I’ve written a lot about incumbents versus startups lately and noted with interest that Jamie Dimon’s annual letter to JPMorgan shareholders picks up on this theme (not as a direct result I’m sure?). He talks about “hundreds of startups with a lot of brains and money working on various alternatives to traditional banking” and that “the ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting.”
These are the ones of concern?
Yes, because “they are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks.”
Interesting. Why does it take banks weeks? He doesn’t say. The answer is because banks are laden with sedentary processes built in the last century for the physical distribution of paper in a localised network called the branch. The branch was filled with human automatons who could manage transactions but not assess risk. Risk is a Head Office function managed by specialists, who are trusted not to lend to idiots (hence the reason why we avoided a credit crisis!). The hand off of fact-finding papers by automatons to enable specialists to work out whether the applicant was an idiot or not would take weeks. Now, self-service forms online have replaced the automatons and automated systems have replaced the specialists. That’s why the new P2P providers can replace banks with instantaneous decision-making services at a fraction of the cost. After all, a server for $1,000 is far cheaper than a specialist Head Office credit risk manager costing tens of $1,000s.
As I blogged a while ago, this is the reason why banks should fear the replacement startup companies more than the wrapper services. It is also why Jamie Dimon not only underscores that the banks is “going to work hard to make our services as seamless and competitive as theirs” but, in a step further towards bank as value systems integrator, he states that JPMorgan “also are completely comfortable with partnering where it makes sense.”
Will JPMorgan integrate Lending Club and Prosper into their credit risk operations and structures, and what does this to do margin, process and operations? Good question and one that JPMorgan along with other banks are all trying to assess, as they have to face it: the day of stand-alone vertically integrated banking is over.
That’s demonstrated well in the payments world, that also gets a note in the letter.
“You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us — and we are quite good at it, but there is much for us to learn in terms of real-time systems, better encryption techniques, and reduction of costs and 'pain points' for customers.”
Learning is a good thing to focus upon, and JPM along with their counterparties are doing just that. It is why UBS, BBVA, NYSE, Intesa, Barclays and several other banks are investing in cryptocurrency startups and supporting new payments models. The thing is that they cannot do this effectively if banks are hamstrung by heritage. As Dimon states: “some payments systems, particularly the ACH system controlled by NACHA, cannot function in real time and, worse, are continuously misused by free riders on the system.”
Free riders? Who could they be? “PayPal and PayPal look-alikes”?
So what are you going to do about JD?
Well, I answered that a while ago but, in case you missed, it JPMorgan has been hiring a whole host of Silicon Valley talent. They have to do this to compete with the new startups, free riders: wrappers, replacers and reformers. As Jamie Dimon puts it: “We move $10 trillion a day. We’re one of the largest payments systems in the world. We’re going to have competition from Google and Facebook and somebody else … when I go to Silicon Valley… they all want to eat our lunch.”
So, although banks have a system designed to protect them through licences, it’s not completely protected from margin squeeze and fee contraction through new players. And we may say that this is just something to be concerned about in the retail space, but I suspect that the likes of Jamie Dimon don’t see it that way as most of the upstarts don’t.
So, the bank of the near future will be value systems integrator of best-in-class apps, APIs and analytics that enable them to deliver the ultimate delivery of value aggregation for their clients. If they don’t move to this model, then their failure to adapt will have been proof of being ignorant of the change that is going on around them and, as noted by Roberto Ferrari who I interviewed the other day, if leadership teams are unable to lead change then they are not a leadership team anymore.