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Goldman Sachs’ foray into consumer banking is getting aggressive

Goldman Sachs is arguably the biggest name in investment banking, but two years ago it dipped its toe into the consumer space through its acquisition of GE Bank and launch of GS bank shortly after. Today, Goldman continues to amp up its consumer business.

The same year it launched GS Bank, it began building a digital-only consumer loan product, Marcus, that was fully developed and on the market 12 months later. Without having the legacy infrastructure under previously existing consumer products and services, the overhaul other major banks have been experiencing don’t exist for Goldman.

Goldman has also been ahead of retail banking institutions when it comes to a platform approach to business.

“[The] platform approach has not been an obvious approach on Wall Street. Our competitors are generally structured in deep vertical silos and we have a different architecture: these shallower silos built on top of many layers of software, tech infrastructure, cybersecurity, enterprise platforms and increasingly, client platforms,” Marty Chavez, an engineer and Goldman Sachs CIO-turned-CFO this year, said in a keynote at Harvard University earlier this year.

“Historically, the API has been human beings talking to other human beings over the telephone, and all the tools, the content, the analytics is on the internal platform only. We are shifting this radically and shifting this fast, and we’re packaging everything we do… we’re redesigning the whole company, around APIs.” Goldman did not respond to a request for comment.

Goldman Sachs loves to say it’s a technology company. At Harvard, Chavez said everything the company does “is underpinned by math and a lot of software” and that a third of the employees at Goldman are engineers. Here are three ways Goldman is has shown that this year.

46 percent of Goldman jobs are in technology 
CB Insights analyzed more than 2,000 open Goldman Sachs job listings by division and business unit to confirm it’s focused on building its technology and digital finance units. Goldman Sachs has no experience in consumer banking and has reacted by resolving to hire the right talent, CB Insights fintech analyst Matt Wong said Tuesday in a briefing on the data company’s research around Goldman Sachs strategy.

Many of the jobs are in digital finance. Goldman is hiring mobile developers “to enable the creation of an all-digital retail bank,” Wong said, speculating that the unit’s offerings may soon include native mobile apps. Earlier job postings have called for iOS developers, he said. It’s also hiring engineers to build a digital advice platform for the mass affluent market and its Marquee platform, which gives clients access to analytics, trading and data tools. Earlier this month it reportedly poached 20 employees from New York-based online lending startup Bond Street — engineers, product developers, and risk and marketing specialists — presumably to build out a lending product.

According to the research, published Tuesday, 46 percent of all of the firm’s jobs as of Sept. 14 are in technology, with the highest amount for core platform roles, followed by operations engineering and then equities technology. While traditional consumer retail banks are still getting acquainted with the idea of the platformification of banking — stubbornly, since rethinking banking services as a platform often means weakening a company’s brand by becoming the “dumb pipes” — Goldman Sachs has aspired to a platform approach and quietly been working on it and readying itself for the consumer market.

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Marcus is expanding in the U.K.
The jobs listings also show Goldman is staffing up its digital finance unit in the U.K. with London-based roles in customer support, product management, and development and operations. Earlier this month, the firm said it plans to expand its retail banking business to the U.K. by launching an online loan deposit business there. That includes launching Marcus there in the middle of next year.

Marcus, the online lending startup built inside the investment bank, has been growing tremendously in the eight months since it launched in October 2016. It has one product: a customizable personal loan for Prime borrowers, with at least a 660 credit score, of up to $30,000. It promises no fees and straightforward repayment terms. It recently passed $1 billion in loan originations with expectations to originate $2 billion by the end of this year. By comparison: SoFi, which launched in 2011, reached its first billion after 14 months; Avant, founded in 2012, took 28 months; 10-year-old Lending Club took 65 months; and Prosper, launched in 2006, passed $1 billion in 98 months.

