The largest banks are betting big on Transformative Technologies (AI, Cloud, Digital, Analytics, Robotics, and Data) as key enablers to achieve better bottom line results. In particular, Jamie Dimon, the CEO of JPMorgan Chase (JPMC), recently stated:
“On the importance of the cloud and artificial intelligence we are all in….The combined power of virtually unlimited computing strength, AI applied to almost anything and the ability to use vast sets of data and rapidly changing applications is extraordinary – we have only begun to take advantage of the opportunities for the company and for our customers.”
According to published information, JPMC is investing half ($5.5B) of its $11B 2019 IT budget into Transformative Technologies to create a different kind banking experience and model, and close to $6B in 2020. This is a significant investment and the largest of its kind in the banking industry.
In a recent study, Accenture ii found that the vast majority (66%) of banks had not moved very far when it came to Cloud adoption. A BankDirector survey iii found that about 70% of banks had no AI or Machine Learning strategy. When the vast majority of banks are just beginning to wade into Transformative Technologies, how and why is JPMC making an “All In” bet?
We believe that JPMC is building on its strength in Data and Analytics and taking its game to the next level. They will do this by integrating Artificial Intelligence and Machine Learning with Digital applications to create a new type of delivery model for banking services, customer insights, and innovative new products.
As we will show in this article, we think JPMC has realized that there is a chance to create a competitive advantage through this new banking model based on the power of Transformative Technologies. The bank is making a significant investment in this strategy with clear support from its senior leadership. We also think that if successful, this advantage could last for some time, perhaps 3-5 years. This is a strong statement – how would this be possible?
AI and Machine Learning based applications are different from anything bankers have seen before. They are not static digital capabilities like Mobile Deposit Capture (MDC), Zelle, or a variety of mobile banking applications. AI and Machine Learning based applications learn and improve, given more time, data, and training. They are constantly evolving and improving.
It will be difficult for banks who start their AI or Machine Learning program two or three years after JPMC to catch up. In a customer’s eyes, there will be clear differences between the quality, service, and insights they will be offered. Thus, an AI and Machine Learning follower strategy, which worked with MDC and Payments, is not going to put a bank in the same competitive place as JPMC will be 2-3 years from now. Follower banks will need to play catch-up and accelerate their efforts to mature (train, provide data) their AI models. In the meantime, JPMC’s AI and Machine Learning program will continue to mature and evolve. Therein lies the possibility of JPMC achieving a longer-term competitive advantage.
We will, in the course of this article, attempt to address these questions and try to explain why we think JPMC is “All In” with their Transformative Technology strategy. First, we will provide a brief explanation of the Transformative Technologies and typical banking applications.
Transformative Technologies – Converging to Create Transformative Value
Most of the killer new applications in banking are based on the Transformative Technologies depicted in the illustration above. While these technologies are often discussed individually (e.g., Cloud, AI, Data) and are buzz-wordy, there is synergy between the technologies that will drive transformative change in the banking industry in the coming years.
This synergy is allowing developers to create unprecedented real-time smart (AI) applications that will disrupt traditional banking processes, as well as product and channel offerings. The convergence of these technologies is where the real power of disruption lies. So many of the popular applications such as in payments, lending, etc. require multiple transformative capabilities working together to create value, and we have only scratched the surface.
It is helpful here to have a brief explanation of each of these Transformative Technologies:
The Cloud provides scalable computing power, data storage, and development tools on demand, often on a pay-for-use basis. With this set of development capabilities, plus advanced Information Security, Business Continuity, and Privacy tools, Cloud providers have powerful capabilities for banking. As we discuss later, the Cloud also fundamentally changes the economics and risk of bringing new applications to market.
Data is the foundation on which most, if not all, of these other capabilities depend. AI, Machine Learning, Digital Applications, Advanced Analytics and Business Intelligence all require a data foundation. JPMC has had a focus on Data and Advanced Analytics for several years, which will accelerate their ability to take advantage of the newer Transformative Technologies, such as Machine Learning and AI.
Digital Applications are well known for their real-time, mobile, and user-friendly experience. Examples include: Zelle, Mobile Deposit Capture, and online banking.
Advanced Analytics provides predictive forward-looking causal models of various aspects of the bank, including customer retention, next best offer, and credit models. PD/LGD and CECL models are examples of the applications of advanced analytics.
Business Intelligence and Dashboards provide bankers with multi-dimensional reporting, visualization of data trends, and performance against objectives. For example, the Call Report can display performance by product, business unit, or geography.
