the banking world of tomorrow.

Therefore, it was of interest to see Jamie Dimon, Chairman and CEO of JPMorgan, spend a couple of pages of his Letter to Shareholders in the bank’s annual report just released, on what JPMorgan is doing with respect to becoming more competitive in the technology of the business.

Before getting into this discussion, just let me point out that JPMorgan Chase is one of the better performers in the commercial banking space these days. In 2017, the bank earned a return of 12.0 percent on tangible common equity.

The bank took a $2.4 billion hit to earnings due to the impact of the Tax Cuts and Jobs Act and when one adds this back into the bank’s earnings, the return on tangible common equity, the bank produced a 13.6 percent result.

Given this performance and the expected deployment of capital, Mr. Dimon writes in his Letter:

“we now think that (the bank) can earn approximately 17 percent return on tangible equity for the foreseeable future.”

If Mr. Dimon can produce these results in the evolving economic and financial climate, I believe that you have a real winner. These kind of results point to an institution that has a sustainable competitive advantage over its direct competitors.

This is all the more interesting moving into an era where many analysts expect major technological changes to transform the financial industry. This is why it is so interesting to read what he has to say.

Julie Verhage of Bloomberg Markets writes that Jamie Dimon “isn’t letting some ‘very smart ‘Silicon Valley challengers rattle his confidence in the bank’s technological progress.”

Ms. Verhage emphasized that Mr. Dimon “touted the firm’s fleet of 31,000 people focusing on development and engineering, and expounded on their work with artificial intelligence, big data and machined learning.”

Mr. Dimon “specifically singled out systems they’ve helped to unfurl for clients, predicting it will ‘solidify and grow our position.’”

Mr. Dimon addresses the following areas in his shareholder letter.

First, he discusses the “payments front” where the bank has developed multiple products to make wholesale payments better, easier, and faster. These apparently will be “rolled out” across all bank platforms.

Second, on the consumer side, the bank has introduced Chase Pay, the digital equivalent to using a debit or credit card.

They also introduced Zelle, a real-time consumer-to-consumer payments systems, which allows customers to easily, safely and immediately send money to their friends and family.

Mr. Dimon adds that these products will allow customers to interact with many other products and payment venues.

Note that Ms. Verhage quotes Dan Schulman, CEO of PayPal Holdings, Inc., (NASDAQ:PYPL) as shrugging this threat off by saying “We’re seeing no impact from Zelle,” as he told in a conference in February that he was not “concerned about the financial industry’s entrant.”

Mr. Schulman added “Banks have had peer-to-peer payments for 10 years.” Ho-hum.

Third, Mr. Dimon discusses artificial intelligence and machine learning. These are core technologies in the “data capitalism” that more and more people are talking about. These tools are crucial to taking advantage of “big data” and all of the information that commercial banks have access to.

Fourth, the bank is working to build more and more connectivity with “networks, data centers and the public and private cloud.” The effort there is the JPMorgan Chase API (application programming interface) store brings together customers “to add simple, secure payments to their software.” Additional efforts are being made to integrate what is done in Consumer & Community Banking, the Corporate & Investment Bank, and Asset & Wealth Management so that the success of one area can be of help to the others.

Finally, “an enormous amount of resources” are being allocated to protect clients and customers “from fraud, cybersecurity risk and invasion of their privacy.” The bank, Mr. Dimon writes, "is ramping up this effort more and more every year. In addition, the bank has recently signed on to work with Intuit to protect the bank, the customers and even the third party as it allows customers to share data... how and when they want.”

JPMorgan Chase is trying to move into a leadership position in the area of information technology and has made a major commitment towards achieving this goal.

It seems important that Mr. Dimon has taken so much space in his Letter to Shareholders to discuss what is taking place in the technology space, internally to JPMorgan. This is a good start.

To me banking is still behind the curve when it comes to fully incorporating the advances that are being made in the information space. Money is nothing more than information. Finance is nothing more than information. Consequently, those that deal with money and finance and their uses should be at the forefront of innovations in information technology.

The JPMorgan Chase annual report and Mr. Dimon’s letter just serve notice to us that this movement into the future is being taken more and more seriously by our leading banks.

Certainly, if Mr. Dimon wants to earn a 17 percent return on tangible equity and sustain that return, it will have to move even more quickly in the future.

NOTE: This column originally appeared on SeekingAlpha.com

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