Being an investment banker doesn’t necessarily mean you can be a credit card lender or retail bank. Established financial institutions like Bank of America, Chase, Citi, and Wells Fargo can work across the spectrum of banking. This includes commercial, investment, and retail banking. If your business focuses on investment banking, you might need help to walk into consumer lending and expect to win.
This Great Recession-era document from Slate explained the nuances of the three banking sectors. It discussed a substantial bail-out. The bail-out influenced a raft of legislation that ended with the Wall Street Reform and Consumer Protection Act (Dodd-Frank).
The short story: Being a banker is not a universal skill. There are some common traits like following capital adequacy requirements, achieving fair and transparent business standards, and anticipating the mood of regulators, but dealing with companies on Wall Street is a different game than dealing with consumers on Main Street.
Shift from Consumer Market
Today’s read comes from The Motley Fool and discusses Goldman Sachs’ shift away from the mass consumer market.
- The investment banking powerhouse Goldman Sachs (NYSE: GS) was handed a slice of humble pie last week when it announced it would scale back its consumer banking efforts and reorganize its business lines into three different units. Over the past six years, Goldman exercised an ambitious retail banking strategy through its digital platform Marcus and various credit card offerings.
- Goldman’s CEO David Solomon on the bank’s call, said the company would “focus on existing deposit customers and consumers that we already have access to … rather than seeking to acquire customers on a mass scale.”
Life has been challenging for GS since it entered the consumer market. Yes, they came with a splash and launched a lending and savings platform with Marcus. And reengineering the Apple Card was no small feat. Then adding a relationship with a GM Co-brand, followed by a relationship with T-Mobile, put them at the threshold of more than half of U.S. households.
Fundamentals of Credit Scoring for Goldman Sachs
However, credit quality impacted operational performance with optimistic anticipation of consumer credit results. In what CNBC called a “surprising subprime problem,” Goldman learned about the fundamentals of credit scoring: dig deep, and losses will rise.
- Goldman’s loss rate on credit card loans is the worst among big U.S. card issuers and “well above subprime lenders” at 2.93%, according to a Sept. 6 note from JPMorgan.
- While competitors like Bank of America enjoy repayment rates at or near record levels, Goldman’s loss rate on credit card loans hit 2.93% in the second quarter. That is the worst among big U.S. card issuers and “well above subprime lenders,” according to a Sept. 6 note from JPMorgan.
The Motley Fool notes that Goldman Sachs’ timing and expectations may have been uncoordinated with the current market.
- Goldman launched its consumer banking efforts in 2016. The goal was to bring in more stable funding for deposits and diversify its earnings stream to make it more durable and consistent. It can be challenging for investment banks to get the exact valuations as more traditional retail banks like JPMorgan Chase and Bank of America because their earnings are volatile and challenging to forecast.
- But in recent months, many news reports have been detailing issues at Goldman’s consumer division. Notably, the bank saw higher possible loan loss rates in its credit card portfolio, and the consumer unit had reportedly lost $4 billion since its launch.
What is the Next Step?
The next step will be interesting to watch. Will GS accelerate its move out of retail banking? Will there be an industry play for one of GS’s top co-brand programs? Or will GS face the situation and tough out the current economic environment?
With top banks beefing up their loan loss reserves; Goldman might have a difficult decision either way.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.