With the rise of new fintechs and neobanks, many traditional banks have found it challenging to compete by going directly to the consumer. Meanwhile, the alternative of being a banking partner carries the risk of disintermediation.
Goldman Sachs went about this issue by setting up Marcus as both a customer-facing business as well as a banking partner for other companies.
Tearsheet spoke with Abhinav Anand, Managing Director at Marcus by Goldman Sachs, at The Big Bank Theory Conference. Anand came in from Discover to be one of the founding members of Marcus.
Anand described the company’s journey at the event, noting that as the company was developing its platform, it realized that the winning strategy was having this two-sided approach.
“We continue to be a direct to consumer business, while we also look for like minded digital native partners, who will be willing to distribute our products on their platform,” Anand said.
Serving the consumer
Goldman Sachs launched Marcus in 2016 as a consumer banking business aiming to allow users to save, spend, borrow and invest. It started with the acquisition of the US online deposit platform of GE Capital Bank and added the personal finance management capability and customer base of Clarity Money in 2018.
Since then, its strategy was to attract customers by offering different ways to finance purchases, both directly to customers and also by embedding its lending capabilities with other platforms.
In 2019, Marcus announced one of the biggest partnerships in the fintech space when it collaborated with Apple to introduce a consumer credit card, the Apple Card. More recently, it bought BNPL provider GreenSky, giving Marcus not only its flexible payments option but also direct access to its customer base of 10,000 merchants in the home improvement space.
At The Big Bank Theory Conference, Anand told Tearsheet that Marcus also wants to introduce a checking business soon.
“The goal is to strive towards being a primary bank of the customer, especially for those customers that are really looking for digitally interacting with their banks. And there’s a whole secular trend towards that.”
Access SMBs through digital partners
Running parallel to its consumer products is the company’s business lending division, where it also wants to establish itself as a banking partner to companies who want to add financial services for small and medium sized businesses.
One example is its partnership with Walmart, allowing sellers on Walmart’s Marketplace to apply for business lines of credit between $10,000 and up to $75,000 offered by Marcus.
Anand explained how Marcus focuses on three important areas in its brand partnerships:
First, the financial product distributed through a partner’s platform has to be simple with a very low cost to the customer. In today’s market, there are many products for small businesses, but most of them are fee based, making them too pricey for the small businesses to actually benefit from those products, according to Anand.
The second thing is using both platform data on revenues and sales from marketplaces like Amazon and Walmart, as well as the digital capabilities they have built around holistic underwriting of seller revenue.
“We built a headless architecture behind the scenes, so that we can plug into the ecosystem of these platforms to the level of depth they want to.
“Even for the smallest partnerships we have done, we made sure that the interaction and signals that we are collecting from the customer in the form of data flows back to our analytical warehouses,” Anand added.
The final step consists in looking at the trends and understanding how the customers interact with the platform and its products. This allows the company to iterate, test and learn to make sure that the experience and the product features meet the needs of the end customers.
Anand highlighted how the market dynamics in recent years pushed traditional lenders to stay in the game by expanding their digital lending capabilities either by partnering with or acquiring fintechs.
For example, American Express acquired small business lender Kabbage in 2020, and while it did not include access to the company’s previous lending portfolio, it did allow American Express to make use of Kabbage’s technology and financial data.
Moreover, there is increased demand from SMBs for more access to working capital, triggered by the turbulent times caused by the pandemic.
“In the last few months we have seen some unprecedented change in the dynamics and the structure of how supply chain works, how sales processes work, and the cash conversion cycle that has become more unpredictable,” he told Tearsheet.
This creates a need for more accessible lending products, and Anand believed that the more popular options such as merchant cash advance can end up being very expensive if the customer experiences financial volatility.
“We prefer a line of credit with low rates and no fees, where a customer can draw when they need and manage their cash conversion cycle predictability by themselves,” Anand said.
All in all, this strategy seems to be working well for Goldman Sachs, as Marcus has grown significantly over the past few years. It went from $36 billion in deposits in 2018 to $97 billion two years later, according to the company’s reports. This year deposits rose by another $8.5 billion as of September 2021.
And in this year’s first three quarters, Goldman Sachs’ Consumer and wealth management division, which encompasses Marcus and the Apple Card, reported net revenues of $5.5 billion. This was a 27% year-on-year increase, with similar growth figures in both the consumer and wealth management segments.