JPMorgan Chase’s Technology Goal: Innovation with Cost Control
With JPMorgan Chase expected to spend $17 billion on technology this year, the banking giant will be eyeing cost efficiency on the one hand and technical innovation on the other.
It’s a dual imperative that many companies face. But for JPMorgan Chase the task is enormous. The financial services company is the largest bank in the United States and one of the largest in the world with assets of $4.1 trillion as of June 30, 2024. The company’s IT component is similarly extensive: It employs more than 63,000 technology workers and operates 32 data centers, but aims to reduce the number of these facilities.
Against this background, the bank is digitizing its services and investing in new technologies such as AI. In addition, the company strives to increase the productivity of its internal and external technology resources and its software development processes.
“It’s a good balance between innovation and cost optimization,” said Arvind Joshi, COO and CFO of JPMorgan Chase’s Global Technology Group, which houses the company’s technology and software development activities.
This balance is emerging as JPMorgan Chase sees an increasing shift of its business to digital channels, from mobile banking to embedded payment systems. The need to expand these channels as transaction volumes increase means technology is becoming a cost of doing business.
It is a good balance between innovation and cost optimization.
Arvind JoshiGlobal Technology COO and CFO, JPMorgan Chase
“Technology spending continues to increase due to gradual digitization of revenue streams, leading to more features and volume,” said Joshi.
In this environment, the ability to reduce overall IT costs falls short as a measure of efficiency. Unit cost, the cost of creating and delivering a unit of a product or service, becomes the critical measure.
“We focus on reducing unit costs as a better indicator of efficiency,” said Joshi.
The technology group JPMorgan Chase is pursuing two ways to optimize costs in its pursuit of efficiency. The first path aims to generate more computing capacity from each unit of power consumed, measured in megawatts. These efforts focus on the company’s IT infrastructure, but there is also a human component. A key part of the cost optimization effort is training the bank’s application teams to follow FinOps practices. The goal is to enable these teams to get the most out of their private and public cloud resources, Joshi said.
The second path to cost optimization relies on the company’s software developers and their ability to increase the speed of software delivery and change management – the task of managing changes to the code. The faster pace results in shorter cycle times, which in turn increases the pace from code to production, Joshi said.
These optimization paths pursue the same cost efficiency goal but address different areas of spending.
Here’s the breakdown: About half of JPMorgan Chase’s technology budget is earmarked for in-house resources – for example, IT infrastructure, software licenses and application/production support. The other half is used for what the bank calls capital expenditure. The investment area is further divided into two segments. One of them includes products, platforms and user experiences. The other segment under the heading of modernization includes cloud migration, software development efficiencies and cybersecurity.
In this context, the first optimization path – the one that focuses on increasing computing capacity per unit – applies generally across the bank. The scope includes core infrastructure and the increasing costs of delivering digital products. JPMorgan Chase expects product, platform and user experience costs to rise about 12.5% year over year, rising from $4 billion in 2023 to $4.5 billion this year, according to company data.
The second optimization path, on the other hand, aims to increase productivity, allowing software developers to achieve more – even when expenses are low, Joshi said. And that is indeed the case with modernization spending, which includes improvements in software development. Projected modernization spending of $3 billion for 2024 will remain flat year-over-year, said Jeremy Barnum, the bank’s CFO, at an investor day presentation in May.
The bank’s technology investment plan includes everything from digital products to cloud migration.
For Jerry Silva, vice president at IDC Financial Insights, JPMorgan Chase’s boost in efficiency comes as no surprise. “If you look at JPMorgan, they’re kind of the leaders in terms of their efficiency ratio,” he said. An efficiency ratio, an important measure of a bank’s performance, weighs noninterest expenses against revenue. Banks aim for a low ratio, meaning they spend less to generate each dollar of sales.
The efficiency ratio provides insight into computational efficiency. That’s because, in addition to labor costs, IT and operational costs dominate noninterest expenses, Silva said. He noted that banks aim for an efficiency ratio of 50% or less than ideal.
According to Silva, JPMorgan Chase has an efficiency ratio of 48% to 49% in the US, putting it ahead of most banks. He said the IT division’s contribution to this favorable relationship was due to Joshi’s focus as CFO of the technology major and the bank’s control over its IT infrastructure.
“They just seem to have a better handle on things than some of their colleagues,” Silva added.
Priorities in technological innovation and modernization
The bank is now pursuing several innovation and modernization initiatives in the technology sector. Investment priorities for the remainder of 2024 include data strategy, AI and machine learning (ML). This investment builds on the company’s previous work in these areas.
“It’s not like we’re starting over,” Joshi said. “We have been on the AI/ML journey for several years.”
But the bank is also researching newer facets of AI/ML, namely generative AI. Joshi pointed to widespread use cases for the technology, citing code generation and unit testing as examples of software development.
JPMorgan Chase is also investing in infrastructure modernization, which involves a hybrid cloud strategy. On the private cloud side, the bank plans to reduce its footprint from 32 data centers to about 20 “highly automated data centers,” Joshi said.
The bank also plans to increase its public and private cloud presence. Currently, 50% of its applications and 70% of its data reside in public or private clouds. By the end of this year, these figures are expected to increase to 70% and 75% respectively. Joshi leads the activation and adoption of public clouds alongside Darrin Alves, the bank’s CIO of global technology infrastructure.
JPMorgan Chase is also updating its applications to use cloud capabilities more effectively.
“You need to modernize your applications to a reasonable extent,” Joshi said.
The company also emphasizes cybersecurity on its priority list for IT investments. In May, Barnum cited “ongoing cybersecurity and resiliency efforts to protect the company and our customers” as a modernization component, alongside the bank’s cloud and data center work.
Innovation meets cost optimization
In some cases, JPMorgan Chase’s technology innovation efforts overlap with cost optimization.
Huard Smith, principal analyst at Forrester Research, cited the bank’s use of Thought Machine’s cloud-based core banking system as contributing to unit cost efficiency. London Thought Machine signed a contract in 2021 will launch its Vault Core platform across JPMorgan Chase’s U.S. consumer and community banking businesses. That same year, the bank joined several companies participating in Thought Machine’s Series C funding round.
JPMorgan Chase’s adoption of Vault Core technology differs from many large banks, which tend to use monolithic corporate banking systems, Smith said.
“Chase is going in the other direction and has chosen a small provider with a lean system that allows for great flexibility – once all Cobol-based core banking systems are phased out,” he said.
Thought Machine’s cloud-based microservices architecture makes it easier for the bank to quickly adopt digital offerings, Smith said. Microservices allow an IT organization to deliver new software features independently of other parts of the system. In contrast, a monolithic application would need to be completely redeployed.
Using Vault Core reduces the additional costs of adding new products, Smith said. The result is a positive contribution margin, he added. This means that the product revenue generated per unit is higher than the variable costs – for example, software development hours – incurred to generate the revenue.
The big picture overview of JPMorgan Chase’s technology strategy
The details on ongoing expenses, technology investments and optimization approaches provide a diverse overview of how JPMorgan Chase manages the day-to-day demands of financial services IT.
But from a broader perspective, Joshi says the company has one overarching goal: to squeeze as much output as possible from its $17 billion in technology spending. Methods for doing this include faster and higher quality code, shorter cycle times, more new feature releases and more efficient use of infrastructure, he said. Agile software development practices overlay these methods.
Joshi framed the bottom line as a business outcome: “shorter time to market, lower operating costs, and better resiliency and controls.”
John Moore is a TechTarget Editorial writer covering the role of the CIO, business trends, and the IT services industry.