In his annual letter to shareholders Jamie Dimon, the CEO of JP Morgan, outlines some of the major themes that present both challenges and opportunities to the bank in the past, present and future. I have read quite a few interesting articles in the last few days that highlight what Jamie Dimon is thinking about disruptive technology and the payments space – and given that this is one of the worlds biggest banks, I thought I would have a read and share with you my key findings. Of course, my focus in this post will be payments and Jamie’s payments related views.
1. JP Morgan is making big bucks…
In 2014, JP Morgan earned a record $21.8 billion in net income, which transpires to record earnings in the last 4 out of 5 years. Jamie highlights various charts and statistics showing growth over the last couple of years.
But the stocks aren’t doing great. This according to Jamie is due to both historical legal and regulatory costs, and uncertainty around future costs in these two areas. Surely this is reference to the high profile cyber security and data breaches that took place last year, and the expectation that there will be future breaches too…
2. Key achievements include:
- Consistent strong financial results according to Jamie “show a great ability to adapt to changes – both from the market place and the regulatory environment”
- Increasing market share and organic growth
- Rated #1, among large banks, in the American Customer Satisfaction Index
- Consistent record in good and bad times due to the “economies of scale, brand, expertise, technology and operations, and – importantly – competitive advantages created by our ability to cross sell”
- In the US, JP Morgan is seen as the “money centre bank” or “bankers bank”
3. JP Morgan and Big Data:
A ‘global think tank’, the JP Morgan Chase Institute, is being formed to focus on big data. Utilising JP Morgan’s global knowledge, access and resources the Institute will provide analysis spanning financial behaviours, industry insights and tracking and forecasting global trade and capital flows.
4. JP Morgan and Risk Management:
Jamie described how JP Morgan are “fanatics about stress testing and risk management”, running hundreds of stress tests a week. These stress tests include scenarios such as replicating the financial crisis of 2008 and various scenarios that might develop in Russia, the Middle East and across the Eurozone (such as a Greek exit). Additionally the letter describes in detail Jamie’s thoughts on the Federal Reserve Comprehensive Capital Analysis and Review (CCAR) stress test too.
5. G-SIB – Global Systemically Important Bank:
I must admit, I didn’t even know about this index. According to Jamie the G-SIB calculations put JP Morgan as THE most important bank and as such JP Morgan must hold more capital than any bank in the world. Since it was new to me, it was interesting since the G-SIB index seems to be raising a number of questions around exactly how the calculations are made and ponders the value of some calculations. Read more about this within the A New Global Financial Architecture section.
6. JP Morgan & Regulation:
There seems to be a love/hate relationship (I’m sure its more the latter though) throughout the letter with Regulation and the Regulators. There is reference to how every new rule and regulation impacts each part of JP Morgan’s business function, and how the industry is “safer and stronger because of all the new regulations”. But at the same time there is some anguish around regulation and the costs it entails. The costs are both the cost of compliance and any incurred penalties. Jamie describes how “banks are now frequently paying penalties to five or six different regulators (both domestic and international) on exactly the same issue”.
7. JP Morgan & ‘The New World’:
The Solid Strategy and Future Outlook is the most interesting section of the letter. Jamie indicates that the JP Morgan strategy will pretty much remain the same, but acknowledges that “some areas will require some surgery”, and that while that surgery is happening growth in those areas will slow down.
Jamie describes how JP Morgan is excited about payments!! He goes on to highlight some current JP Morgan products and describes how big data will be utilised in areas such as helping to analyse credit card and treasury transaction activity to help monitor suspicious activity.
Next the letter turns to the emerging competition, and this is the juicy stuff that has been the target of many articles. The letter highlights how technology and changes in regulation has led to the emergence of many competitors. These competitors Jamie argues have ” fewer capital and regulatory constraints and fewer legacy systems” which is resulting in a “uneven playing field”. Following are the key areas that JP Morgan will be watching closely, but note the recurring theme – a level playing field is required:
- Large foreign banks – particularly those from China, but also those from India, Brazil, Japan and Canada
- Silicon Valley – numerous start ups are providing viable and alternative solutions/products to traditional banking. These start ups are removing the pain in key areas such as making loans, which takes start up companies minutes compared with a couple of weeks through a bank could take weeks
- Jamie writes that JP Morgan will partner with such start ups where appropriate, and will seek to provide it own competitive products too
- Competitors in the payments space – Bitcoin, PayPal and “PapPal-look-alikes” are the cited examples here. Jamie concedes that JP Morgan is quite good at payments but there are opportunities when it comes to real time systems, encryption, cost reduction and removing customer pain points. Jamie goes on to say that there are payment processing limitations via NACHA – for example, payments cannot happen in real time and there are payment processing costs – now this is the interesting bit, Jamie refers to the start up competitors only being able to compete because they are “free riders”… ooo-err missus…!
8. The Elephant in the Room – Cyber security:
Given that many called the JP Morgan hack in 2014 one of the biggest breaches in history with 83 million (!!!!!) personal details exposed, this had to be a key focus area. So here Jamie describes the “absolute, critical and immediate need to combat cyber security threats”, and the lack of knowledge and information about personal data. The letter continues to describe how personal data is brought, sold and subsequently misused by third parties. Jamie states that going forward JP Morgan will limit and control how third parties use the company’s data, and how combatting cyber security will require both governmental and cross industry collaboration.
9. There WILL be another Crisis:
Regardless of whether it is a geopolitical, economic, regional or industry crisis – there will be a crisis and its tremor will be felt by the financial markets. This according to Jamie is a certainty and while the causes may be different during the process of a crisis there are certain common elements.
10. The JP Morgan Corporate Culture:
In the last section of the letter – A Strong Corporate Culture – Jamie outlines the engagement of the Board, for example for scenarios such as succession planning for “hit by the bus” scenarios.. which I thought was interesting! Jamie talks about employee talent, compensation, morale, partnership, ownership and fairness. I don’t want to dwell on this too much, but want to acknowledge that it was mentioned so that you get a full picture. In short this is where Jamie says we care about our shareholders and employees….Aaaah…! 🙂
The JP Morgan annual letter provides us with a useful insight into what the chief of a major global bank is thinking about. Clearly what is keeping Jamie up at night will be shared by his colleagues in the banking industry and gives us something to consider when we review what is happening in our own regions and corporations. Overall the JP Morgan approach sounds pretty conservative, especially when you compare it with BBVA where at its annual shareholder meeting Francisco González said that the bank is going through a “digital transformation“.
So Jamie Dimon’s underlying message here is that whatever happens next – financial crisis, data breach, competitor threat(s) – the banking industry collectively is much stronger due to both the recent and historical lessons learnt. Of course there are some mumblings about regulation and the cost impact that is having, together with the increasing attention banks such as JP Morgan are having to pay (metaphorically speaking) to new start up competitors. It will be interesting to see if this ‘cost’ starts to impact traditional banks such as JP Morgan in the near or long term future, and how disruptive it will be to the traditional way of banking and making payments.