Marcus was built in 12 months — which is impressively fast for a legacy financial institution. Before building Marcus, Goldman didn’t have an existing consumer business built on rusty rails that they needed to cannibalize in order to get the product to market so quickly. Wong said they’ve had the additional advantage of some of their non legacy IT architecture that they have been able to put in place: existing platforms, open source software and external APIs like Twilio, FICO, Facebook and Adobe.

It’s invested in every kind of fintech company
Wong said Goldman is consistently in the top two when it comes to investments in fintech startups. It’s currently invested in 23. Of the top 10 largest U.S. banks ranked by unique fintech investments, Goldman is the only one investing in at least one company in every fintech category: blockchain, data analytics, insurance, personal finance, wealth management, financial services software, lending, payments and settlement (in which has invested in six companies), real estate and regulatory technology.

Earlier this month Goldman revealed its latest investment, $134 million in Neyber, a U.K. startup (whose founders are two Goldman alums) that helps employers lend money to employees to repay through their future salary payments, showcases the firm’s interest in consumer data through lending and payments opportunities.

Investing in a diverse array of startups has allowed the company to create the back-end layers for the platform approach Chavez mentions. Goldman builds the middleware — the micro services APIs — itself. That’s what helps Goldman move so quickly. Using the example of Marcus, the bank only needed to purchase 17 “best-in-class modules from outside,” Wong said, to plug into the platform using APIs and deliver the customer experience for Marcus clients.

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5 charts that show where open APIs are taking banks

Open APIs will be essential for banks’ survival — whether it’s for fulfilling their customers’ expectations, meeting them in different channels or changing their business models.

Open APIs, or application programming interfaces, are what allow banks to share data with third party apps and service providers — whether it’s a nonbank provider of financial services like Digit or Acorns, or a provider of nonbank services that uses bank information for payments or rewards schemes — that customers like to have and use.

But so far banks’ exploration into open APIs has been about one-off agreements for the most part. As banks warm to that kind of external collaboration, however, it’s not a bad time to start thinking about the bigger picture, Capgemini found in its Retail Banking Report, published this week.

“The goal should be less about linking up with a series of independently-operated web pages, and more about taking part in an ecosystem of apps and APIs that support broad synergies between companies and consumers,” according to the report.

Here are five charts that show how how banks are thinking about APIs in their digital strategy today and how they think it could play out in the future.

Large banks are using APIs to improve their omnichannel experience
Of 112 large banks, those with more than $50 billion in assets, surveyed by Celent this February, 56 percent indicated that they would probably expose open APIs as part of their strategy to deliver an omnichannel experience. That point proved more popular than the other six options: 55 percent indicated they would migrate to a single digital technology stack; 50 percent indicated they would replace ATM software along with branch teller or platform sales systems. A large bank with a large budget can make many choices.

 

Just 26 percent of the mid-sized banks, those with under $50 billion in assets, indicated they would pursue an open API strategy (compared to the 50 percent that indicated they would migrate to a single digital channel tech stack); as did 22 percent of small banks, those with less than $1 billion in assets.

It’s important to note, however, that as banks of all asset classes are still trying to nail omnichannel, according to PwC, customers may already have moved beyond that. In 2012, 57 percent of customers indicated they prefer banking by both digital channels as well as human interactions, but that number has dropped to 45 percent today. In the same period, customer engagement with branches and call centers fell from 15 percent to 10 percent while people who use all digital channels — mobile devices, computers and tablets — to interact with the bank grew from 27 percent to 46 percent. (PwC is dubbing this new customer set the “omni-digital” customers.)

Banks aren’t putting up walls, but they have their doubts
A lot of the narrative today in fintech is about bank-startup partnerships and collaborations. Don’t be fooled, banks still want to maintain the status quo — in 2015, 48 percent of banks saw third parties as more of a threat than an opportunity, compared to 31 percent today; and 60 percent felt the need to tackle nonbank competition, compared to 54 percent today — but their change in attitude toward startups is loud and clear. In 2015 35 percent were ready to invest in an API platform, now almost half are; then, 30 percent said building an open banking platform was high up on the list of priorities and today more than half agree.

