Nicolas Aguzin, chairman and CEO of J.P.Morgan, Asia Pacific, in this wide-ranging interview, discusses the steady progress in China’s financial liberalization efforts; challenges global banks face with already-huge Chinese players in the electronic payment space — like Tencent; why India’s Aadhaar system (biometric iris and fingerprint scanning), with 98% of the adult population registered, may become a game-changer for world credit markets; and how J.P. Morgan’s is spending $3 billion a year on new technologies, $600 million of which is earmarked to meet the fintech challenge. Aguzin said his bank can now be considered a tech company in its own right. His comments came during a break at the recent 2017 Wharton Global Forum in Hong Kong.
An edited transcript of the conversation follows.
Knowledge@Wharton: What will be the highlights of banking growth and innovation in Asia over the next two to three years?
Aguzin: Looking across the region I am very optimistic about China, India, Indonesia and the Philippines. I would say these countries are going to continue to be interesting — most are growing at over 6%, and have substantially higher populations than any other country in the region as well as internationally.
Knowledge@Wharton: Which sectors will see the most growth?
Aguzin: Each region is different. For example, China’s capital markets are very exciting. They are big and have great potential. Recently, index provider MSCI decided to include China in their index weightings, which means that 222 Chinese stocks will be part of the index and a lot of investors will now have to buy those shares.
Its domestic equity markets have a market cap of between $8 trillion-$10 trillion depending on when you measure it. That’s really big. And in terms of international banks like J.P. Morgan, being able to directly participate in this market it would be fabulous.
Another statistic that provides an idea of the scale of this market is that fees paid to investment banks for equity underwriting are about $2.5 billion, which is the size of Europe. So it’s a very, very significant and exciting market. We look forward to owning our own securities firm, which will allow us to participate directly in this market. It is the same with the bond market. The bond market is about $10 trillion, which is huge, and so we are very excited about the possibility of doing more domestically. We have just been awarded a bond underwriting license for China, which will help us grow.
And then there is everything that surrounds that. If you look at any of the business areas, that will also carry a lot of trading sales. Private banking is also a great opportunity. Half of the people that became billionaires in the last 12 months came from China. Even though today [the percentage of] billionaires from China is under 20%, it’s growing fast … they are all coming from China.
“We look forward to owning our own securities firm [in China], which will allow us to participate directly in this market.”
When you look at China, every single sector seems to be exciting. You look at outbound M&A from China — it’s just amazing what is happening. Last year, ChemChina bought Syngenta, for $43 billion. That requires lots of financing, capital-markets advice, hedging, risk management — all types of activities.
Knowledge@Wharton: Regarding China opening up its markets more to integrate with the global financial system — some say that’s been a little bit slow.
Aguzin: The direction has been consistent…. Yes, they’ve introduced some controls in terms of speculative outflow of money, but in terms of our business, our possibility of acting and doing business in China, the direction has been consistent. We’ve been able to do more and more over time.
It’s true that today we cannot own 100% of our own securities company in China. We believe China has to change that, and I believe they know that, and they will. But overall the direction will continue to be one of more openness, more participation by international players, and we welcome that.
Knowledge@Wharton: How long might that take?
Aguzin: Overall, I don’t think we can put a time scale on it because China will never be exactly the same as the U.S. as they will have their own model of democracy and their own model of capitalism. When will foreign securities firms be allowed to own over 50% of a securities firm? It could be one year, it could be five years but it will happen. But over the last year and a half, we have seen the introduction of the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect, where investors in one market can trade equity shares in the related market using local brokers; and Bond Connect, which allows non-mainland investors to trade Chinese corporate bonds. And while we are still not able to buy 51% [of a Chinese securities company] the amount we can buy has increased from 33% to 49%. Progress is going in the right direction.
Knowledge@Wharton: How about when it comes to private banking, wealth management, the ability for the Chinese to take their money out of the country and invest it more freely — there are lot of limits on that now…. Do you see that opening up in the same kind of timetable?
Aguzin: It is happening and has been happening. It takes a bit longer now to be able to take money out of the country but investors can take money out, and invest in international products. Then you also have insurance companies, which can invest up to 15% of their assets under management internationally. Right now they are investing 4% or 5% of their assets overseas, so if they wanted to invest more they can. They are starting to expand.
