Apple Savings cannot save Goldman Sachs’ retail transformation

Apple Savings enabled by Goldman Sachs drew in $990 million of deposits in the first 4 days of its launch. Generally these kinds of numbers have the ability to imbue partnerships with a sense of security and longevity. But as jaw-dropping as the numbers were, recent murmurs in the industry hint are hinting that the end is nigh for the golden partnership: Goldman Sachs wants to part ways with Apple and it is in talks with American Express to take over its credit-card business with the company, according to WSJ. 

Goldman Sachs’ consumer banking venture, which the Apple partnership has been a part of, has been on a ventilator for some time now. Marcus by Goldman Sachs, the online only bank, remains unprofitable, incurring $3 billion in losses since December 2020. 

For Goldman Sachs, Marcus was a way to diversify its revenue streams, which was suffering after the 2007-2008 financial crisis. As regulations started to climb up and investor appetite for taking large and risky bets went down, Goldman Sachs needed a pivot from reliance on its trading unit. The route it chose was consumer banking.

It tried to make Marcus and its consumer banking aspirations as a whole work for some time. It expanded to the UK. It fiddled around with checking accounts. Goldman acquired GreenSky, a provider of point of sale home improvement loans, for $2.2 billion as a foothold in consumer lending. The acquisition was meant to prop up the consumer banking products the bank had on offer. “We have been clear in our aspiration for Marcus to become the consumer banking platform of the future, and the acquisition of GreenSky advances this goal,” said David M. Solomon, Chairman and CEO of Goldman Sachs, at the time. 

Goldman Sachs also restructured. It built Platform Solutions which housed both its wealth management, digital commercial banking, and retail business under one new roof. For Goldman, Platform Solutions was meant to be an “end-to-end primarily cloud-based technology platform business that embeds our best-in-class financial products and services into our clients’ ecosystems,” said Solomon in his firm’s Q3 2022 earnings call. But come February 28, Goldman was singing a very different tune, with Solomon saying that it had tried to accomplish too much in too short a span of time and that Goldman had “significantly narrowed our ambitions” for the unit. 

Meanwhile, as the bank didn’t see the results it wanted, it began to reconsider GreenSky. In April, Goldman Sachs revealed plans to divest the business. Bids for GreenSky are coming in around $500 million, a lot lower than the bank expected.

On the other hand, Goldman’s work with Apple seemed different. With the launch of the Apple Card in 2019 and powered by Goldman Sachs, Apple dove into the lending space. Until then, Apple’s financial products like Apple Pay and Apple Cash were still squarely in the same space as its competitors like Google Pay and Cash App. The partnership with Goldman Sachs enabled both firms to launch a convincing and recognizable consumer spending and banking product. 

“For any potential bank partner, the idea that through one partnership, you could potentially reach 56% of the US population – there’s really nothing comparable to that,” said, Jason Mikula, founder of Fintech Business Weekly who also has prior experience as VP of Product Management, at Marcus by Goldman Sachs. Now the Journal has reported that the bank is in talks with companies to offload its credit card business with Apple.

Bad omens and major red flags

Nearly a month after the launch of the Apple Savings Account, reports that customers were having trouble withdrawing their money from the account started to surface. Customers had to wait several weeks for their money and customer service agents at Goldman Sachs gave them inconsistent or unhelpful advice when contacted.

New and Unfun: Unlike the Capital Ones and Bank of Americas of the consumer banking space, Goldman Sachs was entirely new at handling issues of the everyday American consumer. Another thing it is very new at doing is handling the CFPB. Things that Alex Johnson, the founder of Fintech Takes, calls the “unfun” parts of the consumer banking business. Last year Goldman Sachs’ credit card unit came under investigation by the CFPB, which was scrutinizing the bank’s account management practices, including refunds, resolving billing errors, advertisements, and reporting to credit bureaus. 

A big portion of Goldman Sachs $11.84 billion in card loans in Q2 2022 came from the Apple Card. Unfun: short for complex matters that are unprofitable, look bad, and bring the regulators to your doors.  

All that glitters is not gold-man: There is also talk in the industry that the partnership was built on terms that did very little for Goldman Sachs. “From what I’ve heard, the terms of the deal were so onerous that other banks just backed out, and Goldman Sachs won by default,” said Mikula.  The fact that Goldman Sachs was new to consumer lending and willing to go out on a limb may have fueled its willingness to accept terms that were less than great.

“Part of what I had always heard is that the profitability of the program is just not good, because of the credit box, the losses, plus no fee and 3% cashback,” said Mikula. Apple didn’t want to name Goldman’s consumer banking arm, Marcus, on the card, said Mikula. Ultimately this meant that the Apple Card mentions Goldman Sachs only on the back. Goldman was saddled with all the risk and very little of the Apple Card/Savings fame.

Where does Goldman Sachs go from here?

If Amex decides to take Goldman Sachs credit card business off its hands, it may come with a few stipulations. Amex is not known for a wide credit risk aperture. One possible reason that might interest Amex in the Apple Card is its business with Gen Z and Millennials. Amex’s annual revenue recently surpassed $50 billion, driven in part by an increase in business by younger age cohorts, according to American Express Chairman and CEO Stephen J. Squeri. Apple is a Gen Z and Millennial favorite.

Goldman Sachs may end up paying more to wash its hands of the Apple business. “It could be a situation where American Express gets what they want, and the product itself doesn’t change. Then it’s either Apple or Goldman Sachs that have to pay the difference,” said Johnson.

There is also a possibility that Goldman Sachs may want to retain some of the deposits it got from Apple Savings, because Marcus still has its own savings account business. There might be a willingness to pare back the expensive and risky parts of the business and keep the ones that can still fit into Goldman Sachs strategy, says Johnson.

This seems like a band-aid solution to Goldman’s problems. It is possible that Goldman needs a pivot away from its pivot. 

One option can be focusing on wealth management like Morgan Stanley did. The bank emerged from the financial crisis worse off than Goldman in terms of reputation, because it had less of its former employees in positions of influence and it was less profitable. But Morgan Stanley chose to focus its future growth strategy on wealth management. It bought Citigroup’s wealth management business in 2009 to support its strategy and a handful of other asset managers along the way.  “The general consensus is that what Morgan Stanley did has paid off, and what Goldman did has not paid off,” said Mikula.

Goldman Sachs’ path forward will have to right the ship in the wake of its consumer banking venture. After that, areas like wealth management or even things they are already involved in like commercial real estate lending or securities based lending could be expanded upon, according Johnson. 

“Goldman Sachs is a fully licensed bank and I can see them grow out their banking business. It’s just the consumer lending in particular that they are pulling out of,” he added.