Blogs

JP Morgan leads the digital banking revolution with its multi-billion-dollar investment. What other banks can learn?

  • Overview of the digital transformation in the banking sector
  • Digital strategies initiated by JPMorgan and their outcome

 

The global banking industry is undergoing a transformational change in its business model due to the challenges posed by a growing prominence and invasion of innovative fintech companies in the financial space. Digital transformation is the rallying cry among banks with some adopting it in a better way than others. Banks are expanding beyond their traditional boundaries to remain relevant in the digital environment. Multiple research surveys and studies have highlighted the fact that a majority of the customers have switched to digital for accessing their bank accounts through mobile banking and mobile apps. Customers are becoming more open to adopting new digital platforms because of the ease and convenience these provide.

A slow adoption to new technology and lesser focus on customer convenience for its offering has been the shortfall of traditional banks and it is this area where fintech has leveraged. In order to cope up with the digital transformation, banks have increased their spending by billions to better digital customer deliveries (through analytics), improved mobile banking, upgraded their systems (automation of back-office) and protection of data. The spending of these banks is also focused on ensuring the information security of clients becoming more efficient, staving off competition (especially from the fintech) and reaching out to the millennial generation.

JPMorgan Chase & Co. one of the largest banks in the world is making major investments on transformation and is scaling to emerge as a full-fledged digital player in the banking industry. It leads the pack in terms of spending on technology and innovation. The company increased its technology budget to $10.8 billion (2017) for scaling up to the next generation of digital banking and also introduced multiple lines of digital platforms for its customers. The company is trading off short-term losses for long-term gains, with investment in digital strategy. The trade-off can be seen with the rise of active digital customers, which increased from more than 10 million active digital customers (2013) to 46 million active digital customers (2017). This even topped the Bank of America, its biggest competitor, which had 35 million active digital customers in 2017. Additionally, JPMorgan’s active mobile customers have increased by more than 50% in five years from ~15 million active mobile customers (2013) to ~30 million active mobile customers (2017).

The bank is evolving itself into a holistic digital banking ecosystem by offering multiple suites of digital mobile apps, these include Chase Mobile (bank’s mobile banking app), Chase Pay (bank’s digital wallet), Finn (bank’s mobile-only bank) and JPM Mobile (bank’s digital wealth management app), all of which appeal to different customer segments. JPMorgan has ~30 million active mobile users for these mobile applications.

One of the priorities for JPMorgan is to focus on the hiring of talent with technological expertise, this is done in order to lead the innovation in the company. In addition, JPMorgan already has more than 50,000 people working in technology. Beyond the traditional approach of hiring, the company is also leveraging on its engineering hires from its recent acquisition of the online payment startup WePay, which has been attracting talent from the Silicon Valley. Recruiting top-notch tech talent has positively impacted its capability to develop and deliver well-received digital products and services, which is one of the key drivers for the company’s growth in digital customers in recent years.

The profit margins for the bank has been compressed with new business models’ centred around customer convenience and as the company increased its operating expenses to ramp up digital presence. In 2017, JPMorgan’s non-interest expenses increased by 4.8% as compared to 2016. All the non-interest overheads individually also registered an increase in the same year in relation to the previous year, but of all these technologies, communications, equipment expenses along with compensation expenses, professional and outside services expenses registered the biggest overall increase. The compensation expenses increased by ~53% of the total non-interest expenses (2017) as compared to ~51% (2016), while the technology, communication and equipment expenses, professional and outside expenses increased by ~13% and ~3%, respectively (in 2017 as compared to 2016). The increase in non-interest expenses for the company has also been relatively higher than the previous years as it has been focusing heavily on its in-house capabilities to support the digital strategy and this reflected with the increase in headcount as well to 252,539 (2017) from 243,355 (2016).

JPMorgan has positioned itself with an ecosystem which is more customer-friendly and in the meanwhile shifted its business model from being profits based out of products to profits dependent on the backdrop of having a huge customer base. It is playing the long-term strategy by transforming into a digital bank ready for the future. Furthermore, going digital is the way forward to make up for the profit margin since this provides an opportunity to scale the business at minimum marginal cost and, in turn, deliver to customers a huge value and convenience.

