How Goldman Sachs leverages strategic partnerships to bring innovative products to consumers and small businesses

This following is part of a new series we’re running. It’s called the Big Bank Theory, and it’s all about the future of banking. We see three options going forward: in the march towards digital, people will gravitate towards the digital arms of incumbent banks, give their business to new upstart challenger banks, or the biggest opportunity, which is to bank with the brands they love. 

The following series includes content from Tearsheet’s Big Bank Theory Conference, held in November 2021. 

Abhinav Anand was chugging along in senior risk roles at Discover when he received a call 5 years ago. That call, from Goldman Sachs, changed the trajectory of his life and the nature of the bank he would eventually join. As part of the early Marcus team, Abhinav went into startup mode. A consumer lending product would kick off a stream of new financial products for consumers and small businesses. 

As part of the Marcus distribution plan, the team would pursue a DTC strategy combined with strategic partnerships with top brands like Apple, Amazon, Walmart, and JetBlue.

Anand joined us at The Big Bank Theory Conference to discuss the partnership journey Goldman Sachs embarked on to massively ramp Marcus and its transformation to a retail bank. Here’s my conversation with Goldman Sachs managing director, Abhinav Anand. 

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The following excerpts were edited for clarity.

Setting the stage

I've been at Goldman Sachs since the very beginning of Marcus’ launch to market in 2016. And in the last five years, I've worked across different roles in general management, product development, risk management, and also lead some of the important strategic partnerships with players such as Amazon, Walmart and Apple.

I was at Discover, running the risk functions for almost seven years before I was brought on as part of the founding team for Marcus -- when the consumer business at Goldman Sachs didn't exist, and the first four or five employees were tasked with the idea of starting the first consumer product. We grew into a platform that meets the spending, savings, borrowing and investing needs of our customers.

If I go back down my memory lane, I remember when the call came through. When Goldman Sachs calls, you typically pick up the phone. I did that more out of curiosity to understand what was going on. It was very interesting how such an old institution with a really great reputation, risk management, and data capabilities was thinking of disrupting the business of consumer finance.

Paving the way internally

What was most interesting for us was how to startup the new consumer business, educate the firm and bring them along the way because it's completely new for them. We would use the strengths that the firm has in terms of balance sheet, risk management and digital technology, and then bring the customer centricity to the table. 

One great thing about Goldman Sachs is that the firm has always focused on client centricity. They use the word client or customer as one of the top business principles. And when you come to Goldman Sachs, you will see that doing the right thing by the client is the number one thing. Getting the ethos aligned towards customer centricity was never a challenge.

Enter partnerships

We have evolved over time, for sure. We started as a direct to consumer, primarily a personal loan, business. And over time, we bought our deposit platform from GE and grew that rapidly. Then we launched the Apple Card, point of sale financing, and small business lending. Soon we are going to launch a checking business. And as we were going through all of these different enhancements of our platform, we realized that our strategy for success lies in a two pronged approach. One is 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.

Our vision is to be the digital banking platform of the future. We meet the borrowing, saving, spending and investing needs of our customers and help them take control of their financial lives. We want to do it directly ourselves. But we also want to work with like-minded partners who can help distribute those products and make the same change in the financial lives of the customers that come to their platform. 

One thing we care most about, and you will notice that as you look at the list of people we are partnered with, is the focus on the customer and creating value for the customer. Making sure that the products are simple, transparent, and personalized remains really important to us and is actually super important to our partners, as well. In all cases, it's a really good marriage.

Structuring the partnerships

I think there are three things that become very important for us as we start talking about our value proposition in this market. It's important to say for these partnerships, the partnership is more on the small business side, primarily e-commerce sellers, which you know, in the last 18 months, a lot of commerce has shifted towards digital. It's a very interesting customer base to work with. In fact, it's a very underserved customer base to work with, because traditional banks don't use the more modern underwriting techniques to provide great financing to this particular group of customers. 

The way we thought about our partnerships is essentially three pillars: one is the financial product itself that we distribute through a partner’s platform has to be simple, and they bear very low cost to the customer. In today's market, there are many products for small businesses, but most of them are revenue-backed, fee based, which makes some of them too heavily priced for the small businesses to benefit from those products. 

The second thing that we focused on is using both platform data -- the data we have about revenues and sales from platforms like Amazon, Walmart, C2FO -- as well as the capabilities we have built around holistic underwriting of sellers’ revenue. So for example, I may be doing only 30% of my business on Amazon, another 20% on some other platform and the remaining 50% directly managed by my retail store. We brought all the data together, so we can do more holistic underwriting. So you're not just underwriting the business for a small sliver of the revenue, but the entire business. 