It’s similar when you look at the money coming into China. International investors invest about 1% to 2% into both the domestic bond and equity markets, which is very small. But as more money flows out of China, more money will flow in. In addition the renminbi will become fully convertible and that will also lead to greater cross border investment flows.
Knowledge@Wharton: One hiccup we’ve seen is in the IPO market – it has opened and shut….
Aguzin: That is correct if you are referring to domestic IPOs. If a company wants to do an IPO in Hong Kong, they are free to do an IPO in Hong Kong. That hasn’t been limited. What has been limited are domestic companies issuing IPOs in the domestic market for domestic investors.
Knowledge@Wharton: The U.S. has dropped out of the Trans-Pacific Partnership. And at the same time you see China cranking up investments, or making money available to other countries with the One Belt One Road Initiative. Do you think the U.S. is losing some preeminence in Asia?
Aguzin: Anything that increases interaction between companies and promotes globalization is good — a positive for the world. Obviously, it has to be done in a logical way and China is clearly on its front foot in terms of trying to increase trade and activity among a group of countries along what they call the One Belt One Road corridor. It’s a pretty big area that covers two thirds of the global population and one third of global GDP. They have been very committed to this initiative, and as a result China will increase their influence in those areas of the world. Is this all bad for the U.S.? It depends on the lens under which you look at it.
“Another approach we take is investing directly into fintech companies and partnering with them…. We’ve done this with about 100 companies so far.”
I do think that the U.S. has certain agreements that do not make a lot of sense, and need to be looked at but at the same time we need to ensure that international trade and globalization isn’t stifled. It’s very important to make sure countries continue to talk, and communicate. Hopefully the U.S. continues to push towards a system where there is respect for international laws, respect for the rules of the game.
Knowledge@Wharton: Is dropping out of TPP … a little bit of a speed bump for American banks?
Aguzin: It doesn’t affect us as an American bank that much…. What would be great for us is that there is more trade. So from that point of view it will [affect us] but it affects every bank in the same way, not just us as an American bank. It affects every institution that depends on trade … and TPP was probably going to increase the amount of trade in Southeast Asia, and Southeast Asia with North America, China — and China is clearly trying to set up its own platform.
So that would have been good. Now are all of the agreements within TPP the right ones, or is it not fair – that requires deeper analysis.
Knowledge@Wharton: Let’s turn to fintech. Tencent and Alibaba — their payment systems, have leapfrogged a generation of technology. Most Chinese people never had a PC, they went right to a smartphone. Now they are developing smartphone apps for payments … this is what everyone is using in China…. But from a banking point of view, this is a big change. These are non-banks that are now competing in a space that used to be reserved for banks. How do you look at fintech — as a challenge, as an opportunity, as a threat, as a risk?
Aguzin: Well it’s a reality that we have to face, and for the most part when you look at the different companies that are appearing, especially here in Asia, they are innovative, quick and very efficient. They think about what the customer wants, and they do very well. Tencent and Alibaba are two great examples. Tencent, by some reports that I read, processed US$1.2 trillion in payments in 2016 — that’s massive.
Their payment processing capabilities are very advanced when compared to many parts of the world.
Knowledge@Wharton: How will traditional banks compete?
Aguzin: J.P. Morgan invests and develops its own technologies very effectively. We’ve always invested in technology.
We invest about $9 billion a year in technology which is not easy for anyone to do. I don’t think there are many companies that invest $9 billion in technology. Of that, about a third — about $3 billion — is dedicated toward new technology initiatives and $600 million of that $3 billion is spent on emerging fintech solutions. We invest $600 million a year in cyber security — just cyber security. We also have 44,000 technologists. These are massive investments as J.P. Morgan looks to position ourselves in the best possible way.
Another approach we take is investing directly into fintech companies and partnering with them as they develop. We’ve done this with about 100 companies so far. By collaborating with these companies we can actually produce a lot. We’ve invested in companies like OnDeck, which provides loans to small- and medium-sized entities as well as another company called Digital Asset Holdings, which is focused on block chain and distributed ledgers.
We also form consortiums with other participants in the market, such as other banks. We are in a consortium of 43 banks related to block chain and the settlement of commercial paper. There are a lot of industry initiatives around technology, which is allowing us to build something very unique.
