JPMorgan Chase, led by CEO Jamie Dimon, continues to post impressive profits, even as analysts question its dominance in the highly competitive U.S. banking industry. During the megabank’s earnings call on Friday, Dimon dismissed the idea that JPMorgan has an unchallenged market position, citing the presence of over 4,000 U.S. lenders and the rise of fintech challengers. However, the bank’s ability to consistently generate supernormal returns suggests that in some respects, traditional competition rules no longer apply to the banking giant.
Retail Banking and Supernormal Profits
JPMorgan’s consumer division is a major profit driver, achieving a 29% return on equity in the latest quarter. Considering that the minimum return investors typically expect, or the cost of equity, is about 10%, the bank is earning far beyond what is necessary. Over the past decade, if JPMorgan had only met this 10% threshold, its retail bank would have generated around $50 billion in earnings. Instead, it earned an additional $90 billion above that, thanks to Dimon’s leadership and favorable conditions.
This kind of profitability would typically attract competitors looking to claim a market share, but a few factors help JPMorgan maintain its dominance.
High Barriers to Entry and Tech Investment
Setting up a rival bank with a national presence is prohibitively expensive, and JPMorgan’s vast troves of customer data give it a competitive edge, particularly in the credit card sector. For instance, Goldman Sachs tried and failed to replicate the kind of customer insights and credit card services JPMorgan offers.
Technology has also further tipped the scales in favor of JPMorgan. The pandemic accelerated the shift toward digital banking, and the biggest lenders are now pouring billions into upgrading their technology. JPMorgan alone spends $17 billion annually on technology, enabling faster payments, artificial intelligence, and enhanced customer experiences. To put that into perspective, only nine other U.S. banks have total operating expenses that match JPMorgan’s tech budget.
Customer Inertia and the Regulatory Moat
Another factor working in JPMorgan’s favor is customer inertia. Dimon explained that “deposit betas,” or the returns depositors expect from their savings as interest rates change, came in lower than expected. In simpler terms, many customers stuck with JPMorgan despite lower deposits returns, illustrating customer loyalty’s power.
Regulatory red tape also plays a key role in protecting JPMorgan from competition. While bank executives often complain about new capital rules, such regulations ultimately create a moat around the largest lenders. Stricter rules mean more customer trust, reinforcing JPMorgan’s standing as a secure and reliable institution.
Not All Banks Are Thriving
While JPMorgan flourishes, not all large banks enjoy the same fortune. Citigroup, for example, has struggled over the past decade. If the same 10% return-on-equity benchmark were applied to Citigroup, it would fall more than $60 billion short of expectations. This highlights the stark contrast between JPMorgan’s successes and Citigroup’s ongoing challenges, where shareholder value has continued to erode year after year.
