J.P. Morgan Chase and the Rise of the Machines

How a retail bank is adapting to the growing internet of things

Retail banking on the surface seems to be a rather boring industry – an old-fashioned, people-oriented business slow to adapt to the changing technological landscape. But in reality, nothing could be further from the truth. Financial technology startups, collectively referred to as the fintech industry, are rapidly changing the way in which consumers interact with their banking institutions in an age of digital transformation. But while nimble startups are trying to disrupt the industry, the largest banks are fighting to hold onto their customer base by adapting to the times.

Take J.P Morgan Chase, the storied Wall Street giant. According to the company, Chase touches nearly half of all households in the United States with its 5,200 branches [1]. Dana Deasy, the company’s Chief Information Officer, says that 20 million of the bank’s customers conduct the majority of their business on a mobile device, with an additional 18 million banking on their computers rather than visiting a physical location [2]. Between now and 2020, the so-called Internet of Things, the network of smart devices becoming increasingly prevalent, is expected to increase at a compound annual growth rate of 35.2% to a whopping 25 billion devices [3]. As consumers become ever increasingly connected to the internet, they demand more services be provided in real time through their devices, and that digital experiences change frequently [4].

J.P. Morgan, like most banks, has responded to these demands by offering a host of online banking services to its consumers. But the lender has taken a somewhat more novel approach to staying relevant than some of its peers: it has outsourced large parts of its digital transformation. In 2015 alone, the bank met with the CEOs of 300 fintech startups to follow trends in the industry and to articulate the bank’s own transformation needs [5]. According to Deasy, the key challenge is fostering an environment of experimentation while not disrupting the $3 trillion of payments processed by J.P. Morgan daily [6]. By partnering with more agile startups, J.P. Morgan is able to continue adapting to its changing customer needs without interfering with its daily operations. At any given time, the bank is partnered with 60 to 70 startups working on innovative new solutions, the best of which will be implemented into J.P. Morgan’s core businesses [7].

But what innovations should a financial institution like J.P. Morgan be looking for from its fintech partners?

As with insurers which use sensors to assess driver’s safety, J.P. Morgan should use sensors (for instance, smart phones) to better discriminate interest rates on the loan portfolio it offers. If, say, a user frequently searches for home improvement projects on his or her phone, J.P. Morgan might infer that it could safely issue a mortgage against that person’s house at a more competitive rate. Additionally, banks could use sensors to monitor collateralized loans. If a sensor monitored a company’s inventory against which it borrowed, the bank could more accurately track covenants and issue margin calls as needed [8]. In theory, the reduction in information asymmetry would allow the bank to lower the interest rates it charges on loan.

Indeed, the use of sensors in many applications will provide lenders such as J.P. Morgan with unprecedented visibility into borrowers’ behaviors, which will allow it to lower rates. Like insurance companies, lenders face the difficulty of trying to price risk under information asymmetry – that is, they cannot accurately predict who is a high risk consumer and who is low risk. By using sensors to provide better visibility, lenders will be able to lower rates to low risk borrowers and raise rates on high risk borrowers. By doing so, both the lender and borrower benefit (except, of course, the high risk borrower). But faced with increased rates, even high risk borrowers are incented to modify their behavior. As a result, a company like J.P. Morgan stands to create more business for itself by increasing the volume of its loan portfolio by attracting lower-spread loans to low risk customers, and more accurately pricing the interest on the loans it makes to less credit-worthy customers.

But of course, perhaps one of the most lucrative prospect for the mega-banks is its ability to better price the risk of consumer installment credit, such as credit cards. As the use of mobile payments increases, banks stand to learn even more about their consumers’ borrowing, purchasing, and repayment habits, reducing uncertainty in one of the bank’s key profit-driving segments.

With the increased visibility provided by mobile payments, banks could expand or contract credit at different rates in real time to consumers based on their behavior.  Like many service industries being disrupted by digital transformation, J.P. Morgan needs to integrate changing technologies into its operating model in order to survive.

(788 words).



[1] JP Morgan Chase & Co., https://www.chase.com/digital/resources/about-chase. Accessed November 12, 2016.

[2] Knowledge@Wharton http://knowledge.wharton.upenn.edu/article/jpmorgan-chase-cio-on-digital-transformation-and-the-4-ps-to-career-success/ Accessed November 12, 2016.

[3] Middleton, Peter. “Forecast: Internet of Things, Endpoints and Associated Services, 2014.” https://www.gartner.com/doc/2880717/forecast-internet-things-endpoints-associated Accessed November 12, 2016

[4] Knowledge@Wharton. Becoming Digital: Strategies for Business and Personal Transformation. Philadelphia, 2016. http://d1c25a6gwz7q5e.cloudfront.net/reports/2016-03-12-Becoming-Digital-Web.pdf

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Hernces, Christopher. ”Banks Should Prepare for the Internet of Things.” https://techcrunch.com/2015/11/10/banks-should-prepare-for-the-internet-of-things/ Accessed November 17, 2016.


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Student comments on J.P. Morgan Chase and the Rise of the Machines

  1. As similar to many other applications of IoT into our daily life, I am worried about banks’ invasion into their clients’ privacy. In the example that is given in the case- banks give competitive loan interest rate to people who frequently search for mortgage- I would be concerned where the bank is getting these data from; is it from a 3rd party who is constantly collecting data from my daily behavior, or is it from a plug-in software secretly hidden in my hard-drive. Where to draw the line between leveraging data to benefit businesses and make more profits and protecting citizens’ privacy should be taken into account. With that being said, regulatory and legal institutions should fast forward its discussion and legislation on the protection of privacy against the backdrop of rapidly evolving technology industry.

  2. Similar to @Clement’s concerns, I wonder about the cyber security aspect of privacy. With Tor clients and dark networks, to what degree can information be truly protected? Several well-publicized hacks (e.g., LinkedIn and Sony) have already rocked the corporate world. Having such detailed information on customers could be a treasure trove for bad guys. What are the other steps JPM must take to protect its customers from external attack? Does JPM need an internal cyber security team or should they license out with a third party? Given the lack of cyber-laws, how will JPM go about developing a legal framework to defend itself against hackers?

  3. I really like the idea of this service as an opt-in to lower my potential interest rate on a loan. One area of concern that is clearly brought up here and in the comments is the risk of security and invasion of privacy. How should JP Morgan go about offering this service in a way that minimizes push back from the public, while enabling savings for savvy borrowers who are tolerant of this level of partnership with the bank? What risk does JP Morgan take by quelling the security concerns of the consumers and public? Will they need to evolve into a hyrbid of a data security company meets financial institution?

  4. That’s an interesting trend indeed! I see more and more banks outsourcing IT development, investing in fin-tech startups and acquiring successful solutions all over the world. I know several fin-tech companies that use social network activities as such “sensors”. They monitor your friends, personal info and geo information to help banks in making credit decisions. I guess such data collection is not regulated right now.

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