Artificial Intelligence is a set of computer programs that work together, thereby allowing a human to interact with the computer on a natural language basis. AI’s ability to understand intent and context within the conversation, and to bring back answers from large sets of unstructured and structured data (including images, real-time video, books, studies, etc.), provides a cognitive interaction between humans and computers. AI serves up insights on volumes of data in a manner that is similar to how humans think.
Machine Learning is a subset of Artificial Intelligence. It occurs when the computer program develops causation models based on the patterns it identifies in the data and makes adjustments based on more data and the changes it sees in that data. Deep Learning, a subset of machine learning, occurs when patterns and causation, often not visible to the human mind, are found in large sets of data over time.
The synergy of these capabilities provides the opportunity to create a new kind of banking model. Here are the top five reasons why we think JPMC is “All In”:
1. Transformative Technologies are Providing Results Today
JPMC is gaining momentum in its digital transformation, and it is taking hold across the bank. Each line of business has specific examples of how Transformative Technology has positively impacted its business strategy:
Consumer Banking – Uses data to speed up the mortgage application and account opening process by 20% and reduce overall approval time to three weeks
Corporate & Investment Banking – Leverages technology to provide better data and insights to clients, generating record earnings and ROE of 16% through the use of machine learning to identify trends and patterns for buy/sell signals
Commercial Banking – Through advanced analytics, JPMC identified nearly 38,000 prospective clients and grew bottom line net income by over 20%
Asset & Wealth Management – Uses data and analytics to transform interaction with existing clients and to attract new clients; 89% are first time investors with Chase
Compliance & Risk – The Risk Management function is able to run hundreds of stress tests per month, reduce fraud, and improve underwriting through machine learning. It saves the firm about $150m annually.
2. Transformative Technology is a Key Driver of JPMC’s Expansion Plan
JPMC is using its Transformative Technology strategy to make bold expansion moves into regional competitors’ home turf. The bank has made major expansions into markets where several super regional banks have significant market share and brand loyalty.
In fact, JPMC’s retail expansion plan closely ties to new middle-market commercial banking business opportunities identified by using Transformative Technologies. The concentration of new middle-market opportunities identified using data and analytics mirrors JPMC’s retail branch expansion map.
As JPMC moves into these new markets, will their other investments in Transformative Technologies make them a new kind of competitor in the next few years, and can the regional banks keep pace?
3. JPMC is Attracting Net New Customers
There are several examples of digital applications having a positive impact on improving Customer Experience and attracting new customers:
JPMC’s Digital Account Opening system has seen over 1.5m new accounts added in 10 months in the Consumer Bank
Home Lending’s new digitally-enabled mortgage fulfillment application, MyHome, uses existing known-customer data to pre-fill mortgage applications and speed up the approval process by 20%
In Wealth Management, the new digital application, You Invest, has attracted many new clients; 89% are first time investors with Chase
The future is in new digital applications that are enhanced with Artificial Intelligence. This will provide customers with a new level of service and insight, leading to more tailored and specific opportunities to grow wallet share.
AI, combined with data-driven insights presented to customers on a digital platform, will be a major game changer in the delivery of banking services, payments, advice, and, most importantly for banking, lending.
Quicken Loan’s Rocket Mortgage digital application is a breakthrough in Mortgage Lending. Rocket Mortgage, enhanced with Artificial Intelligence, would personalize, improve, and shorten the process further. It will add more insights to the consumer regarding home affordability, pricing, and other options. AI-driven digital lending will offer new opportunities to banks to drive new revenue and improve customer service.
4. AI & Machine Learning Build on JPMC’s Strength in Data
Artificial Intelligence and Machine Learning present real problems for banks with a “(not so very) Fast Follower” operating strategy. AI and Machine Learning systems improve and get better over time with more data and training. It is not the same as a static digital application.
Sometimes it seems that banks think that catching up in AI will be similar to implementing Mobile Deposit Capture (MDC) or Zelle, which are static digital capabilities that do a task. Once a bank implements MDC, it has more or less the same capability as an earlier bank adopter from that day forward. The competitive disadvantage ends the day you implement that digital capability. This is not true with AI and Machine Learning.
The capabilities of AI and Machine Learning are not well understood by many banking leaders. AI-intensive systems continuously learn and get better with more data, time, and training. The models evolve and capabilities constantly mature with new information and training. If a bank begins the AI journey later, it will be that much further behind an earlier adopter.
Below is a real-world example of AI learning from a Call Center AI project at a large financial institution. The overall success rate at handling a complex (1/2 hour on average) customer call went from a 20% overall success rate (no human agent interaction required) to a 60% success rate over a 24-week period. The machine learned from new data and continuously improved through an agile change process. And it will continue to get better over time. A bank starting later at the end of this process could lag behind their competitor for some time before catching up. In the meantime, will customers continue to be loyal to the bank?