In the last year, Citibank, BBVA and Capital One, to name a few, have opened their APIs to third-party developers.

Others are doing this on a case-by-case basis. JPMorgan Chase and Wells Fargo have data sharing agreements with Intuit that employ APIs in order to share customer data more safely. Finicity recently signed a similar deal with Wells Fargo, as did Xero with Wells, Silicon Valley Bank and most recently, Capital One.

However, banks are still highly regulated, highly scrutinized businesses with a lot on the line. So it’s unsurprising that data security and privacy still raise a lot of red flags for banks thinking about opening an API platform. When Capgemini asked fintech startups for their concerns, their answers didn’t really differ from the banks’.

Banking as a platform
Most banks (56.5 percent) believe banks will remain the main channel for banking products and services (incidentally, so do 55 percent of fintech startups). But Capgemini said if it stays on that path could struggle to match competitors on time to market, according to its Retail Banking Report. Most banks (53.8 percent) also believe they’ll evolve into platforms that support cross industry players that tap into core banking systems, kind of like Amazon.

“An open banking model similarly presents new opportunities for creating and distributing products,” the report says. “Traditionally, banks have owned the process of building and selling products from end to end, and the only entity responsible for adding value to a product has been the bank itself. An open banking model turns this approach on its head… Collectively, these partners would give rise to much more creativity than the bank could muster on its own.”

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What banks can learn from Amazon

No one knows if Amazon will be buying a bank anytime soon, but more and more, it’s becoming a shining example of how banks themselves should be running their businesses.

Banks have embraced the idea that their own customers want new products delivered by new financial startups — the savings and management apps, authentication and security tools and money movement capabilities — but to truly put the customer experience first (as so many say they do) they should show the customers they’re here to give them what they want. That means instead of collaborating with young startups on building technology, they should make themselves a distribution channel with different financial products — just like Amazon does.

“Amazon opens its platform to hundreds if not thousands of providers of goods and services and makes it available to millions of consumers — they don’t care what you buy or from who as long as you buy it from the Amazon platform,” said Ron Shevlin, director of research at Cornerstone Advisors. “Amazon does have products to sell,” like the Fire TV or the Kindle. “They don’t care if you buy them because they still sell the iPad and everything else.”

It’s probably a little out there for banks. But more and more, changing customer expectations and an increasingly digital world are forcing banks to accept the idea of open banking platforms. But they should also bring that thinking to their actual business model.

Why a platform?
Banks today don’t care where customers buy their products, as long as they buy their products. But considering how many millions of customers they have, they don’t have that many products and services to sell to them — loans, credit cards, accounts.

In a banking context, a successful platform would be one that attracts and matches both producers and consumers. It would give people choice without friction — duplicate data entry, integration, having to paying multiple providers — create new revenue streams for banks and offer opportunities for fintech startups to scale, by reducing acquisition costs through platform participation, according to Shevlin’s report, The Platformification of Banking.

“The platform as a business model is designed to address that problem of enabling a bank to provide products and services without having to go into different partnerships and one-to-one integrations,” Shevlin said. “If you want to sell your stuff on Amazon, you sign up and you’re in. It’s easy to plug into Amazon, and that’s the concept missing in banking.”

Banks that exist today are one sided, they attract consumers and they’re the only provider of services to their customer. When it offers customers a choice of products and services, they’re bank-selected products and services. Fintech companies have trouble reaching consumers and banks have the challenge that they have this base of consumers but aren’t able to provide them with a large base of products and services.

Banks as platforms
If banks are becoming platforms, these are the earliest days of that shift. APIs are nothing new — they’ve been around for decades — but in the last year alone, Citibank, BBVA, Capital One and probably others have made their APIs open to developers in an effort to innovative better and faster.

They should also open additional revenue stream by monetizing offerings that run on those platforms. For example, a payments API that makes it easier for a retailer to do payments with a bank should inevitably bring in more payments. The bank takes a cut, everyone wins. But to be truly customer-first, the platform model shouldn’t stop at technology; banks should move their consumer-facing business to a platform model too, Shevlin said.

