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Citigroup, JPMorgan CEOs shrug off Libra’s potential to impact their card business

Quick Take

  • Mike Corbat, Citigroup CEO, said he’s read the Libra whitepaper several times; questions whether it will be consortium led or Fed-backed when the coin (or something like it) inevitably comes
  • Jamie Dimon, JPMorgan CEO, said “we’ve been talking about blockchain for seven years and very little has happened,” and opined not to “spend too much time on Libra.”

While power brokers on Capitol Hill put Facebook’s Libra under the microscope this week, the yet-to-launch cryptocurrency is also getting its fair share of attention on Wall Street. 

Both Citigroup and JPMorgan executives weighed in on the imminent crypto during their firm’s respective earnings calls, raising questions about how it could upend an increasingly important part of the business: consumer banking. 

Within card businesses, Citigroup saw purchase volumes grow by more than 8%, while JPMorgan’s volumes grew by more than 11% to over $190 billion worth of quarterly volume. Goldman Sachs, which currently is ramping up heavier investment into its consumer business Marcus, is the only large U.S bank so far to report lower year-over-year profit in 2Q, according to the Wall Street Journal.

Indeed, these consumer business lines are some of the financial services Libra and Facebook’s Calibra are looking to disrupt with its “new global currency,” touting the capability of enabling lower cost P2P and cross-border payments.

Facebook would join a crowded field of fintech challengers, which have long been exalted as democratizers of finance and bank killers. If recent quarterly results are any indication, the largest U.S banks have been able to defend their turf — at least on the consumer side of the business.

Still, that hasn’t kept some analysts and investors from wondering whether Libra could present a different threat this time around, siphoning off business from big bank’s credit card businesses. Such a move could in theory put pressure on the fees associated with card transactions, eating into the bottom lines of Wall Street banks, suggested Morgan Stanley analyst Betsey Graseck on JPMorgan’s earnings call.

“A lot of times [initiatives like Libra] highlight friction in the system… and opportunities to take out fee rates of legacy businesses. I think some people might view you as a legacy business with a margin that can be taken out,” Graseck noted.

Interchange fees, which banks charge merchants on each credit purchase, could be put on the chopping block under a fee compression environment. 

Mike Corbat, CEO of Citigroup, acknowledged on this week’s 2Q19 earnings call that interchange is an example of friction in credit card transactions, but noting that it has already come down in some parts of the world. Just last year a report from the Australian government’s Productivity Commission surfaced which even discussed the possibility of banning interchange fees entirely.

Source: The Block, Autonomous Research

“I think the way we think about it is that the market is moving and likely moving quickly towards 24/7, real-time friction-less, ubiquitous global money movements and payments. That’s just the reality,” said Corbat.

Corbat added on the call that while his firm is not part of the initial founding Libra Association members, he isn’t dismissive of the tech. He also said that he had in fact read the Libra white paper several times.

“I think there are some redeeming or some qualitative aspects that are appealing. I think there are others that might raise some questions.”

“Libra is not a question of if. It’s when a digital currency comes… is that currency one that kind of operates as a consortium, or is it a Federal Reserve… central bank-backed type currency?”

Recent research from The Block questioned whether Libra would actually be that much cheaper than the current U.S. card interchange model, given how relatively low-cost the system already is for consumers. Currently, a majority of interchange fees get rebated back to the consumer via rewards, with other payment fees covering value-added services like insurance and charge-back protection for fraudulent transactions.

Yesterday, Calibra head David Marcus in a testimony to the Senate Banking Committee said Calibra would operate with traditional payment processors and service providers hooked into the Libra network. He also confirmed that the Calibra wallet would offer consumer fraud protections, 24/7 customer support, and account recovery the same way other leading financial services offer. These types of value-add services would likely introduce costs into the Calibra stack.

JPMorgan CEO Jamie Dimon, meanwhile, brushed off the impact Libra could have on consumer banking and payments. 

“We’ve been talking about blockchain for seven years and very little has happened. And we’ll be talking about Libra 3 years from now, so [I] wouldn’t spend too much time on it.”

Dimon said the banking giant moves more than $6 trillion per day for consumers and corporates alike, in an already secure and relatively cheap manner.

“We didn’t have real-time payments and now we do with Zelle offering P2P payments. We’re building the thing the future wants, including APIs and blockchain ledgers that will help move money and data.”

“At the end of the day we serve the consumer, and people love their credit cards. They use their credit cards far more than they use their debit cards. I don’t remember the last time I used my debit card.”

Maximilian Friedrich, a fintech analyst at ARK Invest, told The Block it wasn’t surprising that bank executive comments on Libra during this week’s earnings calls were rather reserved.

“According to our research and company filings, issuing banks capture up to 80% of the economics behind card transactions via interchange fees and interchange revenue makes up more than 10% of annual revenue and close to 25% of non-interest income for some banks.

“Libra may have the potential to reduce payment frictions like the interchange fee and compromise banks’ interchange revenue streams,” Friedrich concluded.

Frank Chaparro contributed to this report.