We’re doing that in a very digital way, building 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. It could be as simple as a data hand over to our platform through a link. But in most cases, we have deeply embedded our experience within those platforms. To do that effectively, we made sure that we build a headless architecture with the right micro services so that we can enable that. And that allows us to bring partners online very quickly. It also allows us to iterate and test and learn to make sure that the experience and the product features meet the needs of the customers on those platforms.

Digital engaging SMBs

If you think about it, one of the things that a small business owner doesn't have is time. Of course, they need financing, and they need more employees these days -- there's a shortage of employees across the board -- but they don't have time. And so it's very important to think about the different ways that we can actually help them save time and give them more certainty of outcome. 

The other thing that we are seeing is the small business life cycle -- invoicing, payments, order fulfillment, borrowing, financing -- they're all converging. And more and more tools that the small businesses are using are actually digital tools, from Shopify to Square to Intuit. 

There's several proof points that we have been seeing and noticing, especially in the last 18 months, that show that the tailwind to digital engagement for small businesses is just going to increase. I'll give you some examples that I was reading recently. Of course, in the small business world, the Paycheck Protection Program was very rampant in the last 18 months. I was reading some data that 44% of small businesses applied for the program online with online lenders in 2021. That is up over 10 percentage points from the year before. And another survey I was looking at found 52% of small businesses are now indicating, across all categories, that they prefer at least starting their journey on a digital channel, getting a more certain offer through a digital channel, then working through the classical ISO or broker model, or even going to a retail bank. 

So those things show that the trends towards the small business engagement in digital is increasing. And last but not least, a lot of the traditional lenders have actually acquired digital lending capabilities. A good example would be that Amex bought Kabbage last year. And then you know OnDeck was acquired [by Enova] primarily for its digital capabilities.

Prioritizing pipeline

I'll be very clear that prioritization, in any other form, is always a challenge. I wish I had infinite resources to do whatever I wanted to do. One of the key things that we have aligned internally on is whatever we're going to build, we will try our best to build it in a platform way. I'll give you an example: let's say, income verification for the self employed. We can use that for your personal loan business. We can use it for the small business sector, as well. 

And on the set of smaller small business, we actually call them consumer plus plus, because that's the other interesting thing changing in the world: there are a lot of folks who are self proprietors who have multiple jobs and freelancers and gig economy folks that are kind of small businesses, but behave more like a consumer. We call them personal plus plus. 

As we are building such capabilities, we are trying to build as a platform and as a micro service, so that we could try and experiment with multiple different products. We are not saying that we’ll be the best product in every category. We are not saying that every product will launch or will be super successful, but we will have a product to meet the needs of the customer. Because over time, we want to become the primary banking relationship for the customer.

Primary bank relationships

The goal is to strive towards being a primary bank of the customer, especially for those customers that are really looking to digitally interact with their banks. There's a whole secular trend towards that. And the way we feel we could do it is by meeting their borrowing, saving, spending, and investing needs and being where they are: on their mobile phones most of the time.

SMBs and working capital

Access to working capital is definitely crucial to the growth of any small or medium sized business, especially now. In the last months, we’ve seen some unprecedented change in the dynamics and the structure of how the supply chain works and how sales processes work. The cash conversion cycle has become more unpredictable. In certain cases, for example, in e-commerce, it has actually accelerated so much that we hear from a lot of small businesses right now that they don't need credit, because they are selling things faster than they’re building inventory. 

But for the last three or four months, all you hear in news articles is about supply chain prices for everything that’s been manufactured. There are so many ships outside LA and Orange County waiting to be undocked with material and goods to be shipped to different places and consumers’ homes. That creates a cash purchase cycle where having a product that is not super expensive helps you manage your working capital more efficiently. It’s something that our customers tell us that they really need. 

If you see some of the surveys, 67% of small businesses report challenges meeting their operating expenses, due to cash flow mismatches. There are a lot of different ways to do that: there’s merchant cash advance that is a product that works for certain customers. But it could end up being very expensive, especially if the cash conversion cycle is very unpredictable. We prefer a line of credit with low rates and no fees, where a customer can draw when they need and manage their cash cycle predictability by themselves.

The impact of COVID

I'll put the COVID changes in three phases. Phase one was what I would call February, March, and April [2020], when the whole world was falling apart, impacting small biz lending quite a bit. Many of the digital lenders specifically had a really tough time collecting on their past debts, because small businesses could not sell anything. We all went into sheltering in place, and brick and mortar small businesses were especially suffering massively because there were no sales and lending completely froze. Everybody tightened their underwriting policy. 

Phase two is when I would say the federal agency stepped in with the PPP program, which I thought was a very smart move, a really great way of making sure that the capital that the federal government is putting in play actually reaches the pockets of the small businesses. I think that it has been very successful and made tremendous progress. We saw a lot of small business lenders actually pivoting to become PPP lenders. The digital technologies they had helped them quite a bit.

