Category: JPMorgan Chase

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Blockchain: What It Is and How It Works

Quickly:

  • Many speculate that blockchain could turn out to be one of the most revolutionary technologies ever developed.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

WASHINGTON, DC — J.P. Morgan’s CEO, Jamie Dimon, recently threw some big time shade at bitcoin.  However, as the Wall Street Journal shared this morning, he’s “still enamored with the technology that underpins it and other virtual currencies.”  For those wondering about where and why blockchain might revolutionize the business of banking, take a look at our just-released Q4 issue of Bank Director Magazine.  We dedicated our cover story to “Understanding Blockchain,” and this post teases out some of the key concepts bank executives and board members might focus in on.  Authored by John Engen, the full piece can be found, for free, here.  As you’ll read, the article covers three major points:

What is Blockchain

If you’re on the board of a typical U.S. bank, odds are that you don’t know much about blockchain, or distributed ledgers, except that there’s a heavy buzz around the space—and a lot of big bets being made. As John Engen wrote, being a know-nothing might be fine for now, but going forward could be untenable.

At its most basic, blockchain is a digital-ledger technology that allows market participants, including banks, to transfer assets across the internet quickly and without a centralized third party.

Some describe it as the next, inevitable step in the evolution of the internet; a structure to help confront concerns about security, trust and complexity that have emerged from a technology that has opened the world to sharing information.  To others, it looks more like business-process improvement software—a way to improve transparency, speed up transaction times and eliminate billions of dollars in expenses that markets pay to reconcile things like credit default swaps, corporate syndicated debt and other high-volume assets.

Where are things heading

“Trying to guess how blockchain is going to affect us in the next 20 years is kind of like standing in 1995 and trying to imagine mobile-banking technology,” said Amber Baldet, New York-based JPMorgan Chase & Co.’s blockchain program leader, in an online interview. “I’m sure the ultimate applications are things we can’t even imagine right now.”

For now, the space certainly has the feel of the 1990s internet, with hundreds of startups and billions of investment dollars chasing distributed-ledger initiatives.  Armonk, New York-based IBM Corp., a big blockchain supporter, estimates that 90 percent of “major” banks in the world—mostly those with trading, securities, payments, correspondent banking and trade finance operations—are experimenting with blockchain in some way.

Collaboration is the current buzzword

Most large banks are involved in consortiums with names like Ripple, Hyperledger, R3 and Enterprise Ethereum Alliance.  Smaller banks are taking more of a wait-and-see approach.  For all the promise of speed and efficiency, blockchain’s real power lies in its transparency, which makes data both trackable and immutable.  Ultimately, blockchain could usher in new business models, which require different ways of thinking.

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For members of a bank’s board, we created this “Blockchain 101” video.  In it, I touch on the potential application of blockchain in terms of digital identities, digital banking and cross-border payments.  In addition, the ten minute video surfaces key concepts and business ideas that remain material to many today.

*This video is just one of the offerings found in our Bank Services program designed to help board members and senior executives develop strategies to help their bank grow, while demonstrating excellence in corporate governance that shareholders and customers deserve and today’s regulators demand.

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Keeping Up With JPMorgan Chase

As much as executives at community banks need to focus on the emerging challenges posed by non-bank competitors, so too are the priorities of the globally systemic banks like Citi, BNY Mellon and JPMorgan Chase important to understand.  So file today’s post under “know thy enemy….”

At a time when many community bank CEOs sweat margin compression, efficiency improvements and business model expansion, it is very interesting to take note of the six areas of focus for JPMorgan Chase.  Last week, Gordon Smith, their Chief Executive Officer for Consumer & Community Banking, provided insight into the behemoth’s strategic agenda at the company’s investor day.  Their focus touches on the following key areas; the first five should resonate with bank leaders at institutions of all sizes:

  1. Continue to improve the customer experience and deepen relationships;
  2. Reduce expenses;
  3. Continue to simplify the business;
  4. Maintain strong control environment and automate processes;
  5. Increase digital engagement; and
  6. Lead payments innovation.

As Mr. Smith lays out, their deposit growth has been strong and core loans show continued improvement.  From a community bank CEO’s perspective, this is important as JPMorgan Chase’s organic growth may precipitate an even greater desire for smaller institutions to merge with another.  Indeed, I continue to see banks eyeing deposits, not just assets, as a catalyst for bank M&A (*this is not to suggest JPMorgan wants to buy another bank, as I don’t think regulators will allow any significant acquisitions from them nor do they seem to have even a sliver of interest. While they have a rich history of acquisition, I’m pretty sure they’ve reached their cap in terms of deposit market share).

Further, with their bank branches becoming more “advice centers,” it strikes me that many community bank operating models should aggressively shift to employing fewer people serving in more of a consultative capacity.  True, this model has been effectively emulated by some, most notably pioneered by Umpqua in the Pacific Northwest.  However, I see far too many local and community banks still arranged as if a bank will be robbed faster through the front door than it will the internet. The implication remains that a transaction trumps a relationship.  Finally, as banks like JPMorgan Chase divest various branches based on their drive for greater efficiencies, it should be helpful to think about some of their spun-off locations as potential targets that can bolster a regional presence.

So if you work for a community bank, it’s important to pay attention to the big banks. Sometimes, they can help you.