With JPMorgan Chase expected to spend $17 billion on technology this year, the banking giant will have one eye on cost efficiency and another on tech innovation.
Many companies face this dual challenge. For JPMorgan Chase, however, the task is enormous. The financial services company is the largest bank in the United States and one of the largest in the world. As of June 30, 2024, it had assets of $4.1 trillion. The company’s IT component is similarly massive: it employs more than 63,000 people in technology and operates 32 data centers, although the number of these centers is planned to be reduced.
Against this backdrop, the bank is digitizing its services and investing in new technologies such as artificial intelligence. It is also striving to increase the productivity of its internal and external technology resources and its software development processes.
“There is a fine line between innovation and cost optimization,” says 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 becoming clear as JPMorgan Chase shifts more and more business to digital channels, from mobile banking to embedded payment systems. The need to expand these channels as transaction volumes increase increases technology as a cost of doing business.
There is a fine line between innovation and cost optimization.
Arvind JoshiGlobal Technology COO and CFO, JPMorgan Chase
“Technology spending continues to rise due to gradual digitization of revenue streams, leading to more features and higher revenues,” Joshi said.
In this environment, the ability to reduce overall IT costs is no longer a measure of efficiency. Unit cost, the cost of creating and delivering one unit of a product or service, becomes the key metric.
“We are focusing on reducing unit costs as a better indicator of efficiency,” Joshi said.
Two ways to optimize costs
Technology group JPMorgan Chase is pursuing two paths to cost optimization in its quest for efficiency. The first path aims to generate more computing capacity from each unit of electricity 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 equip these teams to get the most out of their private and public cloud resources, Joshi said.
The second way to optimize costs relies on the company’s software developers and their ability to increase the speed of software delivery and change management – the task of managing code changes. The faster pace leads to shorter cycle times, which in turn increases the speed from code to production, Joshi said.
These optimization paths pursue the same cost efficiency goal but target different spending areas.
Here’s the breakdown: About half of JPMorgan Chase’s technology budget is earmarked for banking purposes — for things like IT infrastructure, software licenses, and application/production support. The other half is earmarked for what the bank calls capital expenditures. The investment pot is further divided into two segments. One covers products, platforms, and user experiences. The other segment, under the heading of modernization, covers 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 to the entire bank. The scope includes core infrastructure and the rising costs of delivering digital products. JPMorgan Chase expects its costs for products, platforms and user experiences to increase by about 12.5% year over year, from $4 billion in 2023 to $4.5 billion this year, according to company data.
The second optimization path, meanwhile, aims to increase productivity, allowing software developers to do more — even while spending is flat, Joshi said. And that’s indeed the case with modernization spending, which includes improvements in software development. The $3 billion in planned modernization spending for 2024 will be flat from last year, Jeremy Barnum, the bank’s CFO, said at an investor day presentation in May.
The bank’s technology investment plan covers everything from digital products to cloud migration.
For Jerry Silva, vice president at IDC Financial Insights, JPMorgan Chase’s efficiency drive is no surprise. “If you look at JPMorgan, they’re kind of the leader in terms of efficiency ratios,” he says. An efficiency ratio, a key 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 revenue.
The efficiency ratio provides insight into computing power. According to Silva, in addition to labor costs, IT and operating costs dominate non-interest expenses. He noted that banks aim for an efficiency ratio of 50% or less as ideal.
In the U.S., JPMorgan Chase has an efficiency ratio of 48 to 49 percent, which puts it ahead of most banks, according to Silva. He said the contribution of IT operations to this favorable ratio is due to Joshi’s focus as the technology group’s CFO and the bank’s control over its IT infrastructure.
“They just seem to have things under control better than some of their colleagues,” Silva added.
Priorities for technological innovation and modernisation
The bank, meanwhile, is pursuing several innovation and modernization initiatives in the technology space. Investment priorities for the remainder of 2024 include data strategy, AI and machine learning (ML). This investment builds on the firm’s previous work in these areas.
“It’s not like we’re starting from scratch,” Joshi said. “We’ve been on the AI/ML journey for several years.”
But the bank is also exploring newer facets of AI/ML, namely generative AI. Joshi noted widespread use cases for the technology, citing code generation and unit testing as examples in software development.
JPMorgan Chase is also investing in modernizing its infrastructure, which revolves around 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 cloud presence, both public and private. Currently, 50% of its applications and 70% of its data are in public or private clouds, and by the end of this year, those numbers are expected to increase to 70% and 75%, respectively. Joshi is leading the public cloud enablement and adoption effort alongside Darrin Alves, the bank’s CIO for global technology infrastructure.
In addition, JPMorgan Chase is updating its applications to use cloud capabilities more effectively.
“You need to modernize your applications to an appropriate extent,” Joshi said.
The company also emphasizes cybersecurity on its list of IT investment priorities. In May, Barnum cited “ongoing cybersecurity and resilience efforts to protect the business and our customers” as a modernization component — in addition to the bank’s cloud and data center work.
Innovation meets cost optimization
In some cases, JPMorgan Chase’s technological innovation efforts overlap with cost optimization.
Huard Smith, principal analyst at Forrester Research, cited the use of Thought Machine’s cloud-based core banking system as contributing to the bank’s unit cost efficiency. London-based Thought Machine signed a deal to deploy its Vault Core platform in JPMorgan Chase’s U.S. consumer and community banking business in 2021. That same year, the bank joined several companies that participated in Thought Machine’s Series C funding round.
JPMorgan Chase’s adoption of Vault Core technology is different from that of many large banks that use more monolithic enterprise banking systems, Smith said.
“Chase is going in the opposite direction and has chosen a small provider with a lean system that allows tremendous flexibility – once they get rid of all COBOL-based core banking systems,” he said.
Thought Machine’s cloud-based microservices architecture makes it easier for the bank to bring digital offerings to market quickly, Smith said. Microservices allow an IT organization to deploy new software features independently of other parts of the system, whereas a monolithic application would have to be deployed from scratch.
Using Vault Core reduces the incremental costs of introducing new products, Smith said. The result is a positive contribution margin, he added. That is, the product revenue generated per unit is greater than the variable costs – such as software development hours – that go into generating the revenue.
The big picture of JPMorgan Chase’s technology strategy
The details of banking operations expenses, technology investments and optimization approaches provide a varied overview of how JPMorgan Chase addresses the day-to-day IT requirements of financial services.
But from a broader perspective, Joshi says the company has one overarching goal: to get as much as possible out of its $17 billion technology spend. The methods to do this, Joshi says, are faster and higher quality code, shorter cycle times, more new features, and more efficient use of infrastructure. Agile software development practices overlay these methods.
Joshi described the end result as business outcomes: “Faster time to market, lower operating costs, and better resilience and control.”
John Moore is a writer for TechTarget’s editorial team, covering the role of the CIO, business trends, and the IT services industry.
