J.P. Morgan Chase’s CEO Jamie Dimon said in his annual shareholder’s letter that banks are facing a slew of competitive challenges from tech-nimble, non-traditional financial services players – even as boom times likely lie ahead for the economy at large.
At a high level, he said, “I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE (quantitative easing), a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom.”
Looking for a Boom
The boom, he said, might “easily run into 2023.” But drilling down, there are notable changes underway and in the works for financial services. “Banks are playing an increasingly smaller role in the financial system,” Dimon wrote, noting that traditional financial institutions (FIs) have become smaller relative to the U.S. financial markets and to the size of most of the shadow banks. In the meantime, there has been a marked growth in payment and FinTech firms, and Big Tech has reached an “extraordinary size.”
“It is completely clear that, increasingly, many banking products, such as payments and certain forms of deposits, among others, are moving out of the banking system. In addition, lending in many forms – including mortgage, student, leveraged, consumer and non-credit card consumer – is moving out of the banking system,” he wrote.
Losing Share to Non-Traditional Players
Neobanks and non-banks have been taking share in consumer accounts, and Dimon noted that the non-traditional players have not had the same capital rules and regulations imposed on them that traditional banks have had to satisfy. “We should remember that the quantum of risk may not have changed – it just got moved to a less regulated environment. And new risks get created,” he warned.
He pointed to Big Tech as another competitive front, where in financial services, Apple, Facebook, Google “and now Walmart” represent threats that are “here to stay. As the importance of cloud, AI (artificial intelligence) and digital platforms grows, this competition will become even more formidable.” FinTech companies based in the U.S. and globally, he said, “are making great strides in building both digital and physical banking products and services. From loans to payment systems to investing, they have done a great job in developing easy to use, intuitive, fast and smart products.”
With a nod to the changing financial services landscape, Dimon stated that “sometimes a new product or an investment should simply be considered table stakes – meaning there’s no need to do analysis at all. Think about banks adding the capability of opening new accounts digitally, for example, or maintaining a strong technology infrastructure and adopting new technologies, like cloud or AI. These could be life-or-death decisions for a company, so instead of focusing on net present value, the emphasis should be on getting the work done properly, efficiently and quickly.”
Some Sticky Trends — and Some Challenges
Dimon said that remote working seems to be a trend that will reduce J.P. Morgan’s reliance on physical real estate, where the banking giant may need 60 seats for every 100 of the bank’s employees.
Among the challenges that loom beyond shadow banking, he said, FIs and regulators must contend with the legal and regulatory status of cryptocurrencies, the proper and improper use of financial data, and the tremendous risk that cybersecurity poses to the system, among other issues.
Of his own bank’s competitive position, Dimon wrote that “our eyes are wide open as the landscape changes rapidly and dramatically. We have an extraordinary number of products and services, a large, existing client base, huge economies of scale, a fortress balance sheet and a great, trusted brand. We also have an extraordinary amount of data, and we need to adopt AI and cloud as fast as possible so we can make better use of it to better serve our customers.”
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Selected by EFXA