5. JPMC Realizes that the Cloud is a Game Changer
Quite simply, by being “All In” on a Cloud strategy, JPMC will be able to more quickly achieve its transformational strategic objectives at a lower fixed cost and risk profile than their more traditional competitors. And, over time, the Cloud will have a positive impact on their Efficiency Ratio and ability to flexibly reduce cost in an economic downturn.
Often, especially when it comes to customer facing applications, it is difficult to properly predict marketplace acceptance and volumes. Not every application is successful. Will the application be successful and have a million users, 5,000, or hardly any at all? In traditional development, the fixed costs of development (hardware, software, and people) are added early in the process and will quickly begin to impact the bottom line. These costs will tend to stick over time, regardless of the success of the application. Transformation is a risky business.
The Cloud will allow JPMC to more effectively manage its financial risk, its impact to the fixed cost structure, its ability to expand, and ultimately, its bottom line. This will give the bank more financial flexibility, while also more effectively managing operational risk.
So, JPMC will have more flexibility to take risks in application development, while avoiding the inevitable downsides of more fixed costs and excess capacity. Since Cloud costs are often variable, the cost for a failed application will go away as usage drops. Hence, with the Cloud strategy, JPMC will be able to:
More quickly implement new game changing applications
Integrate multiple advanced transformative capabilities into applications
Flexibly bring on experienced resources to help them innovate
Make application development as variable cost and avoid sticky fixed costs
Seamlessly scale up or down computing capacity and cost when market conditions require
How to Respond – It Begins with a Strategy
JPMC states that 50% of its $11B IT budget, or roughly $5.5B, will be spent on projects related to Transformative Technologies. As the chart below shows, competing banks will struggle to make equivalent investments in terms of either total real dollars or percentage of assets. And, due to the economics of the Cloud, more dollars will be able to be spent on delivering value-added capability rather than on scale.
The real question is not what kind of competitor JPMC is today, but rather, what will it be in a few years as it realizes the benefits of the “All In” investment and Transformative Technology Strategy? And, once JPMC becomes that new AI-driven bank, how will other banks ever catch up?
In response, banks need to act with a sense of urgency. Six immediate actions are:
Bank leaders must begin to develop a Transformative Technology Strategy for fiscal year 2020. This is more than an IT exercise and should be business driven to identify those initiatives that will help the bank increase its competitiveness. Out-of-the-box thinking is needed to identify creative new ways to drive business value through Transformative Technology.
Budgets need to be re-thought, especially for traditional investments for data center expansion and software purchase. Traditional IT investments can be equivalent to putting a new transmission in an old car. It makes the car run better, but are your customers going to be impressed? Did you really add value to the bank or increase its competitiveness, especially when there are Cloud alternatives? Are you getting every bit of value out of your IT investments?
An action plan for adoption and migration to Cloud-based services needs to be developed and acted on, especially for new development initiatives. Outside input may be required to develop the readiness for Cloud adoption by the bank.
Big rules should be identified and driven from the bank’s Executive Committee. For instance, as data is central to the other capabilities, defining how data will be captured and governed is a key aspect of the strategy. Maintaining a strategic vs. piecemeal approach will be key to the bank’s long term success.
IT needs to re-think its own priorities, structure, delivery models, architecture, and skillsets. Does IT need to get out of the data center business and focus on Transformative Technology based applications? IT will need to take a more proactive role in introducing new capabilities to the business in defining what is possible. The hard questions must be addressed by the IT organization.
Bank CEOs needs to drive, support, and regularly review the progress of the Transformative Technology program. If Jamie Dimon is “All In” with a Transformative Technology strategy, how should your bank’s leadership approach this topic? How many bank CEOs understand this space well enough to make this statement and to deliver a game changing investment against it? If it’s this important to Jamie Dimon, and JPMC is already ahead, how important should this be to the long-term success of your bank?
Sources:
JPMorganChase, 2018 Annual Report. Accenture, 2018. “Accenture Cloud Readiness Report – Banking”. BankDirector, 2019. “2019 Technology Survey”.
For More Information
For more information, please contact Michael Andrud, President, FinResults, Inc. (michael.andrud@finresults.com).
About the Author: Michael Andrud has significant experience as a senior level banking executive, having been an Executive Vice President at leading financial institutions, including roles as a transformative Enterprise Chief Information Officer and Chief Data Officer. More recently, he was the lead Banking Data & Analytics Partner for IBM’s Global Business Services organization. Michael founded FinResults, Inc., which provides financial institutions with advice and solutions to some of their most complex business problems by leveraging the capabilities of the Cloud, big data, Artificial Intelligence, advanced analytics, and process robotics.