Morphing from investment banking into the rough and tumble world of consumer banking is not easy, but Goldman Sachs is doing it with cobrand credit cards. They are making friends along the way with co-brands that Amex, Chase, and Citi would savor.
Record credit card accounts
First, there was Apple, which brought an addressable market of 113 million iPhone users in the U.S. Then came the GM card, an iconic brand representing a base of 2.2 million car sales in the U.S. (and 61 million total General Motor vehicles on the road, whether they be good, bad, or ugly). Now comes T-Mobile, with 22 years in the U.S. market and 109 million customers.
What a way to build a credit card company. Prescreened prospective customers in three vertical markets. No branches to manage, simply good names to harvest and solicit.
The strategy is disruptive to the U.S. credit card industry. Goldman Sachs entered the saturated credit card market four years ago and ramped up over one million accounts in record time. There were some stumblings, such as the sexist claims about their credit decisioning. (Goldman Sachs was in the right, and the claims were wrong.)
Credit Scores
Then there is the current issue of going too deep into low FICO Scores and having the worst charge-off rates in the business. Would you want to be the one to eye-to-eye with David Solomon and explain the Apple Credit Card posted sky-high credit losses of 2.93% for 2Q-2022? In comparison, top U.S. credit card banks sit at only 1.84%. The best answer to the high-powered DJ is that the portfolio needs to cure for a few years.
Those losses will continue to outpace top issuers such as American Express, Capital One, Chase, Citi, Discover, and Wells Fargo well into 2023. Still, with a market capitalization of $107 billion, Goldman Sachs can afford to learn about using credit scores as the guiding light for credit management decisioning.
American Express might select prime and superprime credit scores above the 720 cut-offs. Capital One and Discover know how to make things work with a deeper cut and have management processes engineered to address the market. But successful credit card companies know you cannot just cross your fingers and hope for the best. Credit quality matters. Safety and soundness is still the order of the day.
Cobrand Credit Card Machine
The big picture is that Goldman Sachs is executing a strategy, and the goal is more significant than just putting out credit cards. They are getting into households. Read those numbers in the second paragraph again and think about the addressable market.
Goldman Sachs now will have an addressable market of more than two hundred million people. Sure, there is an overlap between people with Apple phones and those with GM vehicles which now have T-Mobile accounts. I have two affinities and would bet you have at least one of the three relationships.
There are 258 million adults in the U.S., and Goldman Sachs has potential relationships with arguably more than half. Right now, they have about 1% penetration, but with three connections, they have the potential to scale their business rapidly, even as the economy goes into a tailspin.
Goldman Sachs has plenty of consumers to harvest over the next few years. They are building a card acquisition machine, much like Chase. Chase is in 62 million households, just about half of the number of U.S. households. But if you know U.S. history, Chase dates to the Bank of Manhattan and Aaron Burr in 1799. Goldman will take some time, strategy, and luck to approach Chase’s prowess, but after four years in the business, this is a major league play for U.S. consumers. Goldman Sachs has been around since the end of the American Civil War, but less than a decade in retail banking.
With co-brand partners, Goldman will not need to go through the challenging learnings that American Express, Capital One, and Discover mastered without a branch banking network, but booking a few more partnerships will soon address most credit-qualified households in the U.S. With lots of intelligent people at Goldman Sachs, you can be confident their credit policy issues will quickly be mastered, and they will increase competition in the U.S. market.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
