Introduction to Marcus
As you’ve most likely heard, Goldman Sachs opened their first retail banking service in the UK on August 23rd, 2018 called Marcus. It was first launched in the US in 2016 and has already grown to a $26bn business used to refinance expensive credit-card debt for customers and is starting to use AI to cross-sell financial products.
Over a decade ago during the financial crisis, Goldman converted from a securities firm to a bank holding company. As a result, they were protected by the Fed reserve during the crisis, allowing them to access emergency funds which prevented them from facing a liquidity crisis. So, it was in their benefit that they weren’t acquired like Bear Stearns and Merrill Lynch. However, this came with some drawbacks. Bank-holding companies have to undergo an annual review called the ‘Comprehensive Capital Analysis and Review’ (CCAR) by the Federal Reserve which ensures that financial institutions have robust capital planning processes and adequate capital.
Reasons for Marcus
Revenue Targets: last year Goldman Sachs announced a plan to produce up to $5bn in new revenue of the next 3 years, and they are expecting that this retail bank will help achieve this target, which is why they are also branching Marcus out to the UK. Marcus has already had a revenue of $1bn in the US.
Rebalance Funding
Goldman’s retail banking service will drastically reduce their cost of funding. If Goldman is able to change their creditors from institutional investors to people like you and me, this will help them make huge savings over time. Currently, they’re offering a 1.5% rate on savings accounts which makes it the highest-yielding instant-access account, which will attract a huge range of savers. At the moment Goldman Sachs are currently paying an average coupon of 3.86% on 2500 bonds tracked by Bloomberg, so it is still considerably cheaper to be paying savers an interest rate of only 1.5% for the first 12 months.
Goldman Sachs are a wholesale funded bank, this generally-means that the bank is not in the business of extending home mortgage, small business or consumer loans to retail clients. However, as they are now lending to retail clients, they may lose their designation as a wholesale bank. Banks are trying to rebalance their funding, so they are less reliant on wholesale funding as they once were, as a giant wholesale funded securities firms such as Lehman brothers died in the 2008 crisis.
Banks receive short-term deposits from financial intermediaries such as mutual funds[2], and they use these short-term deposits to invest in longer term assets such as loans and businesses, which is clearly a bit of a timing mismatch. Hence banks are trying to move more away from wholesale funding, as when creditors withdraw these funds in large quantities, the bank cannot return their money (called Bank Runs). This results in a fire-sale of assets, selling them far below their intrinsic value in order to fund withdrawals.
We can see the benefit of moving away from wholesale funding if we look at the worst point in the financial crisis. RBS had £343bn of short-term wholesale funding requirements in 2008; today it has £17bn. RBS only held £90bn of liquid assets against £343bn of short-term funding; today it has £156bn vs. £17bn of short-term funding.
Competing for Advisory Mandates in US: Within the US, Goldman Sachs will be able to utilize Marcus when competing for advisory mandates, as they will be able to support deals by providing funding (Gramm-Leach-Bliley Act)[1], helping them compete with balance sheet banks such as JP Morgan Chase and Bank of America Merrill Lynch. However, in the UK, Goldman Sachs will not be able to benefit from this aspect due to the ‘ring-fencing’ threshold of £25bn which is being implemented January 1st, 2019, which enforces the separation between the commercial bank and investment bank. This is in order to protect the consumer, because if a borrower becomes insolvent it has less of an effect on the balance sheet as opposed to a corporation. Thereby protecting the consumers money as the probability of the bank not being able to withdraw their funds will decrease dramatically.
Conclusion
Ultimately The big key for Goldman is customer data, which is holy grail for banking. This will create an open financial marketplace platform that can also utilise their huge balance sheet. Having a more diversified business will help protect Goldman Sachs during times where their investment bank is performing poorly, and it will help reduce their cost of funding. If their rates remain attractive Marcus will continue to grow extremely rapidly with the support of the behemoth that is Goldman Sachs.
[1] In the US, the Glass-Steagall Act(1933) prohibited commercial banks from participating in investment banking business, which was passed as an emergency measure to help counter the failure of almost 5000 banks during the Great Depression. This was repealed by the Gramm-Leach-Bliley Act (1999), allowing commercial banks to offer financial services such as investments.
[2] A mutual fund is an investment fund that pools money from many investors to purchase securities and the investors can be either retail or institutional.
References:
https://www.investopedia.com/terms/m/mutualfund.asp
https://www.ft.com/content/e807a76a-c23d-11e8-8d55-54197280d3f7
https://www.ft.com/content/68ab0626-c1aa-11e8-8d55-54197280d3f7
https://www.ft.com/content/97a410b6-884a-11dd-b114-0000779fd18c
https://finance.yahoo.com/news/risks-associated-short-term-wholesale-130027922.html