I stumbled over a detailed analysis of Goldman Sachs’ efforts to be a fintech the other day. Written by Mario Gabriele, Founder and Editor of The Generalist, the lengthy text is a great breakdown of how Goldman pivoted from an investment bank to launch a consumer bank over the past few years. I’ve picked a few key paragraphs from the text, but feel free to read the whole thing. It’s worth it if you’re interested.
The discussion begins before the financial crisis when, in 2007, Goldman Sachs made $4 billion from shorting the mortgage market (remember Lehman Brothers?), with greater returns coming in 2009. How did it get this so right? Tech.
Securities Database, better known as “SecDB,” was founded by the firm in the early 1990s. Over the years, the software platform evolved to become a robust way for traders and risk management to track and model positions on a granular level … it had been pivotal in profiting from the crash and navigating its fallout. Seeing tech act as a differentiator likely emboldened Goldman’s later efforts. Reclassifying as a bank holding company was the more significant long-term shift.
The last line in that para is very true. Before 2008, Goldman Sachs were a pure investment bank. As a bank holding company, they could launch retail services and, since then, Goldman has spent $5 billion on its consumer banking efforts. Some postulate that this was to reposition the bank from being a fusty financial institution serving the uber-rich and making squid loads of money (Ed: or is that Vampire squid loads of money?), and thinking that Goldman Sachs could reframe itself as a tech-forward company bringing services to the everyman.
In 2016, Marcus launched its first product: personal loans … sources have suggested that Goldman picked that product after handling LendingClub’s 2014 IPO … after seeing the business up close, Goldman’s team was convinced they could compete head to head.
One-third Goldman Sachs. One-third consumer finance. One-third Silicon Valley.
Since then, they’ve expanded into other services from saving to robo-investing, as well as partnering with Apple (which has questions). The numbers are then quite impressive:
Marcus has 14 million customers. That figure puts the product in elite company, surpassing U.S. neobanks like Chime (13 million) and Current (4 million). However, it is far from payment-focused products like Venmo (70 million) and Cash App (44 million). Interestingly, many of these customers have come via the Apple Card tie-in. Out of the 14 million Goldman amassed, the Apple partnership contributed millions, according to one report. Total consumer deposits surpass $110 billion, another sizable figure … by 2024, Goldman expects its consumer business to generate $4 billion in revenue.
But that came at a cost:
The firm is believed to have spent over $5 billion on the effort, logging heavy losses. That figure doesn’t include the billions used to acquire GreenSky. Losses are not expected to slow, with a $1.2 billion deficit expected this year.
Equally, Marcus is fairly confused strategically according to The Generalist.
In six years, Marcus has fanned out into a confusing range of products that often seem geared toward different customer bases. The high-yield savings account appeals to affluent consumers, while personal loans target those with debt, for example. As for Marcus Invest – it may be a case of the less said about it, the better.
Nevertheless, there are some bright lights. For example, Goldman Sachs launched transaction banking (TxB), which has rapidly become a standout success:
Transaction banking seems to have been a particular success. When the platform first launched in mid-2020, Goldman set two five-year targets: to reach deposits of $50 billion and revenue of $225 million. Eighteen months later, TxB hit $50 billion in deposits; in 2021, it delivered $225 million, up 50% from the year prior. At that rate, it should exceed $1 billion in revenue by its goal of 2025.
Equally, they are about to launch full deposit banking with checking accounts. It will be interesting to see how that goes. The Generalist is not impressed:
It’s easy to understand Goldman’s strategy here. Checking accounts are often loss leaders, but they are a customer’s primary financial relationship. If Goldman wants to own consumer banking, having a high-contact hub like this may be necessary.
It also feels like a repeat of past mistakes. Marcus’ problem is not that it has too few products but too many. As we’ve discussed, these often don’t connect as coherently as Goldman might wish and run at a considerable cost.
That’s quite funny. The Generalist calling for Goldman Sachs to be more specialist! But then they do make a serious point:
Goldman should consider taking a page out of the Transaction Banking book. Part of the reason that initiative is so interesting – and seems to be working so well – is that it leverages Goldman’s natural advantages. This is a business with connections to every meaningful fund and company on earth, with an elite brand that makes it an attractive partner. It holds global banking licenses, a massive balance sheet, and modern tech infrastructure. In the coming years, the firm should look to lean into these strengths rather than attempting to build new ones from scratch.
Ultimately, there is just one true measure of success or failure: the stock price.
By that measure, Goldman Sachs’ tech efforts have struggled to break through. On a price-to-book value basis, Goldman Sachs trails its rivals. Morgan Stanley’s P/B stands at 1.637, and JPMorgan’s is at 1.380. Goldman comes in at just 1.083. This isn’t an artificial low – the bank’s average for the past five years is 1.100. Commentators have argued that Goldman’s spending on technology has hampered its valuation.
The consumer bank, known as Marcus, will lose more than $1.2 billion in 2022 according to the bank’s internal projections,In addition, it is noteworthy that Goldman is laying off staff right now, as results are not delivering in its core business.
Add to this that the investment banking strengths of Goldman Sachs are also faltering:
It reported a 48% slump in its second quarter profit as its clients face inflation, rising interest rates, the Coronavirus pandemic and war in Ukraine. Its investment banking division generated revenues of $2.1 billion, down 41% compared to a year ago.
And you have an interesting concoction. Goldman Sachs does have strength, obviously, but its strength is not in consumer banking ... yet. A final line resonated with me:
Goldman has acted as if it believes the prize to be won via technology is to emulate Chase or the Discover Card. It must realize that it is far better positioned to become the embedded banking partner to the world’s innovators.
All in all this, with Ron Shevlin’s takedown of Marcus, and my own takedown of its relationship with Apple questions, hit me as big articles. Watching this space.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...