Letter to shareholders from Jamie Dimon: Big banks are shrinking

JPMorgan Chase chief executive and Wall Street guru Jamie Dimon released his annual letter to shareholders on Monday, which is mined each year by the best minds in finance for valuable insights into the currencies that run our country.

Among the points raised were two worrying trends for the street. “The increasing competition between banks from each other, shadow banks, fintechs and big tech companies is intensifying and clearly contributing to the diminishing role of banks and state-owned companies in the United States and in the global financial system. “, Dimon wrote.

The idea that big banks might be in decline isn’t new: a cabal of legacy institutions has been monitoring the fintech threat for nearly a decade. But as Dimon notes, the competition has recently gone turbocharged. For example, Apple, with already widely used Apple Pay and Apple Card services, is now expanding its reach into the industry with more banking-like products, including payment processing, credit risk scoring and banking offerings. immediate purchase and subsequent payment.

It’s that most Big Tech has “an extraordinary competitive advantage” over banks, being “already 100% digital, [and having] hundreds of millions of customers and huge resources of proprietary data and systems,” says Dimon.

Meanwhile, Walmart, which boasts a massive customer base of more than 200 million shoppers in stores per week, is moving into the space with the potential to blow up the bank as we know it, as predicted. analysts. And neobanks, another banking alternative, have an edge when it comes to regulatory exemptions, like circumventing the Durbin Amendment that prevents banks from charging debit card fees, allowing them to earn higher revenue per scanning.

However, even as the space expands, consolidation is inevitable, says Dimon: “I would expect to see a lot of mergers among the more than 4,000 US banks. They have to, in some cases, to create more economies of scale so they can compete. . Other companies will try different strategies, including bank-fintech mergers or fintech-only mergers. You should expect to see winners and many victims – it’s just not possible for everyone to perform well.

Listed companies in decline

But what Dimon considers perhaps more important: the weakening of public companies. The number of U.S. public companies peaked in 1996 at 7,300 but has since fallen to 4,800, when you might have expected IPOs to boom over the past decade given the tech boom . Where do all these companies get their money? Not by selling public stocks, but by making deals with private equity firms, it seems. The number of private U.S. companies backed by private equity has more than sixfold, from 1,600 to 10,100.

The factors driving the trend are complex and could include “increased public scrutiny and relentless quarterly earnings pressure” that accompanies market debuts. But whatever the reason, it has the detrimental effect of reducing the transparency of these companies and keeping them out of the realm of regulation. Of course, this also prevents outside investors from sharing in the companies’ success.

Is it in the interest of the country?

It may not yet be clear, but the rise of private equity firms is troubling given the track record. Take the example of the media: with the evolution of the Internet and social media, once profitable and reputable newspapers have lost revenue and been swallowed up by private capital or hedge funds, which in many cases have quickly emptied the publications (the Chicago Grandstand and the Denver Post, to only cite a few). The last big leveraged buyout came last week, when media data tracker Nielsen was acquired by equity giants Elliott Management and Brookfield Management.

Comments are closed.