Embracing Digital: JPMorgan Chase Rethinks Delivery

It's becoming a familiar refrain in the banking industry: The expansion of digital channels, along with a growing customer preference for self-service, is rendering the traditional branch less productive -- spurring a scaling back of branches and related workforce reductions. We've already heard this message from banks such as Barclays. JPMorgan Chase is the most recent bank to sound this theme, which the company's senior management discussed at the company's Tuesday, Feb. 25, Investor Day.

[From Appliances to Apps: What Does Digital Mean for Banks' Products and Services?]

The strategy includes significant projected employee reductions. Already in the past two years the bank has reduced its overall branch staff by 7,000 (from 60,000 to 53,000), and that trend will continue as digital capabilities and consumers' embrace of self-service combine to redefine the role of branches. JPMorgan Chase confirmed that its headcount will be reduced by 5,000 people in 2014.

The staff reductions reflect not only the changing branch strategy, but also are part of a broad business simplification and expense reduction strategy -- the goals being to "reduce complexity and focus on core competencies," according to the bank's presentation -- JPMorgan Chase outlined during Investor Day. Other elements of the strategy include existing products that are non-core to customers or that are too risky (such as student lending originations, co-branded business debit cards and gift cards and identity theft protection), and discontinuation of certain business with select clients (such as lending to check cashing businesses and checking accounts for foreign politically exposed persons).

The goal, as outlined in the presentation, is to end 2015 with expenses about $2 billion lower than 2014 expenses. In addition to expansion of digital channels and self-service, key expense reduction initiatives specifically in the Consumer & Community Banking (CCB) unit include further consolidation of operating centers, consolidation and rationalization of vendors, and continued optimization of the branch network.

Branch reduction doesn't appear to be an end in and of itself -- the bank ended 2013 with 5,630 branches, slightly up from the 2012 total of 5,614. Rather, the strategy is to "optimize the branch network" with smaller branches (2,500 to 3,5000 square feet versus an average 4,400) and less density. "The Chase branch network of the future will be more efficient, automated and consultative," with less transactional staff (two tellers per branch compared to what historically has been four). But while headcount in the "branch of the future" will be less, the percentage of those workers who are considered "advisory staff" will increase from 40% to 60%.Overall branch staff has been reduced by 7,000 people over the past two years, the bank reports.

In its presentation the bank notes that a higher percentage of its branches are in a "growth phase" (11% are less than three years old, 23% are three- to 10-years old) compared to five of the largest U.S. banks (Citibank, US Bank, PNC, Wells Fargo, Bank of America). Ultimately, though, it's all about digital, and driving "digital engagement" and "[improving] customer experience by providing access through preferred channels." This also extends to the cards and mortgage business.

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Pride In The Franchises: Dimon

Still, chairman and CEO Jamie Dimon emphasized that JPMorgan Chase's business is strong and growing. "I'm so damn proud of this company," he declared during Investor Day. Referring to the bank's four business areas -- in addition to CCB, that's Corporate and Investment Bank (CIB), Commercial Banking and Asset Management -- he called them "four of the best franchises in the world." Dimon emphasized that the four businesses help each other and that he sees no reason to abandon the model, regardless of too-big-to-fail-related regulatory pressures or an undervalued stock price. "We have four wonderful franchises," he said. "You don't mess them up while you figure out what the new world will be." In fact, if market conditions change significantly JPMorgan Chase will be able to respond to them "from a position of strength," he said, pointing out "We earned $30 billion pretax -- we have these wonderful franchises."

When asked during the Investor Day question/answer session whether he was concerned about the expenses related to the bank's growth strategy, Dimon responded: "Drive good revenues and there are good expenses." He also suggested that if recent improvements (though modest) in the global economy and lending market continue, "There will be an inflection point … the economy starts to grow, loans go up, payments go up, interest rates are going up … [We could be] the exact same company, and we are making $5 billion more, and we didn't do a damn thing. I think that may happen."

He did acknowledge the bank has experienced "pain in the mortgage business … it's been the most painful business ever. We've lost a tremendous sum of money." But Dimon emphasized, "We are here for the long gain," pointing out that JPMorgan Chase's mortgage business "has been cleaned up, it's down to 12 products. We're going to stay in it [and] build the best mortgage business. It'll be smaller."

Another unavoidable expense area is regulation and risk management, and the bank previously had reported it expects to spend some $2 billion this year to improve controls, systems and processes in areas such as anti-money laundering, customer onboarding and know-your-customer. During the Q&A Dimon had some reflections on these investments. "All these things will derisk the company," he said. "We will automate a lot of it." He described the investment as comprising "10,000 people, it's global, building new systems. It's part of how we drive more efficient operation … I'm hoping we've maxed out on those expenses, but the rules may change again. We have to deal with whatever the rules are."

Indicating the scope of the project, Dimon said, "We have 15,000 programmers, my guess is probably 5,000 are now working on all these things, [and] not just the Volcker Rule. We're talking about 1,000 systems. We've got a lot of work to do -- that's why we have to make sure we do it right. Those resources don't go away, they get reinvested in other things when the time comes."

Another area of risk that Dimon acknowledged is that of potential new competitors. "I'd be an idiot not to think that the Googles, Apples … all want to eat our lunch -- every one of them is going to try. We have huge resources around this." A new era of competition in consumer banking and payments with technology companies is "a given," he said.

Dimon also anticipates more competition from "some big shadow banks," as well as more traditional institutions such as Wells Fargo, which he expects will be stepping up its activities in the investment banking space. Chinese financial institutions also are on JPMorgan Chase's radar. "They are ambitious, they have reason to be ambitious, and have a strategic reason to win," Dimon said.

Regarding the competitive landscape, Dimon said, "My operating assumption will continue to be that we will have huge, tough competition … We know we are going to be attacked everywhere. That's capitalism, that's a good thing."

Speaking of capitalism, Dimon had perhaps surprisingly high praise for the performance of the U.S. economy. "I think America's stronger than people think, and may come back stronger," he declared during the Q&A, adding:

"Corporate America, the middle market and small-business America are in very good shape … Credit is back to where it was before the crisis … large corporate America, huge amounts of capability … the debt/service ratio hit an all-time high,[but] it's already back to where it was in 1985 … America still has the best hand ever -- we have the best military, the best universities, the best financial system … there is nowhere else in the world where you can raise money, get capital, invest, startup, fail, start again … [there's] unbelievable innovation … a great work ethic, a great rule of law. Our democracy is actually quite functioning -- that is, you don't question if it will still be a democracy in 20 years. That's why Warren Buffet does so well, [he has] abiding faith in the American system."

Dimon cited the immigration stalemate and income inequality as issues that could detour the comeback. "If we did the McCain/Schumer deal, the economy would grow," he said. "We're sending brains overseas." Dimon added, "I do think income inequality is an issue the country should face … but the fact is, we have this unbelievable hand, I'm unabashed, we can do it … I just hope it's sooner rather than later, to me we're missing the secret sauce of confidence."

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio