JPMorgan Chase technology goal: Innovation with cost control
Financial services firm JPMorgan Chase seeks to balance technology modernization and cost optimization as it pursues initiatives like cloud migration, AI and machine learning.
As JPMorgan Chase spends a projected $17 billion on technology this year, the banking giant will keep one eye on cost efficiency and the other on technical innovation.
It's a dual imperative many enterprises face. But for JPMorgan Chase, the task takes on enormous proportions. The financial services company is the largest bank in the U.S. and among the largest in the world , with $4.1 trillion in assets as of June 30, 2024. The firm's IT component is similarly massive: It employs a technology workforce of more than 63,000 people and runs 32 data centers, although it aims to reduce the number of those facilities.
Against that backdrop, the bank is digitalizing its services and investing in emerging technologies such as AI. It's also seeking higher productivity from internal and external technology resources and its software development processes.
"It's a fine balance between innovation and cost optimization," said Arvind Joshi, COO and CFO of JPMorgan Chase's Global Technology group, which houses the firm's technology and software development operations.
This balance is playing out as JPMorgan Chase sees more of its business shift to digital channels, from mobile banking to embedded payment systems. The need to expand those channels, as transaction volumes grow, elevates technology as a cost of doing business.
It's a fine balance between innovation and cost optimization.
Arvind JoshiGlobal Technology COO and CFO, JPMorgan Chase
"The tech spend continues to increase as a result of incremental digitalization of revenue streams, which translates to more features and more volumes," Joshi said.
In this environment, the ability to trim total IT costs misses the mark as a measure of efficiency. Unit cost, the cost of creating and delivering one unit of a product or service, becomes the critical yardstick.
"We focus on reducing unit cost as a better proxy of efficiency," Joshi said.
Two paths to cost optimization
The JPMorgan Chase technology group follows two paths to cost optimization in its drive for efficiency. The first path aims to generate more compute capacity from each unit of power consumed, measured in megawatts. That effort focuses on the firm's IT infrastructure, but there's a human element as well. A significant part of the cost optimization effort is training the bank's application teams to follow FinOps practices. The goal is to equip those teams to get the most out of its private and public cloud resources, Joshi said.
The second path to cost optimization rests on the firm's software engineers and their ability to increase the speed of software delivery and change management -- the task of managing changes to code. The faster tempo translates into shorter cycle times, which, in turn, ramps up the code-to-production pace, Joshi said.
Those optimization paths have the same cost-efficiency goal but address different areas of spending.
Here's the breakdown: About half of JPMorgan Chase's tech budget is earmarked as run-the-bank funds -- IT infrastructure, software licenses and application/production support, for example. The other half is allocated for what the bank terms investment spending. The investment bucket is further subdivided into two segments. One includes products, platforms and user experiences. The other segment, under the heading of modernization, includes cloud migration, software development efficiency improvements and cybersecurity.
In this context, the first optimization path -- the one that focuses on boosting compute capacity per unit -- applies generally across the bank. The scope includes core infrastructure and the rising cost of delivering digital products. JPMorgan Chase expects its costs for products, platforms and user experiences to grow about 12.5% year over year, increasing to $4.5 billion this year from $4 billion in 2023, according to company data.
The second optimization path, meanwhile, seeks a productivity boost that lets software engineers accomplish more -- even when spending is flat, Joshi said. And that's indeed the case with modernization spending, which includes software development improvements. The projected $3 billion modernization outlay for 2024 will be flat year over year, said Jeremy Barnum, the bank's CFO, speaking at an investor's day presentation in May.
The bank's tech investment plan covers everything from digital products to cloud migration.
JPMorgan Chase's efficiency push comes as no surprise to Jerry Silva, vice president at IDC Financial Insights. "If you look at JPMorgan, they kind of lead the pack in terms of their efficiency ratio," he said. An efficiency ratio, a key measure of a bank's performance, weighs non-interest expenses against revenue. Banks strive for a low ratio, which means they're spending less to generate each dollar of revenue.
The efficiency ratio provides a window into compute efficiency. That's because, aside from labor costs, IT and operations costs dominate non-interest expenses, Silva said. 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%, which puts it ahead of most banks, according to Silva. He said the IT operation's contribution to that favorable ratio stems from Joshi's focus as the tech group's CFO and the bank's control over its IT infrastructure.
"They just seem to have a better handle on things than some of their peers," Silva added.
Technology innovation and modernization priorities
The bank, meanwhile, pursues several innovation and modernization initiatives on technology. Investment priorities for the remainder of 2024 include data strategy, AI and machine learning (ML). This investment builds upon the firm's previous work in those fields.
"It's not like we're starting fresh," Joshi said. "We've been on the AI/ML journey for the last 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 software development examples.
JPMorgan Chase is also investing in infrastructure modernization, 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. By the end of this year, it aims to increase those figures to 70% and 75%, respectively. Joshi co-heads public cloud enablement and adoption along with Darrin Alves, the bank's CIO for Global Technology Infrastructure.
JPMorgan Chase is also updating its applications to more effectively use cloud capabilities.
"You have to have a reasonable amount of modernization of your applications," Joshi said.
The firm also emphasizes cybersecurity on its list of IT investment priorities. In May, Barnum cited "ongoing efforts in cyber and resiliency to protect the firm and our customers" as a modernization component -- alongside the bank's cloud and data center work.
Innovation meets cost optimization
In some cases, JPMorgan Chase's technology innovation efforts intersect with cost optimization.
Huard Smith, a principal analyst at Forrester Research, cited the bank's deployment of Thought Machine's cloud-based core banking system as contributing to its unit cost efficiency. London-based Thought Machine inked a deal in 2021 to roll out its Vault Core platform across JPMorgan Chase's U.S. Consumer and Community Banking business. That same year, the bank joined several companies participating in Thought Machine's Series C funding round.
JPMorgan Chase's adoption of the Vault Core technology differs from many large banks, which tend to use monolithic enterprise banking systems, Smith said.
"Chase is going in the other direction and picked a small vendor with a lean system that allows super flexibility -- once they get rid of all the Cobol-based core banking systems," he said.
Thought Machine's cloud-based, microservices architecture makes it easier for the bank to quickly launch digital offerings, Smith said. With microservices, an IT organization can deploy new software features independently of other parts of the system. A monolithic application, in contrast, would need to be redeployed in its entirety.
Using Vault Core reduces the incremental expense of adding new products, Smith said. The upshot is a positive contribution margin, he added. That is, the product revenue generated per unit is higher than the variable costs -- software development hours, for example -- incurred to produce the revenue.
The big picture on JPMorgan Chase's technology strategy
The details of run-the-bank spending, technology investments and optimization approaches provide a varied snapshot of how JPMorgan Chase handles the day-to-day demands of financial services IT.
But from a wider lens, the firm pursues one overarching objective, according to Joshi: extract as much output as possible from its $17 billion tech outlay. The methods for doing so include faster and higher quality code, reduced cycle times, more new-feature releases and infrastructure utilization efficiencies, he said. Agile software development practices overlay those methods.
Joshi framed the ultimate result as business outcomes: "faster time to market, lower cost of operations, and better resiliency and controls."
John Moore is a writer for TechTarget Editorial covering the CIO role, economic trends and the IT services industry.
