Could JPMorgan Chase’s Digital Bank Be a Global Success?

21.08.2022

The megabank previously launched its own digital challenger bank in the United Kingdom and is now making good progress, quieting down investor concerns, and showing potential global success as the bank eyes international expansion.

Last September 2021, JPMorgan Chase & Co., the America’s biggest bank, piloted a digital lender bank in the United Kingdom under the name “Chase”.

Based in Canary Wharf in London, thousands of miles away from its parent company, Chase has now been making great results in less than a year. It was able to amass more than half a million customers, raised more than 10 billion USD in deposits, and processed approximately 20 million card and payment transactions since its launch.

The objective was not only to enter the U.K. consumer banking market but also to set up a digital banking model that could potentially be scaled globally as JPMorgan eyes expansion to other countries.

Could JPMorgan Chase’s Digital Bank Be a Global SuccessAccording to Sanoke Viswanathan, Chief Executive Officer of the International Consumer initiative of JPMorgan Chase, and member of the firm’s Operating Committee, the launch of Chase U.K. has been a long process. They have been watching multiple international banking markets, hunting for country that is ready for digital-only banking channels, and obviously, U.K. is on-top in this respect.

It is undeniable that Chase U.K. is off to a great start. However, such success has not come easy and cheap. Many banking experts, and even investors have shown scrutiny over the decision to pilot a digital consumer bank in a new market, previously made by Jamie Dimon, chairman and chief executive officer of JPMorgan Chase.

This is given the recent failures of the firm with Finn, JPMorgan’s rolled out digital bank in the U.S., which lasted for only a year, resulting to millions of losses.

On top on this, the Washington Post indicated that the United Kingdom does not need a new digital bank in its market given the presence of multiple startups fighting its way against traditional firms.

So, what’s the rationale behind the experiment to establish this digital bank? How can Chase change the U.K.’s banking market? Should we expect this to be a global success?

THE FORAY INTO THE U.K. DESPITE INVESTORS’ PUSHBACK

Breaking into international banking markets is not a walk in the park, not even for a megabank such as JPMorgan Chase. Typically, new markets already have deep-rooted firms, and stepping-in requires significant effort and material investments.

JPMorgan initiated its own digital challenger in the U.K., with Fintech being in the limelight and consumer-to-business banking being less favorable. More so, JPMorgan believed an online-only bank would be much cheaper and more flexible for further experimentation.

During the initial phase of the Chase U.K. establishment, JPMorgan observed that securing low overhead is essential in making digital bank in the U.K.

Sanoke Viswanathan specified that the structure of the U.K.’s banking market is such that one should build “economies of scale” — profit is there to amass but high-cost infrastructures will make it hard to work.

Additionally, generating scale needs huge number of investments particularly in technology. This has been one of the major reasons why the Chase U.K. initiative faced serious scrutiny from investors and industry analysts, when CEO Dimon announced that the spending needed for technology-related projects would be heavy.

Could JPMorgan Chase’s Digital Bank Be a Global SuccessIt was previously reported that during that time, JPMorgan’s stakeholders showed major concerns with the firm’s plans to increase the budget for new technological initiatives by around $15 billion.

According to Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities, multiple investors agreed with their presumptions that JPMorgan should better provide transparency on why and where this significant amount will be spent to ensure support from the industry.

Chase U.K. had to take a rocky road in gaining community trust, as it took some time to convince market experts and relieve concerns about digital bank failures, specifically one of JPMorgan’s previous experiments.

Given the previous failure of JPMorgan with Finn, their first U.S. digital bank project, shareholders and industry analysts have been critical and skeptical.

Multiple banks have tried to challenge the digital banking market in the U.S., but most faltered, which analysts attributed to insufficient demand. As estimated by Cornerstone Advisors, JPMorgan’s Finn only had around 47,000 customers during its market presence, which only lasted for about a year.

CHASE’S REASON FOR INVESTMENTS

After JPMorgan’s CEO Jamie Dimon announced the firms budget announcement, the industry had been silent and tense for several months, until Viswanathan made another announcement, revealing detailed plans regarding the technological investments for Chase U.K..

It was reported that given the launch of the firm’s digital bank under Chase U.K., JPMorgan expects to lose around 1 billion USD in the following years, and that the boards hopes that the project will breakeven come 2027 or 2028.

The Motley Fool, a private financial and investing advice company, pointed out that around 70% of the allotted cost are expected to be fixed in nature. Additionally, the digital platform would be able to cater multiple products and service millions of consumers with lower marginal cost.

Viswanathan also indicated that once JPMorgan has established the presence of Chase U.K. in the industry, the same amount of investments would not be needed for further expansion to other international market.

In spite of this, there is still some level of skepticism across the community, and this should be expected to remain for some time.

HOW CHASE U.K. SHOULD COMPETE

Almost a year after its launch, JPMorgan has only created a single “purpose-built customer contact center” for Chase U.K., and no other branches were added. This was purposely planned by the firm, similar to most of digital challenger banks in the United Kingdom.

Could JPMorgan Chase’s Digital Bank Be a Global SuccessAs per JPMorgan CEO Jamie Dimon, the firm does not expect its digital bank to thrive and actually compete by building multiple branches in different places.

However, Chase U.K.’s service strategy is more than just a digital banking through mobile application. It began with a simple free-of-charge checking accounts with multiple budgeting and finance management packages.

Afterwards, saving accounts were added to cater demand and cope with economic changes in the U.K.

JPMorgan recently claimed that Chase U.K. was able to raise non-interest-bearing deposits amounting to more than twice from that of other digital banks in the U.K. in less than a year after its inception. The Motley Fool pointed out that this is a great start for Chase U.K., indicating that non-interest-bearing deposits are the best type of deposits a bank can hold, given its sticky nature.

This significant amount of non-interest-bearing deposits that the Chase U.K. was able gather over the year has been a great relief for the investors, helping JPMorgan to better justify its massive budget for technology investments.

On top of this, the firm’s own digital bank was able to attract hundred-thousands of customers and around 30 percent of this were flagged to be highly engaged with Chase U.K.’s products and services, as reported by the firm.

“These are customers that are using our debit cards multiple times a day, [and] making payments in and out multiple times a week, including bill payments in the form of direct debits,” Viswanathan expounded. “They’re making regular credits into their accounts — including salary credits, and they’re putting in substantial savings.”

WHAT’S NEXT FOR CHASE DIGITAL BANK

Looking at the current trend of the progress that Chase U.K. is making, more should be expected on the coming years.

As mentioned by Sanoke Viswanathan, there are boundless of doors and opportunities for JPMorgan and its digital banking ventures.

During JPMorgan’s recent Investor Day, it was reported that the multinational investment bank expects no less than 1.5 trillion USD in revenue that is forecasted to grow at least 6 percent for the following years. Viswanathan indicated that even though banks typically falter when establishing presence in other markets outside its home-base, the firm believes that they are changing the game with digital and online banking.

Aside from Chase U.K., JPMorgan has also made other initiatives in its digital banking ventures. The megabank has recently bought Nutmeg, an online investment management service bank, eyeing 1.5 billion USD of net new money post acquisition.

In addition to this, JPMorgan has also acquired 40 percent stake in C6 Bank, Brazil’s one of the fastest growing full-service digital banks catering more than 7 million customers.

Viswanathan pointed out that JPMorgan’s investment under C6 Bank is expected to be a good resource to break into the Brazilian market, which is deemed to be third biggest retail banking market around the globe, being one of the most aggressive industry in digitization.

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