How a Goldman Sachs brand is trying to erase debt stigma

For most people, Goldman Sachs conjures up images of money, power and scary cephalopods.

But the investment bank is getting into consumer lending now, which means it’s going to have to make its brand a little more relatable to the masses. In October, it launched Marcus, an online lending startup dedicated to helping people own their debt issues with a personal loan product and a new message: “Debt happens. It’s how you get out that counts.”

“There’s a stigma around debt, people don’t like to talk about it,” Nicole Sbarra, a product manager for Marcus, said at an event in New York Thursday night. “It makes them very uncomfortable. And most people also don’t think of credit card debt as actual debt, they see it as a balance… [Marcus] is going to help you understand that there’s more to you than this extreme amount of debt on your shoulders.”

While it’s a shift away from the image Goldman has built over decades, Marcus by Goldman Sachs is its own brand, which is as much to avoid alienating long time Goldman clients as it is to give confidence to Marcus customers. Marcus was built inside Goldman Sachs from scratch; no branches, no outdated technology systems, no baggage.

Marcus was co-created with thousands of consumers that helped designers to find out how they can best tackle the problem of getting out of debt. Marcus loans come without fees and lower rates than those of many credit cards, making it well positioned to compete with consumer banking products and online lending startups like Prosper.

Keeping the brand separate, as much as possible, from Goldman is necessary, in some ways, considering the bank’s history. From 2005 to 2007, Goldman issued and underwrote mortgages and securities backed by residential loans that were borrowed by consumers with poor credit. This led to the housing bubble burst and economic recession. Last year Goldman paid out $5.1 billion for its role in the financial crisis.

A key point the Marcus team found through research sessions was that when dealing with their finances — and particularly sensitive subjects like debt — they want to work with “a trusted, secure, extremely well-established brand,” Sbarra said.

“Marcus is a brand new brand, but Goldman Sachs has been around for a long time,” Sbarra said. “People like to think about banking with Goldman Sachs, but we think of ourselves as a startup within Goldman.”

Money is one of the most personal and sensitive topics for people, even people with lots of it, which is why empathy plays such an important role in building a financial product. The average American carries some $16,000 in credit card debt and about 70 percent of them don’t know there are alternative options to that credit card debt, said Michael Cerda, head of product.

“The team spoke with some 10,000 customers and learned about this stigma, learned about how to consult about it, learned about how anxious people got about it,” Cerda said. “It’s everything from that emotional level to the detailed level of all these fees, all these rates, the jargon and the terminology. What the team did was really take a great swing at making it very simple to understand.”

For example, they learned that “origination fees” are widely misunderstood among the general population, so Marcus calls it a “sign-up fee” on the site — as in, “No sign-up fees. Since that’s not a very warm welcome.” Consumers said other players in the space put credit scores and APRs front and center, so Marcus asks how much users want to borrow and how much they can afford to pay on a monthly basis.

“People don’t think about when they want to be out of debt by, they think about what they can afford to pay every month,” Sbarra said.

Why ‘challenger banks’ haven’t taken off in the US

Digital banks, big in the U.K., have a trust problem in the States.

“Challenger banks,” as they’re called across the pond, include the likes of Monzo, Starling, Tandem and Atom — completely digital banks built on new technology as opposed to the outdated infrastructure of legacy banks. They usually tout better interest rates, lower fees, if any, and better service. They have an have an easier time creating a good customer experience because they don’t build on the rusty rails of the existing financial system, making the way they operate more efficient and the user experience more enjoyable.

That model hasn’t really caught on in the U.S., though, where startups are mostly building technology-based solutions for payments, investing and lending – anything that doesn’t require opening a bank account with an unknown entity. Building that type of business profitably is hard: the cost of customer acquisition is high and complying with complex financial regulations can be a big undertaking.

But beyond that, U.S. customers are still largely distrusting of startups when it comes to handing over all their deposits, and digital banks are waiting for that doubt to wear away, said banking and payments consultant Faisal Khan. Customers responded well to startups that give them convenience by connecting to their existing bank accounts, like Venmo for easy peer-to-peer payments or Moven for personal finance management. Even startups that take micro deposits like savings app Digit or micro-investing app Acorns have become popular among early adopter types.

