“Banking is a bit like running a small retail store. You gotta work out what kind of stuff your customers want. Then you gotta get the stock in and sell it as quickly as you can, making a profit” – Jamie Dimon
One of banking’s legendary operators pulled no punches in his 2020 Chairman & CEO Letter to Shareholders this week. Jamie Dimon shared strong opinions – as they usually are – on fintechs and how they were affecting JP Morgan Chase & Co.’s existing and future business. Contextually, his comments came in the section of the shareholder’s letter entitled “Bank’s Enormous Competitive Threats – from Virtually Every Angle”, wherein he addressed the growing influence fintechs were having on traditional banking; particularly their increase in market share as a function of innovation, and their ability to operate in a less stringent regulatory regime known as the “shadow banking system”.
According to Dimon, “banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay. As the importance of cloud, AI and digital platforms grows, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.”
As a true “master of the (financial) universe”, I can only assume that Dimon knew exactly what the implications of characterizing fintechs and BigTechs as members of the shadow banking system were. It wasn’t too long ago that the large banks – JP Morgan to a MUCH lesser degree than others – were chastised for recklessly facilitating the uncontrolled growth of the shadow banking ecosystem. In the 2008 – 2009 Great Financial Crisis (“GFC”), it was the large banks that over-leveraged the financial system with derivative products via the use of off-balance sheet, structured investment vehicles (“SIVs”). These SIVs, integral parts of the shadow banking industry, were used as a workaround for the institutional capital requirements mandated by the Basel II Accord. The point being, these SIVs and other conduits were used and partially funded by the big banks, and played a key role in the big bank’s collective ability to facilitate the continued funding of Wall Street’s CMO machine – a primary cause of the GFC. The big banks were in cahoots with these SIVs and conduits which were the OGs of the shadow banking system of which Dimon has now declared fintechs and BigTechs de facto members.
Dimon is sending a clear message with his statements. On one hand he’s acknowledging that fintechs represent legitimate competition to legacy banking institutions with their new products and service offerings. Open banking and shared consumer financial data are arguably at the center of this movement. I also believe Dimon is conveying to his shareholders and others that this innovation sea-change manifesting itself in fintechs and BigTechs is permanent, and must be addressed in order to assess the long-term viability of banking’s legacy players. Dimon’s quote (above) really plays to his innate understanding that a financial institution’s commercial success is directly tied to its ability to know the needs of its customers, and provide the services and products to fulfill those needs.
Further, Dimon believes there’s an inherent inequity between the restrictive regulatory regime that legacy financial institutions operate within, and the looser, lesser regulated shadow banking system regime of fintechs and BigTechs. Thus, Dimon is also sending a clear message to government – Congress, the SEC, the Fed, the OCC – that in order to promote fair competition, the rules of the game need to change so that all financial players can compete on a level playing ground.
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC