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About eight months ago JPMorgan Chase (JPM 1.41%), America’s largest bank, has launched a digital consumer bank in the UK. The goal was not only to establish a presence in the UK consumer banking market, but also to pilot a digital banking model that can be scaled to other countries as JPMorgan Chase expands internationally. So far, although it’s early days, JPMorgan Chase seems to be making good progress in the UK. Let’s take a look.
The advance into Great Britain
Breaking into retail banking in new international markets is not easy, even for a bank as large as JPMorgan Chase. There are already well-established brands in new markets, and getting started usually requires significant investments such as buying or building bank branches, corporate offices and data centers. JPMorgan decided to essentially launch its own digital challenger in the UK as fintech is all the rage right now and brick-and-mortar banking is less cheap these days. Additionally, JPMorgan believed that a digital bank would be a less expensive avenue with more flexibility to experiment with. So far, the bank seems to be off to a good start.
Image source: Getty Images.
At its most recent investor day, JPMorgan Chase announced that it has 500,000 customers who have deposited approximately $10 billion and processed approximately 20 million card and payment transactions in eight months. But perhaps most impressively, JPMorgan claims it has collected twice as many non-interest-bearing deposits as digital challenger banks in the UK a year after launch. Interest-free deposits are deposits on which the bank does not have to pay interest and are considered to be more resilient than other deposits in an environment of rising interest rates, making them the best type of deposit a bank can have.
In addition, the bank considers around 30% of its customers to be very engaged with its products. Sanoke Viswanathan, the bank’s head of international retail banking, said customers used JPMorgan debit cards several times a day and made payment transactions to and from their accounts several times a week — all indicative of a primary banking relationship. JPMorgan Chase plans to add more lending and investment products to its UK digital bank.
Image Credit: JPMorgan Chase.
While the digital bank won’t help the bottom line immediately, management expects operations to break even in the next five to six years. The bank expects to face an annual loss of about $450 million over the next few years as it ramps up.
But it seems like the cloud-native platform on which JPMorgan built the digital bank is pretty efficient, since about 70% of its costs are mostly fixed in nature. The platform can also support multiple products and scale to millions of customers at low marginal cost. Viswanathan said the bank could use the platform to enter new countries without too much additional investment.
JPMorgan already appears to be considering future international consumer expansion by buying British digital wealth management platform Nutmeg, which the bank believes will play a valuable role in the UK and beyond. JPMorgan Chase also took a 40% stake in Brazilian digital bank C6 Bank, which has over 16 million customers in a huge addressable banking market.
A solid start
As Viswanathan said, “It’s too early to announce victory,” but JPMorgan’s digital experiment in the UK appears to be off to a good start considering trends with zero-interest deposits and highly engaged customers. The bank also appears to have invested in an excellent digital platform that can scale efficiently. Of course, it will still be a few years before the UK digital bank contributes to profits and investors will not be happy if the bank fails to meet its targets, but all you can do for now is keep watching this progress well and hope it stays on track.