The big banks like JPMorgan Chase & Co. are spending heavily on the customer-based technology, giving it an edge over its smaller rivals in the competition for deposits. Novantas, a retail banking consulting company has stated in one of its recent research that the big banks are growing more rapidly in comparison with their smaller competitors, re-affirming the firm control of the large banks over the deposits. In addition, as per the American Banker, the top 20 banks in the US collectively control ~67% of the deposits in the US, currently, as compared to ~22% ten years ago and this is because that these top banks have invested heavily on the customer-based technology over the years. The deposit growth rate of the top three banks in the US; JPMorgan, Bank of America and Wells Fargo is double of the small banks. Investing in customer-friendly technology should be way ahead so that banks can capture the deposits of customers from its competitors (beyond banks such as fintech).

On a broader perspective, customer expectations with regard to financial services are ever-increasing and banks will find it difficult to control their entire value chain using traditional business models. Their success will depend on the ability to leverage insights derived from customers, advanced analytics and adopting technology to provide tech-savvy customers with better financial services and more offerings. The innovation with digital services that each bank provides better than its competitors will be the key going forward and banks will have to go digital to stay relevant. While JP Morgan is already leading the way, other banks are left with not many choices, but to follow the suit.

Your Rating

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

Can lithium-ion anode demand for needle coke reduce availability for electrode players?

What is needle coke? Uses of needle coke Lithium-ion battery manufacturers demand needle coke   Needle coke? Needle coke is a specialised form of petroleum coke...

Rapidly growing Indian online food delivery industry and its unrealised profits

Evolution of online food delivery industry in India Geographical penetration and scope for expansion Key players and their zeal to balance revenue and costs   Online...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Blockchain, an emerging concept, a disruptive technology (Part 1)

What is blockchain? How is blockchain revolutionary? Cryptocurrency, the new money ICOs, the new way of raising money Summary Blockchain is a software architecture...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Carbon black industry, strong potential for supernormal profitability?

What is carbon black? Its uses Impact of the environmental curbs in China   What is carbon black? Carbon black is a fine carbon powder and it is a disorderly...

Rice industry outlook 2018

Major rice producers and consumers Global rice trade Factors dominating the trade   Rice is the 3 rd largest produced agricultural commodity in the world, after...

Rise of Ant Financial, will the success story continue?

What is Ant Financial? Journey to become king of unicorn Will regulatory curbs hinder its success journey?    Ant Financial, an affiliate and integral part...

Indian wood panel industry, growth drivers and present trends

Current market scenario in the Indian plywood industry Growth in the housing sector and rapid urbanisation to provide the boost GST rationalization to reduce price difference...

Baidu’s Apollo, the underdog of autonomous driving platform

Overview of the autonomous vehicle sector in the global automobile industry Search giant Baidu’s entry into the autonomous driving space Baidu’s approach in becoming a front-runner...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Battle for the textile and apparel industry in Southeast Asia

The reasons for China’s decreasing presence in the industry Initiatives by the governments in Southeast Asia to boost the textile trade Vietnam and Bangladesh’s quest to conquer...

OYO Rooms, an Indian start-up to enter Japan

Growth story of OYO Rooms in India Business model of OYO Rooms Analysis of strategy to enter Japan   OYO Rooms, the Indian start-up has decided to venture in Japan...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

What’s in store for India’s first commercial REIT as it hit the market with Blackstone teaming up with Embassy Group

Overview of the partnership and assets of Embassy Office Parks Comparison of the Indian commercial office market space with other developed markets Road ahead for India’s...

German economy, will the slide continue?

Weakening global industrial demand weighs on Germany’s manufacturing sector Inflation and business climate take a hit with broader signs continuing to be subdued Future...

Malaysian rubber glove industry, an update

Rising global demand for gloves Impact of USP 800’s implementation and the US-China trade war on Malaysia’s rubber gloves industry Key challenges for the Malaysian rubber...