JPMorgan’s Deep Pockets and Digital Banking Push Should Worry Neobanks

To build a business from the ground up takes money.

To build a business from the ground up in an increasingly crowded space — and a high-tech, digital space to boot — well, that takes a lot of money.

And one wonders, by extension, how and even whether, the smallest firms, the challengers with relatively lighter pockets, can make a go of it.

JPMorgan Chase has said that it will lose at least $1 billion over the next several years as it sets up its digital bank — branching out from its initial market in the United Kingdom.

Break-even is years away, according to commentary from its investor day presentation. And, per estimates offered by management at the Monday (May 23) event, losses will be $450 million this year alone.

That $450 million is of course a lot of money. To get some perspective, consider the fact that Monzo, a digital-only competitor, logged a 105 million GBP revenue run rate last year, according to filings.

Nothing to sneeze at.

Lopsided Playing Field 

But when a bank like JPM is willing to lose multiples more than the small neobanks are able to take in on the top line (which does not necessarily translate directly into operating cash flow), the competitive scales may be a bit lopsided.

By broadening its digital push overseas, JPM is, we contend, tackling a greenfield opportunity without having to set down brick-and-mortar roots (which are more expensive to operate and maintain). The brand name is in place and certainly is an asset. The company need not build out the operations — it can buy some functionality and hit the ground running. We’re seeing that model take shape with its acquisition of digital wealth manager Nutmeg in the U.K.

Read also: UK Wealth Manager Nutmeg To Become Part Of JPMorgan

And, with new details disclosed this week about how Chase in the U.K. is gaining traction — with half a million customers and $10 billion in deposits — critical mass is coalescing.

The great digital shift opens up the financial services arena to all sorts of players. We’re living in an age when simply wrapping prepaid cards into a UX — and then expanding from there — is but one strategy. Smaller, digital upstarts are in a tougher spot as they go to market with basic functionality and then add new capabilities over time, as tech improves, yes, and as they get requisite licenses in each market to, say, hold deposits or offer checking services. JPM already has the expertise in place to do all of those things — and offer a range of products under one digital umbrella.

The urgency is there, and the U.K is fertile ground.

In our own digital studies delving into the connected economies that are taking shape across 11 nations, we found that almost 95% of the adult population is connected to the internet, and 83% own a smartphone. The dry kindling is there, and JPM hopes to ignite things early in its connected banking efforts. Scale, reach and in-place infrastructure can do much to challenge the challengers.