Digital banks, however, need to create a stronger value proposition that will actually motivate customers to break a habit or create a new one and store larger volumes of their money with them – especially with legacy banks partnering more closely with startups and acquiring their services.

Making a profit
BankMobile, a rare U.S. success story, offers a compelling case study. With about 2 million accounts since its 2015 launch, it has grown so quickly Customers is selling it to Flagship Community Bank in Clearwater, Florida. (The Durbin Amendment of the Dodd-Frank Act requires companies with more than $10 billion in assets cap their interchange fees at 44 cents, and Customers’ asset size is just below that. BankMobile’s revenue comes mostly from interchange fees on debit cards.) The $175 million deal is expected to close before the end of the third quarter.

Luvleen Sidhu, president and chief strategy officer, said one of the main reasons BankMobile has been so successful is it is acquiring new customers at a low cost – about $10 per account, she specified, compared to the roughly $300 she said it generally costs to acquire a customer returns come out to “maybe $85 a year” in revenue.

“A lot of people are trying to utilize technology to bring an antiquated model into the 21st century,” she said, acknowledging the similarity of many fintech products and the importance of delivering a valuable solution. “The question is whether they’re successful at doing that and how you measure success. But if you’re not doing it profitably, it’s not a sustainable model.”

The reason most fintech startups aren’t building profitable businesses is obvious but important: It’s expensive and they don’t have easy access to funding like banks do. Many want to “make the world a better place,” and in fintech that often means bringing financial access to unbanked customers or offering low- or no-fee accounts for lower income people. Those ventures often don’t take off in a truly transformational way. But as existing financial institutions know well, lower income customers are not as profitable and the same is true for fintech companies, Sidhu said.

“It comes down to profitability,” she said. “Lower income customers are not as profitable. It’s the same for fintech companies:  A lot of these models don’t have low cost funding like a bank does – they have to lend to customers but then have to borrow from hedge funds – therefore they have to partner with banks or banks have to acquire them.”

Most startups understand that now. Financial technology as a concept is not new but the rise of the movement around “fintech” began with companies bent on disrupting legacy financial institutions. Today both sides understand each is necessary to the other’s success and are eagerly working together.

That’s perhaps part of the reason the U.S. doesn’t really have “challenger banks” – a term generally saved to qualify U.K. startups; U.S. startups are joining banks, not challenging them. Simple was eventually sold to Spanish banking giant BBVA, Moven is now partnering with TD Bank and BankMobile was born from a bank.

Customers need a better value proposition
Digital banks haven’t taken off in the U.S. yet but that doesn’t mean they won’t. However, it will take more than a better customer experience enabled by technology to motivate customers to open an account or switch from their current bank, despite their general dissatisfaction with the current financial system, Khan said. These new experiences need to focus more on customer behavior – something banks get but startups need to work on more. What will ultimately make a digital bank stand out from legacy banks that are improving digitally is the way it handles data.

“Technology is not an edge, it’s a temporary advantage and if a challenger bank can acquire technology so can a bank,” he said. “The one that’s able to get customers is the one that understands behavior well. It’s not about technology or price – and banks understand behavior very well.”

The bank of the future will understand how people use data in their everyday lives – on social media and not just in their financial affairs – and make it easy for them to manage their money in the same platform, Khan said. For example, if one day everyone with a Facebook account also has a bank account with Facebook, making one a natural extension of the other, that might be even more appealing to customers than a bank or digital bank, both of which currently act as designated environments for banking.

The value proposition and difference around brand awareness or trust is not worth it to consumers to make the switch from a legacy bank to a digital bank and that trust is what drives their behavior, said Jeffrey Brown, global banking and financial services lead at Genpact.

“The successful fintechs are the ones who think about a different customer experience or value proposition or solve a different problem than the existing guys,” he said. “Digital and artificial intelligence are just tools by which they deliver that but there’s nothing inherent about the technology driving the ones that are successful.”

That’s why it’s important to remember a tech giant like Facebook or Amazon could get into banking services before a digital bank even takes off, Khan said. If it’s a competition for customer trust, the tech company could beat out all the banks.

“Banks today are asking your institutional association not your social association,” Khan said. “There are many steps from legacy to seamless total data integration.”