One can say that for the past 18 months, the biggest small business lender in the market has been the federal agencies for the PPP program. And we have seen that even for large money center banks, the demand for term loans and LOC has been kind of flattish.

The other thing that COVID did is bifurcate the businesses that are doing well, like e-commerce and the businesses that are still trying to come up out of COVID -- hospitality comes to mind, even though tourism and hospitality is picking up at least in most part of this country. Still 78% to 80% of businesses report reduced revenue from COVID. So there's still some catch up to be done.

COVID has changed the adoption of digital tools, not just for the lending and financing part of the life of small business, but across the board -- all the way from selling their goods and services online, taking orders through more robust digital tools, invoicing, payments, money management, managing their books -- everything has shifted more towards digital tools. And what I think will happen going forward is that trend is here to stay with more and more small businesses, whether they are brick and mortar or completely online, who are using digital tools for managing their customers, their business life cycle -- financing is just one of them. 

Data engineering

Design, data, and digital technology are really key for success, at least for the business we are in. And data becomes almost like the currency that everybody has a lot of but doesn't know how to harness and leverage. Even for the smallest launches and partnerships we have done, we make sure that the interaction and signals that we are collecting from the customer in the form of data flows back to our analytical warehouses where we can then look at the trends, understand how customers are interacting with our platform, understand what kind of products they're taking up, and how they interact with those financial products themselves. 

That allows us to make quick changes in our underwriting policy, quick changes in our onboarding and customer journey, quick changes and rapid alterations of our servicing, to ensure that we continue to evolve and iterate. That is only possible if you're collecting data and ensuring that it's all tied up to provide a 360 view of the customer. 

Data needs to be available at the point of decisioning. I've seen it in my past life (and this is where Goldman Sachs’ clean sheet of paper helps). You collect data, dump it in a data lake, and there is no way to make that data available at the decisioning points. If you do all three of these things together, there's a lot more value you can extract out of any business that you're running -- specifically, in lending or banking.

Talent

Acquiring and retaining talent is very important to the success of the firm. And I'll also say that it's very difficult right now  -- I'm sure everybody that you are talking to is telling you similar stories. I sometimes wonder when I talk to my friends and colleagues in different industries, even marquee firms that are doing very well from a valuation perspective, and they talk about some of the talent drain they're seeing. I wonder where the people are actually going? 

There's a whole concept of the Great Resignation going on right now. The way we think about it is, number one, be very clear on the long term vision. We have been very outspoken about it. More so in the last year, year and a half than maybe the early part of our journey because it just took us some time to come up with more clarity on our vision. Be very clear on the fact that it's not going to happen in six months. It's a long journey, and  it takes time to build large, scalable businesses that are actually able to fulfill their vision. 

The second thing is to be very clear on what takes precedence. One of the things that we said very clearly is customer centricity is something that we will not sacrifice, even if it costs us much more time to build something or it just is more work. You will find that the talent pool and employees across different skills, different age groups, and different backgrounds gravitate very quickly toward long term vision and customer centricity. If you could make sure that you have the right hiring process, the right onboarding process, and the right initial talent development process where you can imbibe these two things into your employees, they will stick around for longer than usual. 

That said, there's a whole talent war going on for product, engineering, data science, and marketing folks. And we all continue to work through that and ensure that we are getting the best talent, and we are compensating them appropriately as well.

Future for SMB lending

There are two or three things we're looking into. We have done well with one of the products we created, which is a line of credit that goes up to a million dollars with fairly low rates, primarily for small businesses on e-commerce platforms. We are now doing surveys and customer research to understand more products they would be interested in. 

A term loan is an easy product that is just another version of line of credit. We're also looking at more short term products. The platform allows us to take our products and services to create different sorts of financial products for our customers. That's on the product side. 

The other thing we're also looking at is distribution. How can we think about distribution beyond the partners we have? Are there ways and means to distribute to partners in other type of categories beyond e-commerce? We'll be looking into that.

And the third thing that we're investing heavily in is further accelerating and improving our underwriting capability. In this business, you need to manage and understand that different businesses have different characteristics. So data you get from commercial bureaus or other places may not be sufficient to really give you a sense of how good or even how bad that business is. So we are investing heavily in alternative sources of data that can help us underwrite a small business better. 

And the last bit I'll say is there's a new market evolving, which we call consumer plus plus, which are not full time employees looking for personal credit cards. They're not small businesses with a physical presence looking for large lines or MCA products or other things, either. These are essentially folks who are doing multiple gigs, who are more in as self employed, and are looking for products that help them accelerate their businesses in their own way -- consumer banks and the small business community banks don't serve that customer and that's another interesting area to look into.