Staying The CourseStaying The Course
J.P. Morgan Chase aims to infuse its business with innovation fueled by the Web
August 23, 2001
Bob DeMarco knows the golden rule of sales: Always be closing. That's why the business manager at Curtiss-Ryan Honda, a car dealer in Shelton, Conn., is excited about using an online credit-approval system that lets him secure a would-be customer's line of credit in minutes. DeMarco keys in credit applications on DealerTrack.com, an online multilender auto-finance service that electronically routes them to computers at J.P. Morgan Chase & Co., which score them and respond with loan approval and terms.
Curtiss-Ryan Honda can process more loan applications and sell more vehicles in a day by cutting out the hours of waiting for the bank's response by fax or phone. "By getting involved in DealerTrack," DeMarco says, "J.P. Morgan Chase is trying to keep my business and make it easier to work with them." It's good business for J.P. Morgan Chase on another front, too: The financial institution, whose systems are integrated with the DealerTrack platform, saves the cost of keeping a staff to process applications.LabMorgan, the Internet strategy and incubation unit of J.P. Morgan Chase, is simultaneously a DealerTrack customer, investor, and adviser. The relationship shows that Chase hasn't given up on the Web and emerging technologies.Although the stagnating economy has quelled enthusiasm for many Web businesses, the world's fourth-largest financial-services company has some 60 Internet ventures percolating at LabMorgan. Its commitment to these companies, in the form of $500 million-plus in investment capital, management and technical expertise, and marketing muscle, hasn't waned though it certainly has been tested. J.P. Morgan Chase, with $60 billion in revenue last year, revealed last week that it will lay off 8,000 people, 10% of its workforce. In July, the company said second-quarter earnings fell 61% as it wrote off $1 billion on equity investments, mostly related to financing fledgling technology and communications companies.
LabMorgan shares tech risks with partners, says Rohatyn (left), co-managing executive with O'Leary. The dark clouds hovering over the technology market haven't dimmed Denis O'Leary's excitement about his work. With blue eyes sparkling and boyish grin, the LabMorgan co-managing executive gives a simple reason for why the lab is staying its course: "It's not an elective-it's oxygen for the industry." He embarked on this path two years ago as head of Chase.com, a predecessor to LabMorgan before Chase Manhattan Bank and J.P. Morgan merged in January and combined their Web divisions. "Almost everything we do is like launching 747s, not rocket jets," O'Leary says. "They need to get rolling down the runway and start to climb. But once they climb, they have big payloads."Most of LabMorgan's 747s are still on the runway. Expectations remain high for LabMorgan investment Spectrum EBP LLC, a consortium of 23 major banks building an infrastructure for online bill payment and presentment that's been in the making for two years but has yet to be realized. In June, the company launched a new version of its platform that lets people view recurring utility, mortgage, and credit-card company bills on their bank's Web site and pay them electronically from online bank accounts.While member banks should start generating payments on the platform in the next 30 days, it may be two or three years before Spectrum will capture a significant share of the more than 19 billion bills mailed to U.S. consumers each month. That's the time Spectrum CEO John Perry thinks it will take to sign up most of the billers and banks, and convince consumers to stop writing checks. J.P. Morgan Chase uses Spectrum, along with bill payment and presentment software from another of its portfolio companies, BCE Emergis, to cut the cost of generating and processing paper statements and bills and improve service.But taking risks in technology-from automated teller machines to smart cards-has always been par for the course for banks. "Keep in mind that we're traditionally making investments in technology in vast sums over the years," says Nick Rohatyn, executive VP and co-managing executive of LabMorgan with O'Leary. Indeed, "some projects we are undertaking today are less risky because we're doing them with other companies and sharing the risk."Spectrum, for example, counts banks Wells Fargo & Co. and First Union Corp. among its investors, and DealerTrack was formed in January as a joint venture of J.P. Morgan Chase, Wells Fargo, and consumer lender AmeriCredit Corp. LabMorgan also invests in online account aggregation through Kinexus Corp. and Yodlee Inc.Yodlee, which has signed on 120 banks and Internet portal companies, lets customers access multiple online banking accounts with a single user name and password. J.P. Morgan Chase offers account-aggregation services to keep customers at its site, rather than letting them turn to competitors. To differentiate itself from other banks using these platforms, LabMorgan will provide users with automated advice, such as notification that a stock has dipped below a certain level, and suggest actions to take.In addition, LabMorgan holds a minority stake in and is a user of a number of online marketplaces, including Market Axess for bond dealers, Archipelago for stock trading, and Atriax for foreign currency exchange. It also owns part of 724 Solutions Inc., which provides infrastructure for wireless Web surfing and E-commerce transactions.LabMorgan, nevertheless, is becoming more cautious with its Internet investments. During the past year, it's managed a massive merger, watched its investments in tech startups lose nearly 20% of their value, and let some struggling portfolio partners fall by the wayside.Today, executives in LabMorgan's offices on the 45th and 46th floors of 60 Wall Street frequently utter the words "pragmatism," "return on investment," and "appropriate expectations." These concepts have replaced New Economy buzzwords like "first mover" and "killer-space