Fintechs are a feature of the financial system, not a bug. Jamie Dimon has put it in writing.
“A lot of things they do, we can do; a lot of things they do, we don't want to do; and of course they can be competitors.”
That was a stray comment JP Morgan Chase CEO Jamie Dimon made about fintechs back in 2016. It’s the kind of thing that has earned Dimon a reputation for downplaying startups that challenge the financial system.
That reputation doesn’t match Dimon’s actions. JP Morgan Chase has been investing in fintech for years. But now Dimon has put his thoughts into writing. In his 66-page letter to shareholders released in April, he declared fintech one of the “enormous competitive threats” banks are facing, and implied that fintechs should be more regulated.
Dimon is the CEO of the largest bank in the United States, one of the top bankers in the history of the United States, and the only head of a major bank still in his role since before the Great Recession. When he puts out his wide-ranging annual letter, which discusses everything from the outlook for his bank to the larger economy, bankers and journalists take notice.
People in fintech? They shrug. They often feel ignored by traditional financial institutions while their user bases and valuations grow exponentially. One of the many things banks and fintechs have in common is a long history of disregarding one another.
This time it’s worth paying attention. Dimon’s recent comments are validating for fintechs, and should serve as a wake-up call for banks.
“We have spoken about this for years, but this competition now is everywhere,” Dimon wrote. “Fintech’s ability to merge social media, use data smartly and integrate with other platforms rapidly (often without the disadvantages of being an actual bank) will help these companies win significant market share.”
I’m glad Dimon is formally acknowledging the power of fintech, but I also think his comments leave out some important details. Fintechs aren’t replacing banks; they’re filling gaps in the financial system. And as companies that tend to start out as scrappy startups, they don’t have the kind of regulatory advantage he suggests.
Fintechs are partners, not threats
When Dimon said in 2016 that fintechs do things banks “don’t want to do,” he was right. But I would take it further. Fintechs do things banks don’t want to do, but that need to be done. They also do things that banks don’t have the technical capability to do.
Take Zeta, which specializes in joint accounts for couples, families, and households (think: roommates). Zeta accounts are different from standard joint accounts because they are more transparent, and you can add more users to one account. Users can direct deposit funds from their main account into a Zeta account to save up for something together, or to pay joint bills.
So why hasn’t a bank built a Zeta equivalent? A few reasons:
- Older, more established bankers who make big decisions may not be thinking about the use cases of an app like Zeta, which largely targets younger customers.
- Banks have a different culture. While startups attract people looking to take risks, banks have entire departments devoted to managing risk and following regulations.
- Banks don’t have the same level of technical expertise as startups, and they are working with older systems.
Elaborating on that last point: Banks’ cores haven’t changed in 30 years. Updating the entire system of a massive bank would be like rebuilding the Bay Bridge while hundreds of thousands of people are trying to drive across it every day. It’s not feasible. That means banks can only update pieces of their system on a rotating basis.
To catch up to the user experience expectations of younger customers, and to reach wider audiences, banks need to work with fintechs. And fintechs need to work with banks. Zeta uses a bank partner to ensure accounts are FDIC insured and their users are protected from fraud.
Banks need to reassess their limits
That’s not to say there isn’t more banks could do on their own.
Dimon called for “level playing field regulation” between banks and fintechs — in other words saying fintechs should be more regulated. Let me zoom out and put this in context: Dimon is the CEO of the largest bank in the United States. President Biden considered him for a cabinet role. No individual banker arguably has as much influence over regulations as Dimon.
VC Frank Rotman, thinks banks aren’t as strictly regulated as they perceive themselves to be. “You’ve created the environment and incentive system that’s created the problem,” he told Dimon on Twitter. “Your teams fear the Regulators. Your teams don’t want to get challenged. You need to own and solve this.”
I agree with Rotman — and not just because his firm invested in Treasury Prime. Look at microlending company Affirm, which doubled its share price when it IPOed earlier this year. Affirm has figured out that it’s actually very rare for people to default on their loans. Meanwhile, banks and lenders deny applications for credit from people based on abstract indicators like credit scores and lack of credit history.
Banks’ caution prevents them from losing money — but it also holds them back from new opportunities to make it.
Dimon already knows all this — and it’s time for banks to listen
Around the time Dimon was calling bitcoin a “fraud,” JP Morgan also launched its own blockchain effort. That same year, 2017, the bank bought payments startup WePay. Then in 2018, they announced plans to open a fintech campus in Silicon Valley.
Whatever reputation Dimon has developed for dismissing fintechs, he’s been playing ball with them at the same time. Last year he said his bank planned to be even more aggressive with acquisitions.
So if you’re a banker who recently read Dimon’s letter, and his comments on fintech surprised you, then it’s time to start paying closer attention to how the financial system is changing.
Banks are still the core of the system. I have yet to see that any solution other than a full stack bank can handle general purpose problems (holding funds, putting them in a trust, and issuing credit on them). Fintechs that work with banks are able to offer more security to their customers, and they have more capacity to grow because they easily add new banking capabilities like credit, trusts, and investment accounts.
At the same time, fintechs build things that banks can’t replicate, like specialized tools for niche audiences. In other words, the relationship goes both ways.
JP Morgan Chase has been the banking leader in the technology arms race, but while the fintech sector explodes, most banks are just starting to think about how they are going to adapt to the changing expectations of increasingly plugged-in consumers.
When Dimon calls fintechs a “threat,” he is misplacing his fear. The real threat is complacency. The danger is in not recognizing that fintechs are the biggest innovative lever that banks have ever had at their disposal. The fintech industry is the opportunity. And it’s long past time for banks to take advantage of it.
If you have thoughts on this or any questions about fintech, feel free to bring them to me directly during my open office hours.