Roughly eight months ago, JPMorgan Chase (JPM 0.49%), America's largest bank, launched a digital consumer bank in the United Kingdom. The goal was not only to establish a presence in the U.K. consumer banking market but also to pilot a digital banking model that could be scaled to other countries as JPMorgan Chase expands internationally. So far, while it's still early, JPMorgan Chase seems to be making good progress in the U.K. Let's take a look.
The foray into the U.K.
Breaking into consumer banking in new international markets is not easy, not even for a bank as big as JPMorgan Chase. There are already well-established brands in new markets, and breaking in typically requires significant investment like buying or building bank branches, corporate offices, and data centers. JPMorgan decided to essentially launch its own digital challenger in the U.K., with fintech being all the rage and brick-and-mortar banking being less favorable these days. Additionally, JPMorgan believed a digital bank would be a less costly route that could be more flexible in experimenting with. So far, the bank appears to be off to a good start.
At its recent investor day, JPMorgan Chase disclosed that it has 500,000 customers who have brought in roughly $10 billion in deposits and conducted approximately 20 million card and payment transactions in eight months. But, perhaps most impressive is that JPMorgan claims it has gathered twice the amount of non-interest-bearing deposits than digital challenger banks in the U.K. one year after launch. Non-interest-bearing deposits are those the bank doesn't have to pay interest on and are considered more sticky than other deposits in a rising-rate environment, making them the best kind of deposits a bank can have.
Moreover, the bank considers roughly 30% of its customers highly engaged with its products. Sanoke Viswanathan, the bank's head of international consumer banking, said customers were using JPMorgan debit cards multiple times per day and conducting payment transactions in and out of their accounts multiple times per week -- all indicative of a primary banking relationship. JPMorgan Chase plans to add more lending and investing products to its U.K. digital bank.
While the digital bank will not help the bottom line right away, management expects the operation to break even over the next five to six years. The bank expects to take an annual loss of about $450 million over the next few years while it ramps up.
But it seems like the cloud-native platform JPMorgan built the digital bank on is quite efficient, with roughly 70% of its costs largely fixed in nature. The platform can also support multiple products and scale to millions of customers at a low marginal cost. Viswanathan said the bank could use the platform to enter new countries without too much additional investment.
JPMorgan already seems to be thinking about future international consumer expansion by purchasing the U.K. digital wealth management platform Nutmeg, which the bank believes will play a valuable role in the U.K. and beyond. JPMorgan Chase has also taken a 40% stake in the Brazilian digital bank C6 Bank, which has over 16 million customers in a huge addressable banking market.
A solid start
As Viswanathan said, "it's too early to declare victory," but JPMorgan's U.K. digital experiment looks like it is off to a good start when you think about trends with non-interest-bearing deposits and highly engaged customers. The bank also looks to have invested in an excellent digital platform that can efficiently scale. Of course, it will still take some years before the U.K. digital bank contributes to the bottom line, and investors are not going to be pleased if the bank doesn't hit its targets, but all you can do right now is continue to monitor the progress closely and hope it stays on the right path.