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Bank investors face a new ‘black box’ quandary

There are few more artful communicators on Wall Street than Jamie Dimon. Unlike many of his counterparts, the native New Yorker is willing to speak his mind and can express himself clearly, dipping so easily into the vernacular that he sometimes sounds more like the host of a sports-radio talk show than the boss of the biggest US bank by assets.

But some subjects are a little too complicated for even the JPMorgan Chase chief executive to turn to his advantage. Like other pillars of the banking establishment these days, he is making fateful decisions about how to respond to a new generation of fintech competitors — and explaining his technology spending to outsiders is proving tricky.

Dimon’s difficulties were on display a few days ago when JPMorgan reported its fourth-quarter results. As usual, it made loads of money — a record $48.3bn last year. The bank also made clear that it was not standing still. It said it would increase investments in technology, marketing, new businesses and additional staff by 30 per cent this year to $15bn. Tech outlays of all kinds are expected to total $12bn.

The rub is that all this spending could help push up the bank’s expenses by 8 per cent, JPMorgan said, threatening its ability to reach its profitability targets for this year and maybe the next. During a call with Wall Street investment analysts, Dimon was pressed for details on what kind of bang the bank could expect from the big bucks it is throwing at tech.

Dimon predicted JPMorgan would gain market share in virtually every activity, but he acknowledged it would take time to fully understand the impact of his tech spending. For instance, he said the bank expected to save $30m to $40m a year by shifting card operations from a mainframe facility to the cloud, but he maintained the main benefit of the move would be in improved capabilities — from snuffing out fraud to making more targeted offers to customers.

Investors reacted warily. JPMorgan shares — which roughly doubled during the pandemic — lost more than a tenth of their value in days after the company’s earnings call. Mike Mayo, a Wells Fargo analyst who had recommended JPMorgan shares for seven years, downgraded the stock, saying the lack of specifics about what the bank expected from its investments raised the possibility that it might squander money without outside investors being able to tell what was happening.

“Investing in banks is always a degree of investing in a black box — it’s a different shade of grey leading up to black,” says Mayo. “In the case of JPMorgan, this got to be too dark a grey for our comfort zone.”

The irony of Mayo’s criticism is that he recognises that Dimon and bankers like him need to move quickly to modernise their operations or risk seeing more banking functions migrate to fintechs and non-bank competitors. He just worries about the transparency of the process.

“It used to be Jamie Dimon versus the banks, now it’s Jamie Dimon versus the world,” says Mayo. “He is sending a signal that nobody is going to outspend JPMorgan. This is Jamie Dimon’s way of saying, ‘I’m not blinking.’”

JPMorgan’s size and financial strength will come in handy. While fintechs need only focus on the coolest technology, traditional banks like Dimon’s have to simultaneously battle their sophisticated new challengers and maintain the legacy computer systems on which their customers still rely. JPMorgan says half of its $12bn tech budget is needed to run the bank and the other half is to change it. Add it up: that’s two businesses.

“The problem is that banks have a huge amount of their operations running on old stuff — old hardware, old software,” says Diane Glossman, a longtime Wall Street bank analyst who takes a particular interest in back-office operations. “As a consequence, a very meaningful part of their technology spend goes to keeping the wheels on the cars.”

For his part, Dimon displayed his customary confidence as he discussed his investment plans this month, saying he would need to “spend a few bucks” to beat competitors old and new. At age 65 — and with a record of often delivering more than he has promised — Dimon seems ready to hang around for the several years it will take to see if his tech-spending strategy is on target.

For the rest of us, this means investing in banks is only going to get more difficult. It will no longer be enough simply to know whether managements can assess credit risks, allocate capital or inspire sales forces. Bankers are becoming software engineers nowadays, and it could be a while before we find out how many of them are up to the job.


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