And last, we hire talented people from across the technology sector. Today about two thirds of the people that we hire, in terms of senior managers for J.P. Morgan’s technology functions, come from other fintech companies or leading technology companies from around the world.
To ensure we are providing them with the necessary environment where they can work effectively, we have created new workspaces that foster greater creativity, collaboration and innovation.
We also hold global hack-a-thons. In June, 5,700 people came together to create solutions and apps for 800 real challenges faced by businesses and non-government organizations in 32 different markets. It’s quite amazing the type of things that we are doing.
India is “working towards pretty much eliminating currency, and in a few years it is likely that [with its Aadhaar system] they will be at the forefront of just having a completely digital economy.”
Knowledge@Wharton: China has two companies handling almost all of the country’s payments. Do you see something like that happening in the U.S.?
Aguzin: It’s more fragmented in the U.S. The interesting thing is that when people talk about technology companies I remind them that J.P. Morgan has 44,000 technologists, which is often more than many of the world’s traditionally recognized tech companies.
Knowledge@Wharton: So you’re a technology company?
Aguzin: Yes – we have 44,000 technologists and invest $9 billion a year into technology – it’s very significant. In the U.S., we have our own payments system called Chase QuickPay that allows customers to send money and receive funds from anyone with an email address who is enrolled on the service. We have been responsible for many of the payments and financial technology developments in the market. And we are also in the position where we will be able to provide some of these services that we are developing for free.
Knowledge@Wharton: So it’s a matter of using technology to bring those other costs down to the point where you can offer them essentially for free?
Aguzin: Exactly. We have a very large full-service platform that services retail customers through to very large multinational corporations, and its essential that we look for better, more efficient and cheaper ways to serve them.
Knowledge@Wharton: As the former head of Latin America for your bank, and now being head of Asia, you are uniquely positioned to talk about differences between Asia and Latin America.
Aguzin: Yes, when I was in Latin America people would ask me all of the time what is my view on Latin America? And I would say it’s hard to say because each country is different, there are a lot of differences between Brazil, Chile, Venezuela, Mexico…. You have to look at it on a country-by-country basis — there’s a lot of diversity.
Now I’m in Asia and I think: This is real diversity. If anything there were quite a lot of similarities in Latin America. Asia has a lot more diversity. You have Australia, Japan, Korea, Singapore, Hong Kong, nation states, more concentrated, highly productive, GDP per capita of $80,000. And then you have India, and then you have Bangladesh, Sri Lanka, Pakistan, all of Southeast Asia. China…. It is mind-boggling.
And then I thought about the other differences. In Latin America you have to deal with Spanish and Portuguese, but they are very similar? In Asia, it’s not just different languages it’s different characters. There’s Korean, Thai, Chinese, Japanese. In Asia we deal with eight time zones and also have 55,000 employees compared to a couple of thousand employees in Latin America.
I do think that there are some similarities as well though. Southeast Asia, emerging Asia, is like Latin America. But China is its own animal. It’s completely different.
I think that Asia has one thing that Latin America doesn’t quite have, which is the scale. Anything they do is massive in scale, and you can do that in China, you can do that in India, both countries have populations of about 1.3 billion. Take the case of India, they’ve implemented some reforms recently including, for example, having the Aadhaar system which is a biometric way of registering people, and it’s both an iris scan and scan of your hand — fingers and fingerprints. It’s just amazing. They have 98% of the adult population registered, in a database.
They are working towards pretty much eliminating currency, and in a few years it is likely that they will be at the forefront of just having a completely digital economy. And when I say digital, it’s not even credit cards it’s just biometrics. So you can do things that are massive in scale and affect the world. China today, whatever they do they have an impact on the world.
Also, the savings rate in Asia is much higher compared with Latin America. Latin America doesn’t save a lot, Asia saves a lot. So that’s a big difference.
Knowledge@Wharton: So what haven’t I asked you that would be interesting for our readers to know?
Aguzin: It is very important that readers take the time to understand Asia, because it’s an incredibly important region that will affect every country around the world, every business around the world. What is happening in Asia across a number of areas, like technology, new products, education is quite remarkable.