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Wednesday, October 4, 2023

Goldman Sachs signals partial withdrawal from consumer banking

Goldman Sachs no longer wants to be the bank for everyone.

The famed investment bank spent eight years trying to expand its business beyond corporations and the wealthy. But in recent months, Goldman has signaled a partial withdrawal from those efforts by scrapping plans for a widely available checking account and suspending its personal loan business. A popular savings account and credit card business survive for now.

Last week, the bank revealed that it had racked up $3 billion in losses on its consumer banking franchise since 2020, mostly money set aside to cover potential credit losses in its consumer lending businesses. Banking regulators are reportedly looking into whether the consumer business had adequate safeguards as it grew.

The pullback in consumer banking comes as Goldman tries to refocus on its roots: advising corporations on deals, investments and operations, and serving the wealthy. The company’s revenue from investment banking, trading and wealth management accounted for two-thirds of total revenue last year.

“I think it became clear to us in early 2022 that we were doing too much, that it was affecting our execution,” David Solomon, Goldman’s chairman and chief executive officer, said on a call with analysts when the bank reported its results earlier this month.

Goldman’s foray into consumer banking was one of the biggest changes in the company’s 154-year history. The investment bank had to legally become a bank holding company in 2008 during the financial crisis to gain access to the Federal Reserve’s emergency funding operations. That sparked jokes within the industry that Wall Street titan Goldman Sachs was going to issue something as commonplace as an ATM card.

The jokes came true when Goldman bought the assets of GE Capital and launched its only online savings account that offers above-market interest rates. The savings account became an unexpected success for Goldman, with waiting lists forming after its initial launch both in the US and later in the UK.

The online savings account is not going away and the company views it as an asset, Solomon told investors. The firm now has more than $100 billion in retail deposits, which is a cheap form of capital for the investment bank that historically hasn’t had access to such forms of financing.

The personal loan business, launched to much fanfare in 2016 with an extensive advertising campaign under the Marcus brand, has been a source of trouble for the bank. Goldman Sachs executives acknowledged at the time of the launch that the Marcus brand was created to give Goldman, with its guise of being a power broker between Washington and Wall Street, a much friendlier and more accessible edge.

Unsecured personal loans, used largely by customers to consolidate credit card debt, became a burden during the coronavirus pandemic when millions of Americans could no longer pay their bills. The bank set aside billions of dollars to cover potentially bad loans, and unlike other big banks that were able to release those reserves in 2021 and 2022, Goldman largely had to keep adding to its reserves. New accounting standards that have required banks to model potential credit losses more aggressively also contributed to the decision to wind down the personal loan business.

The large losses have drawn the attention of banking regulators, which have also been investigating Goldman’s personal lending operations. The Wall Street Journal reported Friday that the Fed is looking into whether the company had adequate safeguards around its personal loan business as it increased lending.

“The Federal Reserve is our primary federal banking regulator and we do not comment on the accuracy or inaccuracy of matters related to discussions with them,” a Goldman Sachs spokesperson said.

Investors have long questioned the need for Goldman to venture into consumer lending. The bank kept the consumer banking operation under the umbrella of its wealth management arm in its quarterly results, drawing criticism that Goldman was hiding Marcus’s losses from investors.

“We have never understood (Goldman’s) desire to expand so far into the consumer given the strength of its 150-year legacy franchise in the capital markets,” wrote Mike Mayo, longtime banking industry analyst at Wells Fargo Securities. , in a note to investors.

One area Goldman isn’t backing down from is its relatively new credit card business, which the firm calls platform solutions. The firm is the subscriber to Apple Card, the popular credit card deeply integrated into Apple Pay that launched in 2019, as well as a co-branded credit card with General Motors. Goldman and Apple announced in October that they were extending their relationship through the end of the decade. The platform’s solutions also include GreenSky, a fintech lender focused on home improvement loans, which the bank bought in 2021.

While the Apple Card and GM Card were great achievements for Goldman, the new business hasn’t been without its headaches for the company.

The bank disclosed in August that the Consumer Financial Protection Bureau, the nation’s financial watchdog, was investigating its management of credit card accounts, including issues with billing, credit reporting, dispute resolution, and other routine credit card problems.

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