Goldman Sachs’ pivot from Marcus shows that disrupting retail banking is difficult | Techy Kings

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David Solomon, Goldman Sachs, at the Marcus event

Goldman Sachs Chief Executive Officer David Solomon is reining in his ambitions to make the 153-year-old investment bank a major player in US consumer banking.

After product delays, executive turnover, branding confusion, regulatory missteps and worsening financial losses, Solomon on Tuesday said the firm was shifting away from its previous strategy of building a full-scale digital bank.

Now, instead of “trying to acquire massive clients” for the business, Goldman will instead focus on the Marcus clients it already has, while aiming to market fintech products through the bank’s workplace and wealth management channels, Solomon said.

The moment was an embarrassing one for Solomon, who seized the opportunity in the emerging consumer business after becoming CEO four years ago.

Goldman started Marcus in 2016, named after one of the bank’s co-founders, to help it diversify revenue from the bank’s core trading and advisory operations. Large retail banks incl JPMorgan Chase and Bank of America enjoys a higher valuation than Wall Street-centric Goldman.

Checks from analysts

Instead, after unveiling his third strategic shift and corporate reorganization as CEO, Solomon was forced to admit mistakes on Tuesday during an hour-plus conference call as analysts, one by one, peppered him with critical questions.

It started with Autonomy analyst Christian Bolu, who pointed out that other new entrants include fintech startups Chime and Block Cash App has penetrated while Goldman has not.

“One could argue that there are some implementation challenges for Goldman in consumers; you’ve had a lot of leadership changes,” Bolu said. “Looking back on the past, what lessons have you learned?”

The CEO of Goldman Sachs said the outlook looked uncertain

Another analyst, Brennan Hawken of UBS, told Solomon that he was confused about the pivot because of early promises related to future products.

“Honestly, when I talk to a lot of investors about Goldman Sachs, very few are excited about the consumer business,” Hawken said. “So I’m not necessarily saying that the pullback in aspirations is necessarily negative, I just want to try and understand strategically what the new direction is.”

After Wells FargoAsked by Mike Mayo if the consumer business is making money and how it stacks up against management’s expectations, Solomon acknowledged that the unit is “not making money right now.” That’s despite saying in 2020 that it will break even by 2022.

Problem with Apple

Even one of the bank’s successes — won Apple Card accounts in 2019— have proven to be less profitable than Goldman executives expected.

Apple’s customers didn’t carry the level of balance the bank modeled, meaning it generated less revenue from the partnership than they were aiming for, Solomon told Morgan Stanley analyst Betsy Graseck. The two sides have recently renegotiated the business arrangement to make it more equitable and extend it to the end of the decade, according to the CEO.

With its stock under pressure and its money-losing consumer operations increasingly blamed, internally and externally, for its operating setbacks, Solomon appears to have little choice but to change course.

Selling services to wealth management clients reduces client acquisition costs, Solomon said. In that way, Goldman reflects a broader shift in fintech, which took place earlier this year amid plummeting valuations, as growth-at-any-cost shifted to an emphasis on profitability.

Despite the turmoil, Goldman’s foray into consumer banking has managed to raise $110 billion in deposits, extend $19 billion in loans and find more than 15 million customers.

“There’s no question that those aspirations might be acquired, and delivered in a way, that is broader than where we’ve chosen now,” Solomon told analysts. “We made it very clear that we are withdrawing some of those now.”

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