deals." LabMorgan's open floor plan, with its clustered workstations, glass-walled conference rooms, and always-accessible wireless network, is worlds apart from the walled office and closed-cubicle design of Chase.com's old space. The setup encourages the easy exchange of ideas among its 240-member staff of financial-services veterans, IT and Web experts, business consultants, and investment bankers. From its lofty perch, with unobstructed views of the Statue of Liberty and lower Manhattan, LabMorgan has gained physical and internal perspective. A more carefully measured evaluation of new opportunities, a closer alignment with J.P. Morgan Chase's lines of business, and a sharper focus on projects that have a clear tie to financial services, all indicate a more mature organization.One outward sign of this shift: the slowing of LabMorgan's deal flow, the volume of startups that it evaluates and invests in. LabMorgan has made just eight investments this year, down from 30 in 2000. It engages line-of-business managers to set and track return on investment, to make sure its investments make J.P. Morgan Chase more efficient and profitable. This year, J.P. Morgan Chase created seven E-strategist positions, tapping executives from each major unit to serve as ambassadors to the lab and keep lines of communication humming.Projects also aren't cleared for takeoff quite as easily as before. The bank charged Janis Collins, who heads a new business-formation unit, not just with targeting the projects that solve business problems for incubation but also with minutely tracking their progress-and being ready to pull the plug on those that don't reach assigned milestones, such as signing on a certain number of clients. "Last year, companies developed solutions believing clients would come. There was no due diligence," Collins says.LabMorgan executives say expectations about how quickly technical innovations will be adopted by employees and customers have come down to earth. The execs also have lower expectations in regard to how soon portfolio companies will deliver a return on equity investments.That's not to say the bank has undying patience for every venture launched, especially those outside its core mission. Just look at Metiom, which filed for Chapter 11 bankruptcy protection in May and had provided the software platform of an online purchasing club for J.P. Morgan Chase small-business customers called bPurchase. Metiom couldn't convince enough purchasing managers to pay for transactions to survive. Or consider TradeOut.com, an online auction site for capital assets with whom LabMorgan formed a marketing agreement. TradeOut.com was to give company treasurers a way to liquidate idle assets with a mouse click. LabMorgan agreed to refer its treasury-management customers to the service, but TradeOut.com couldn't make enough money or raise more funding, and closed in July. "It's put into perspective how difficult it is for startups to gain adoption, customer retention, and continued revenue," says LabMorgan senior VP Ray Fattell, who oversees efforts to propagate bill payment and presentment technologies.J.P. Morgan Chase isn't alone among financial institutions in learning some hard lessons. Thanks to management disruptions and false starts, initiatives begun under Citigroup Inc.'s three-year, $400 million Internet effort, e-Citi, have been distributed among lines of business; e-Citi's narrower duties include developing wireless and broadband technologies and investing in technology companies that offer products the bank itself might use. And after having poured $150 million into Wingspan.com, Bank One Corp. in June folded the Internet-only bank's 225,000 accounts into its corporate online banking business, Bankone.com, which already has four times as many accounts.
Not all of LabMorgan's projects will boost the bottom line, says O'Leary, but they'll promote business in other ways. Conscious of its own and others' failed Internet efforts, LabMorgan is more focused than ever on the core business of the bank and the fundamentals of good business, such as reducing costs, being easier to do business with, and seeing bottom-line improvements.LabMorgan's work with DealerTrack and dozens of other tech startups continues precisely because it keeps customers happy and makes business flow more smoothly at J.P. Morgan Chase. DealerTrack, which went live in February, boasts 7,000 dealers using its platform for free to process loans and five lenders (including J.P. Morgan Chase) that pay to offer loans. By year's end, it expects to double the number of institutional subscribers, expand its dealer base, and debut services, such as electronic transmission of loan paperwork.But LabMorgan executives are uncertain whether ventures like DealerTrack are economically viable as independent businesses. DealerTrack CEO Mark O'Neil won't disclose the transaction fees lenders pay but says the service should more than offset the costs they incur without it-namely, staff to type applications into PCs and toll-free fax lines provided to dealers. O'Neil is leading a second round of funding and expects profitability by October 2002.The Internet's eventual impact on the financial-services industry is unknown. "You have to wonder when these ventures will become primary means of trade rather than startups trying to get market share," says Jeff Kutler, editor of Institutional Investor, a financial-services industry trade magazine.While many of LabMorgan's projects are aimed at lowering costs or raising revenue, some won't show up in the bank's net income line. But that doesn't mean they won't promote business for J.P. Morgan Chase in other ways, the same way that ATMs, though not money-makers themselves, are critical to any bank's operations. "We don't have to shoot rodents out of cannons at the Super Bowl," says O'Leary, in a nod to the wild and wooly ads dot-coms once ran to attract attention to their sites. "We know there will be a market."---More on Redefining Business
The Wilder Side By Clinton WilderPhotos by Sacha Lecca
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