Way back in 2010, Rolling Stone was harsh when they described Goldman Sachs as a “great vampire squid wrapped around the face of humanity.” That is pretty harsh and sent me to Google to find an article by Smithsonian Institution magazine where they define the fish by its scientific name of “Vampyroteuthis infernali” as the vampire squid from hell.
That seemed pretty harsh, even though the recession was painful to everyone.
Today, we might refer to Goldman Sachs as “grouper” and avoid the pun of “goldfish.”
CNBC talks about David Solomon, Goldman’s CEO regarding Goldman Sachs’ success in retail payments noting:
- “we’re getting absolutely no credit from anybody else in the investing community.”
- “If we were out in Silicon Valley and made 20% of the progress that we’ve made, we would get a lot of credit and people would be throwing money at us to own a piece of this business,”
The first takeaway is that GS is not a Silicon Valley startup. It is a big business attempting to edge into the retail banking space. It is not as easy as it looks, as AT&T might tell you.
But Goldman Sachs is making the shift into retail banking.
- The firm’s Marcus business gathers $1 billion in deposits a month.
- …and the firm recently announced its first credit card with Apple.
The deposits are impressive, but the Apple Card remains to be seen as a winner. Citi, a day-1 Mastercard issuer almost a half a century ago, pulled out of negotiations because it did not see the profitability. Analysts, including Mercator Advisory Group, were less than impressed. Barclays, a top global credit card issuer, one of Visa’s first non-US issuers, struggled with Apple’s demands. Barclays/Apple fizzled.
It looks like Goldman Sachs needs this to work.
- In the post-financial crisis era, retail banking fueled by cheap deposits earns a far higher return than capital markets businesses, which is why Goldman is making this push.
- But Marcus sits within a company that still gets most of its revenue from Wall Street activities like trading and mergers advice, and the trading businesses, in particular, have been exposed to an industrywide decline.
- Goldman shares have fallen 19% in the past year.
The article ends with a quote by Harit Talwar, who runs Goldman Sachs’ global consumer business.
- “Our promise is that in everything we do, we help customers save money,” Talwar said in a recent interview. “We are not doing it as a not-for-profit motive or something. We are doing it because we think it helps us win.”
Wait till those credit losses start piling up or watch the margins slip on the broad promise of 2% rewards to the mass market without fees.
It won’t be easy fishing.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group