To The Moon

Goldman’s Marcus has missed the mark

Singapore’s banking scene has been shaken up by the launch of digital banks in Trust and GXS.

This is similar to the buzz last year when Goldman Sachs $Goldman Sachs(GS)$  announced plans for interest-bearing checking account for its digital bank, Marcus. Goldman’s CEO, David Solomon, was so enthused by Marcus that he envisaged that the bank would dominate retail banking, just like its investment banking.

Now, a year later, Goldman has pulled back from Marcus.

In its 3Q22 earnings result yesterday, Solomon stated that “we are no longer looking for large numbers of retail customers”. The bank is narrowing the focus of Marcus. It will no longer serve the masses and will pivot towards wealthy clients.

Hence, it will be interesting to see the situation of Singapore digital banks one year later. Will they continue to serve the masses or pivot towards a more affluent segment, similar to Marcus?

Here are my insights:

• Slow and costly execution of Marcus
• Partnership with Apple Card not as lucrative, but this could change
• Expensive to go after the masses
• Marcus for the wealthy clients

Slow and costly execution of Marcus

Despite hiring around 11,000 engineers, the execution of Marcus has been slow. Also, it has been costly to set up Marcus with up to $4 billion of expenditure. In the conference call for 3Q results, Solomon admitted “bumps” in building a full-scale digital bank with Marcus.

The firm has delayed the launch of checking account service for Marcus due to cost overruns. Now, this checking account service will only be ready for high net-worth clients. It will not be available for all.

The online checking account is a critical feature for users to set up direct deposits and pay their bills online.

Without it, Marcus will not be an effective digital bank for the masses.

Partnership with Apple Card is not as lucrative, but this could change

In 2019, Goldman collaborated with Apple $Apple(AAPL)$  to launch Apple Card, a credit card seamlessly integrated into Apple’s mobile devices. Goldman Sachs is the issuer of the credit card, and it is part of the broader vision of a digital bank with Marcus.

However, this relationship has not been as lucrative. This is primarily due to the financial savviness of Apple Card users. More than half of the users have a college degree, and a third has an income in excess of $100,000. Hence, the main users of Apple Card are rich and do not need to have credit card loans. So, they use Apple Card to transact and pay down credit card loansquickly. This result in small credit card loan book for Goldman Sachs.

Now, Goldman has learnt this lesson. It is deepening its partnership with Apple.

On the funding front, Goldman is trying to gain more deposits by offering high-yield savings account for Apple Card users. Apple Card users will be able to deposit their own monies into account, as well as accumulate daily cashback rewards in it.

Next, Goldman is planning to grow its loan book with the launch the Buy Now, Pay Later business model.

Teaming up with Apple, the bank is planning to launch Apple Pay Later. This is a service that will allow users to pay for their products over several months, and it will be available on any credit card linked to Apple Pay.

Expensive to go after the masses

Introduced in 2016, Goldman launched, Marcus, its digital bank named after its company founder Marcus Goldman. The initial offering was basic with both no-fee personal loans and high-yield online savings.

The original strategic intention for Marcus is great.

Goldman Sachs wanted to rebalance revenue away from the volatile investment bankingand move towards consumer banking model of steady interest income. It planned to earn less from using its own balance sheet at direct investments and focus on earning net interest income via third-party monies in deposits.

In one sense, this strategy makes perfect sense as it is cheaper for Goldman to tap on lower-cost deposits, and rely less on wholesale funding. With Marcus, it has gathered around $100 billion of deposit.

However, the savings from lower cost of funding has been negated by the high cost of client acquisitions.So far, Goldman is projected to have spent up to $4billion on Marcus. This includes the setup cost as well as customer acquisition cost.

Thus, without sufficient scale, Marcus is generating significant losses for Goldman Sachs.

Marcus for the wealthy clients

It is expensive to set up a business for the masses. Hence, Goldman has decided to cut loss and abandon its strategy of being a bank for the everyday American.

In the 3Q22 results, Goldman announced that it will fold Marcus into its wealth management division and restructure the bank into three new operating units: Asset & Wealth Management, Global Banking & Markets, and Platform Solutions.

In addition, the bank announced that it will embark on a renewed direct-to-consumer (D2C) strategy. Instead of chasing after new customers, they will focus on existing deposit customers.

In short, less retail. And more wealthy customers.

Markets clearly love the restructuring of Goldman Sachs, and the lower focus of Marcus. The shares price rose 2.3%.

On a historical basis, Goldman Sachs is trading at 0.95x P/B, close to 1 standard deviation below its 3-year mean of 0.88x. The bank could re-rate further, as it pivots away from retail banking and focuses on its strength at investment banking.