The cofounder of venture capital firm Daphni is back with her latest investment vehicle, 2050, which as the name suggests has its eyes on the long term.
Jamie Dimon’s insights on innovation
In his latest letter to shareholders, Jamie Dimon, the president of J.P.Morgan, shares his opinions about the major topics that are revolutionizing the finance and banking sectors. First topic: innovation. Extracts.
We have to innovate all the time to succeed. Investing in the future is critical to our business and crucial for our growth. Every year we ask, “Are we doing enough? Should we be spending more?” We do not cut back on “good spending” to meet budget or earnings targets. We view this type of cost cutting like an airline scaling back on maintenance – it’s a bad idea. We spent more than $9 billion last year on technology. Importantly, 30% of this total was spent on new investments for the future. Today, we have more than 40,000 technologists, from programmers and analysts to systems engineers and application designers.
$9 billion last year on technology
In addition, our resources include 31 data centers, 67,000 physical servers globally, 27,920 databases and a global network that operates smoothly for all our clients. There are many new technologies that I will not discuss here (think cloud, containerization and virtualization) but which will make every single part of this ecosystem increasingly more efficient over time. We need to innovate in both big and small ways. Technology often comes in big waves – such as computerization, the Internet and mobile devices. However, plenty of important innovation involves lots of little things that are added over time and make a product or a service better or faster; for example, simplifying online applications, improving ATMs to do more (e.g., depositing checks) and speeding up credit underwriting. Many of these improvements were not just the result of technology but the result of teams of people across Legal, Finance, Technology and Client Coverage & Support working together to understand, simplify and automate processes. One of our growing teams is our digital group, including more than 400 professionals focused on product and platform design and innovation. In addition, the digital technology organization has over 1,200 technologists that deliver digital solutions, including frameworks, development and architecture.
Banks have been enormous innovators
We are always improving our economies of scale (to the ultimate benefit of our clients). Over time, banks have been enormous innovators. We commonly hear the comment that a bank of our size cannot generate economies of scale that benefit the client. And we often hear people say that banks don’t innovate. Neither of these comments is accurate. Below I give two examples of innovations that we are working on:
• Consumer and small business banking accounts. Many decades ago, bank accounts meant checks and a monthly statement, with few additional benefits provided to customers (other than maybe a toaster). Today, most checking accounts come with many benefits: debit cards, online bill pay, 24-hour access to online account information, fraud alerts, mobile banking, relevant rewards and ATM access.
• The cost and ability to raise capital and buy and sell securities. Thirty years ago, it cost, on average, 15 cents to trade a share of stock, 100 basis points to buy or sell a corporate single-A bond and $200,000 to do a $100 million interest rate swap. Today, it costs, on average, 1.5 cents to trade a share of stock, 10 basis points to buy a corporate single-A bond and $10,000 to do a $100 million interest rate swap. And much can be done electronically, increasingly on a mobile device and with mostly straight-through processing, which reduces error rates and operational costs – for both us and our clients. These capabilities have dramatically reduced costs to investors and issuers for capital raising and securities transactions.
FinTech will force financial institutions to move more quickly
FinTech and innovation have been going on my entire career — it’s just faster today. If you look at the banking business over decades, it has always been a huge user of new technologies. This has been going on my entire career, though it does appear to be accelerating and coming at us from many different angles. While many FinTech firms are good at utilizing new technologies, we should recognize that they are very good at analyzing and fixing business problems and improving the customer experience (i.e., reducing pain points). Sometimes they find a way to provide these services more efficiently and in a less costly manner; for example, cloud services. And sometimes these services are not less expensive but provide a faster and simplified experience that customers value and are willing to pay for. You see this in some FinTech lending and payment services. It is unquestionable that FinTech will force financial institutions to move more quickly, and banks, regulators and government policy will need to keep pace. Services will be rolled out faster, and more of them will be executed on a mobile device.
Part of the payments system is based on archaic, legacy architecture
You can rest assured that we continually and vigorously analyze the marketplace, including FinTech companies. We want to stay up to date and be extremely informed, and we are always looking for ways to improve what we do. We are perfectly willing to compete by building capabilities (we have large capabilities in-house) or to collaborate by partnering. Whether we compete or collaborate, we try to do what is in the best interest of the customer. We also partner with more than 100 FinTech companies – just as we have partnered over the past decade with hundreds of other technology providers. We need to be very technologically competent because we know that some of our competitors will be very good. All businesses have clear weak spots, and those weaknesses will be – and should be – exploited by competitors. This is how competitive markets work.
Compiled by Vincent Paes
You can also read the original letter to the shareholders.
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