“All these API stores are pretty much technology-driven efforts without a lot of thought to how the business model changes,” Shevlin said. “How do we provide an interface to the consumer that shows there’s a choice? The banks aren’t necessarily adopting this or embracing the concept.”

There are some moves. In November, Citi launched its API Developer Hub. Mastercard, Virgin Money and others are already using Citi APIs to create customer solutions.

If banks today are going to stay relevant in an increasingly digital world, their only choice is to become more open. Until now, banks traditionally have been closed off, not wanting to share their secrets of the trade. It’s been an enormous cultural shift for them. Now they’re becoming more open, but it’s important to recognize there’s a fine line between providing open banking as a service and merely outsourcing innovation, said Carey Kolaja, global head of product at Citi FinTech.

“Our move to a developer hub and an open banking strategy is by no means a reflection that we’re outsourcing innovation or that banks will become the dumb pipes on which a transaction sits and not add value to our customers,” Kolaja said. “That being the case, we have to be realistic around why banks, including Citi, need to embrace new strategies with some of the fintech disruptors out there.”

It might seem we’re entering a world where banks become the platforms that fintech startups plug into so customers can use those services more easily, more securely and with more trust — Digit and Qapital for savings, Acorns and Robinhood for investments, maybe a credit monitoring app like Credit Karma or NerdWallet, and of course, the Venmo, Square Cash and other payments services.

Each of these apps uses APIs to plug into banks, that’s what allows users to interface with their bank account and register those details in order to open accounts with these various apps. It’s fun for now, the experimentation phase, but it’s not sustainable, Kolaja said.

“I don’t necessarily believe that in the next five to 10 years we’ll end up in a place where consumers want fragmented financial lives across multiple apps, nor do I believe some of these fintech disruptors will be able to sustain their existence from a financial and capital perspective without broadening their reach into other categories,” she said. “There’s a convergence that’s already starting to happen.”

Banks can only innovate so much
Customers don’t care about that distinction between open banking and outsourcing innovation. They just want what they need and for that service to come as easily and affordably as possible. That banks are becoming more open with each other on a technology level doesn’t mean they’ll apply the same thinking to their business model. Considering the size of their business, the existing organizational structure and the fact that they are making money, it is highly unlikely a bank will adopt this business model.

“When you look at what has prohibited big institutions from being successful — besides process and not being willing to take risks versus being able to take risks – solving for a simple customer experience with minimal friction has been problematic,” Kolaja said.

The more likely scenario is that a tech giant, like Amazon or Alipay, will enter the arena to sell consumers financial services, and existing banks will compete with those platforms, Shevlin said.

“The large bank is simply not going to become a platform,” he said. “They’ll go through all their technology exercises by opening APIs, but they’re not opening up, they’re not selling additional products or services or creating an environment.”

A bank could theoretically offer its own services and be its own banking platform, said Tom Eck, IBM’s chief technology officer for industry platforms. For example, if it were a Chase banking platform, it would expose Chase services and could open all up as APIs, making it easy for developers to consume those APIs on a Chase-specific platform.

IBM has a similar vision for an Amazon-like marketplace. It’s not consumer facing, but it’s a cloud based platform for financial services on which app developers and data scientist can come and build apps. Eck described it as a one stop shop ecosystem that includes fintechs startups, banks and insurance companies.

“A bank could both be a seller of services while it’s also consuming services from some third-party fintech. In addition to IBMs own assets, we’re focused on attracting fintechs, banks credit card processors… You come to ours because you know you can come and access all these insititutions. You see the catalog, can subscribe to these services in one place and then we make it easy for you to build on our platform consuming those APIs.”

It’ll be a significant additional revenue stream when it starts to monetize offerings that run on that platform — effectively a marketplace fee. It will also bring value to the platform itself.

“There’s an economic incentive for the platform operator because it typically extracts the seed for the use of services. IBM is a great new marketing and distribution channel for them, and it takes very little work to get them into the marketplace.”