Hewlett-Packard Co. (HPQ) has nothing on JPMorgan Chase & Co. (JPM) when it comes to investing in technology. What's that? A bank that's spending more on technology than a tech outfit? Sure enough, HP's ambitious plan to replace 85 global data centers with six cutting-edge facilities will cost about $1 billion. JPMorgan is spending twice that just on overhauling its network, plus another $1 billion to reduce 90 global data centers to 30 by 2008.
The New York bank, the third largest in the U.S., has in fact become one of the biggest spenders on technology that Wall Street has ever seen. In part, Chief Executive Jamie Dimon's hand was forced: JPMorgan is an agglomeration of years of bank mergers, including what were a decade ago five of New York's biggest banks.
A patchwork of out-of-date systems that speak different computer languages continues to be a huge drag on efficiency, particularly on the consumer side of the business (retail banking, credit cards, and so on), which comprises about 50% of overall profits. Of the top 10 banks, JPMorgan ranks lowest both in overhead efficiency ratio and return on equity over the last 12 months, according to SNL Financial.
But in the finance world, technology investing isn't just about keeping the mainframes humming. Techies and engineers are complementing bankers and traders as a source of profits. Dimon, in contrast to his Citigroup counterpart Charles Prince, has been characteristically aggressive, outspending all comers to make IT a fundamental part of his growth strategy. He has elevated Chief Information Officer Austin A. Adams, who oversees a staff of 20,000 and a $7 billion annual budget, to the 15-member operating committee that effectively runs the bank, which hit the No. 28 spot on the BusinessWeek 50 list of the top corporate performers.
Catching up to the 21st century was Dimon's top priority when he sold Bank One (where he was CEO at the time) to JPMorgan in January, 2004. Known as a die-hard cost-cutter, Dimon nevertheless carved more than $600 million for technology out of his first $1.1 billion pool for bank-wide growth initiatives in 2004, and has increased subsequent annual investments ever since. That's a major commitment when you consider that Dimon was, at the same time, aiming to get $3 billion in annual post-merger savings and cost cuts out of the bank by 2007.
In the consumer banking business, it's all about getting the most dollars out of every customer. The bulk of the IT spending is headed there, to do things as simple as enable the sprawling network of banks to serve a customer who moves to a new city.
Retail customers have also seen tech make banking easier. JPMorgan launched the Blink credit card, which lets users hold the card in front of a reader instead of swiping, signing, entering a PIN, or handing the card to a store employee. And approval for a home equity loan now takes two hours, vs. two days a few years ago.
John E. McDonald, an analyst with Banc of America Securities, specifically credits Dimon's tech investment for getting new products to market faster and more precisely targeting customers for new business.
The investment bank is getting a $1 billion annual budget for technology. Investments in the past two years have focused on building sophisticated trading platforms for institutional investors and hedge fund clients that require high-end trading analysis and risk modeling. A clutch of quants with PhDs have been hired to create algorithmic models that speed up trading.
Of course, any trader knows that wrong bets will trump the best technology, and in fact, JPMorgan's profits have been quite volatile. Still, says Sang Lee, an analyst with Boston financial services researcher Aite Group, when it comes to IT: "Dimon is one of the few guys out there who knows that if you do this right [it will] help generate additional revenue."
By Mara Der Hovanesian