JPMorgan Digital Banking should worry neobanks

To start a business from nothing, you need money.

To build a business from scratch in an increasingly crowded space – and a high-tech digital space to start – well, it takes a ground silver.

And one wonders, by extension, how and even if the smaller firms, the challengers with relatively lighter pockets, can get away with it.

JPMorgan Chase said it will lose at least $1 billion over the next few years as it builds its digital bank – branching out from its initial UK market.

Breakeven is years away, according to comments from his Investor Day presentation. And, according to estimates offered by management at the Monday, May 23 event, losses will be $450 million this year alone.

This $450 million is obviously a lot of money. For some perspective, consider the fact that Monzo, a digital-only competitor, recorded a revenue rate of £105m last year, according to filings.

Nothing to sneeze at.

Unbalanced playing field

But when a bank like JPM is willing to lose multiples more than smaller neobanks can cash in on revenue (which doesn’t necessarily translate directly into operating cash flow), competitive scales can be a little unbalanced.

By expanding its digital push overseas, JPM is, in our view, tackling a new opportunity without having to establish physical roots (which are more expensive to operate and maintain). The brand name is in place and is definitely an asset. The business doesn’t need to scale operations – it can buy some features and get started. We see this model taking shape with its acquisition of digital wealth manager Nutmeg in the UK

Read also: UK wealth manager Nutmeg will become part of JPMorgan

And, with new details revealed this week of how Chase in the UK is gaining traction – with half a million customers and $10 billion in deposits – critical mass is coalescing.

The great digital shift is opening up the financial services arena to all kinds of players. We live in a time where simply integrating prepaid cards into a UX – and then expanding from there – is just a strategy. Small digital startups are in a tougher spot when they come to market with basic functionality and then add new functionality over time as technology improves, yes, and they get the licenses required in each market to, for example, hold deposits or offer verification services . JPM already has the expertise in place to do all of these things – and offer a range of products under one digital umbrella.

The urgency is there, and the UK is fertile ground.

In our own digital studies exploring emerging connected economies in 11 countries, we found that almost 95% of the adult population is connected to the internet and 83% own a smartphone. The kindling is here, and JPM hopes to kick things off as soon as its connected banking efforts begin. The scale, scope and infrastructure in place can go a long way in challenging challengers.

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