The news: In his annual letter to shareholders, JPMorgan Chase CEO Jamie Dimon warned that incumbent banks are grappling with a “diminishing role” in the global financial system, largely due to outside competition.

Competitive threats overview: Dimon argued that the relative influence of big US banks has tumbled, comparing 2010 data with 2021 data.

• The collective market capitalization of the US biggest incumbents—defined as those labeled as US Globally Systemically Important Banks (GSIBs)—grew from $800 billion to $1.5 trillion.
• The combined market capitalization of four big US tech companies—Apple, Google, Amazon, and Facebook—grew by much more, surging from $500 billion to $6.9 trillion.
• Banks’ share of mortgages originated crashed, dropping from 91% to only 32%. Meanwhile, nonbanks’ share surged from 9% to 68%.
• Private and public fintechs had no market capitalization data available for 2010, but in 2021, combined for $1.2 trillion.
• Neobanks also lacked available user stats for 2010, but held a collective 50 million accounts in 2021.
• Assets under management (AUM) of shadow banks, including hedge funds and private equity, skyrocketed over the period, from $3.1 trillion to $9.7 trillion. The private credit market also grew from $14 trillion to $20.4 trillion.

Dimon called out some competitors by name.

• Walmart: Dimon noted that over 200 million people use its stores weekly and that it’s able to roll out financial products. It’s backing a nascent fintech, Hazel, which will include neobanking and be broadly available to customers.
• Apple: He pointed out it already offers Apple Pay and Apple Card and plans new offerings ranging from buy now, pay later (BNPL) to credit risk determinations.
• Vanguard, Fidelity, and Charles Schwab all offer banking products.

Dimon also blamed regulations for hampering banks’ competitiveness. For example, he noted that neobanks have avoided the Durbin Amendment in the US while garnering fees from debit card transactions.

Tech spending rationale: Dimon defended the banking giant’s tech spending, which some investors have privately criticized while seeking more details.

• He said JPMorgan will have almost $2 billion in “incremental expenses” this year related to tech—and he previously said it plans to spend as much as $12 billion in 2022. Our new forecast shows the bank allocating $10.10 billion for this year, excluding salaries.
• He said the spending should be assessed according to its impact and how it affects competitive standing, customer satisfaction, and adding market share.
• He also noted that tech investments can, in turn, generate investment opportunities.

Dimon also gave examples of recent expenditures:

• Data center spending increased, with an outlay of $2.2 billion to build new ones, but Dimon noted the bump is mainly driven by the “duplicative expense” of having both old and new data centers.
• Payments modernization has accounted for over $1.5 billion of expenses, including technology, since 2016. However, Dimon pointed out this led to $4 billion in new annual revenue and boosted the bank’s Treasury Services market share from 4.5% to 7.2%.
• JPMorgan developed more than 1,000 application programming interfaces (APIs), which Dimon noted that business customers can use “to automate our banking systems into their enterprise systems.”

The big takeaway: Dimon’s case for JPMorgan’s tech spend is reasonable and provides greater context than initially reported cash outflows.

• Shareholders need to consider the savings and revenue that tech generates as well as upfront costs. A less short-sighted view helps investors understand longer-term payoffs.
• Well-received products and customer experiences help JPMorgan’s reputation with consumers who can, if dissatisfied, take their business to neobanks—or eventually, to Walmart and Apple.
• The tech section of the CEO’s letter also shows the power of shareholders, who have prompted Dimon to offer a greater disclosure and may have inadvertently helped foster greater buy-in for future tech initiatives.