Goldman Sachs’ Marcus has lost $1.3 billion since 2016

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Goldman Sachs’ Marcus has lost $1.3 billion since 2016

Goldman Sachs’ consumer banking division, Marcus, has seen a whopping $1.3 billion in losses since 2016, The Wall Street Journal reports.

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That figure has been driven by spending on startup acquisitions, cloud storage space, and tech talent hiring, among other factors. The bank has also seen loans go bad at a higher rate than rivals have, with one potential explanation being that Marcus launched without a collections team to press delinquent borrowers, something it’s since rectified.

By pivoting toward consumer banking, Goldman faces some fundamental risks:

  • A high loan default rate dampens the chance for profitability.Marcus’ loan losses have so far been higher than rivals’: Goldman wrote off $156 million in 2018 and had written off another $155 million in the first six months of 2019 alone, per public filings cited by The WSJ. And in the year ending June 30, Marcus’ losses amounted to 5.5% of its loan book. If Goldman can’t find a way to limit this damage, it will have a much harder time getting its retail banking segment to generate a profit.
  • Consumer banking could hurt its reputation as an upmarket bank.While it makes sense that the bank is seeking to be more well-rounded — its income from the channels it’s traditionally known for like trading and merger advising has slipped — Goldman’s reputation has been as a leader of high finance. By focusing on products like personal loans and savings accounts, however, Goldman risks mixing up its public perception and getting stranded in a middle ground where wealthy clients might begin to see it as too down-market while it doesn’t come to mind for consumers deciding on a bank.

It remains to be seen whether Goldman Sachs will overcome the risks to turn its retail banking play into a profit generator. It’s possible that high loan default rates and the ongoing cost of retaining tech talent will remain consistent problems, or that Marcus will simply be unable to carve out a niche in retail banking against major competitors like JPMorgan Chase and Wells Fargo.

But on the other hand, with big expenses like the initial launch of Apple Card and startup acquisitions out of the way, Goldman Sachs’ consumer division’s expenses could slow and begin to be offset as its customer base scales. This is the view that the bank takes, with Goldman Sachs CFO Stephen Sherr saying on the company’s Q2 2019 earnings call that 2019 and 2020 represent the depth of the bank’s investment cycle for building new businesses and digital platforms, and that as businesses like Marcus and Apple Card scale up over the coming years, they should come to contribute positively to the bank’s return on equity (ROE). Plus, the talent and tech infrastructure the bank has built up could lower the cost of future expansions. If that happens, Goldman may have multiple avenues through which to succeed in the future.

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