An Interview With Goldman Sachs' Head of Consumer Banking

In today's episode of Industry Focus: Financials, Fool.com contributor Matt Frankel, CFP, interviews Harit Talwar, global head of consumer banking at Goldman Sachs (GS 1.59%). Talwar discusses how the COVID-19 pandemic has affected the bank's business and future growth plans, gives an update on the Apple (AAPL 0.64%) credit card launch, and much more.

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This video was recorded on July 20, 2020.

Jason Moser: It's Monday, July 20. I'm your host, Jason Moser. On this week's Financials show, certified financial planner Matt Frankel sits down with Harit Talwar, global head of consumer banking at Goldman Sachs (GS 1.59%).

The firm just announced in its most recent quarterly results that it continued to scale the digital consumer deposit platforms, as consumer deposits increased by a record $20 billion in the second quarter of 2020 to $92 billion. Matt and Harit talk about the company's progress with Marcus by Goldman Sachs, the state of banking during the global pandemic, why digital banking is here to stay, and much more.

This interview was taped on July 9, 2020. We hope you enjoy their conversation.

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Matt Frankel: All right. We are joined now by Harit Talwar. He is the global head of Goldman Sachs' consumer banking operations and Marcus by Goldman Sachs. Harit, how are you doing today?

Harit Talwar: Wonderful, Matt. Great to be on your show.

Frankel: Thank you. It's been far too long. So tell me about how Marcus is doing these days? Last time I talked to you, Marcus had just been getting started. Now you've kind of gone from being a small, up-and-coming loan platform to a personal finance brand. So can you give us just a quick update on what's new?

Talwar: Sure. Yes, we started three, four years ago, and since then, we've done a lot. Our vision is to build the modern digital consumer bank, and our mission is to serve millions of consumers and help them take control over their financial life. And in the last few months, the pandemic has strongly reaffirmed our business model. This unique combination of being digitally led and with a balance sheet and a strong brand has really helped us serve our customers very well in the last few months, whether it is in terms of uninterrupted customer service, being a digital platform, not having to staff physical branches, or whether it is giving them customer assistance plans with their loans and credit card products.

Because you know, Matt, in the last few months, what we've heard and learned are a few things. One is that the consumers have spoken loud and clear. They want and they expect banks to put them first. The other thing is, of course, [laughs] I'm biased, but the consumers have spoken: Digital banking is here to stay. This is modern banking. Physical branches are dinosaurs and a thing of the past. For example, more than 40% of U.S. consumers have used online grocery shopping services. This was less than 10% three months ago. Around 40% of consumers plan to use mobile banking who had not done it earlier. A third of the consumers say they don't want to go to branches any longer. So for a business like Marcus, which, as I said, is digital and with a balance sheet, tremendous tailwinds. And the important thing is we are using those tailwinds to help customers and keep our employees safe.

Frankel: So let's stick with that for a second. What steps has Marcus taken, and Apple Card, for that matter, taken to help consumers that are in need during COVID, and how has the reception been to your plans?

Talwar: So both, in our card business and in our loans business, we rolled out what we CAP, Customer Assistance Plan. And the essence of that is that customers can defer payments at no cost to them.

Now, the real story here is not that we rolled out these plans, but the real story is how we went about it. So we were one of the first, if not the first in the industry, to roll them out. From the time we made that decision to the time we rolled it out, it was only 72 hours and we made it digital enrollment, so that it is easy and transparent for the customer. If they want to talk to us, they can, but they can also avail of these plans at the click of a button. Because what we have seen in the past, and including now, is that a lot of banks do this as a check-the-box exercise and they tell people, "call us" and then there is a long wait time, and then they have to produce lots of documents and consumers have to go through hoops. And we very strongly felt that that is not empathetic. That is not right. Our brand stands for being on the side of the consumer.

And therefore, it is the ease and transparency because of being a digital platform that has really made these programs very successful. Around 5% to 10% of our customers have availed of these plans; that is in hundreds of thousands of people. And what is also very interesting is that a lot of people who have enrolled in these plans have still made the payment, which shows that they had concerns about uncertainty, wanted a safety net. It's not that they necessarily wanted to defer the payment.

Frankel: That sounds much easier to use than most of the other deferment plans I've been hearing about. So do you think this is an advantage when it comes to helping people avoid things like a charge-off or falling delinquent on their loans? Do you think this is an advantage?

Talwar: Yes. As I said, our structural competitive advantage has always been that we have modern technology and a strong balance sheet. Therefore, we can do things for consumers which large banks with sluggish technology and processes find it difficult to do and fintechs, without a balance sheet, find it difficult to do. And as a result, we've been there when the customers have needed us. And we've got very, very strong customer feedback, positive customer feedback. And we do think that will help us in managing our credit risk, but we are not complacent by any means.

Frankel: Let's pivot away from the COVID response for a little bit. Since the last time I talked to you, or anyone else from Marcus for that matter, the Apple Card has launched. Has the Apple Card met your expectations? Has it exceeded your expectations? Give us a little idea of how the progress has been on that.

Talwar: Sure. We have been very, very pleased with the launch of the Apple Card. Our CEO said last year, and it still remains true, that we believe that it is perhaps the most successful new credit card launch in the country. And since then, we continue to be even more pleased. The customer engagement with the product is very high. The usage of the product is high. And we have received very strong customer feedback in terms of how pleased they are with the customer experience and the product and how willing they are to refer other people to this product. And so we have been very, very pleased.

And we have continued to expand on that. We started with the Apple Card. Then, a few months after that, we introduced installment financing for the iPhone on the card, which was a very unique feature in the marketplace. Since then, we have expanded further to provide financing not just for iPhones but for all products. And so, we are very appreciative of the partnership, and it is going very well.

And if I could pivot: Overall in Marcus, our go-to-market strategy is twofold. One is, that we go directly to the consumers with the Marcus brand. But a very important element of our strategy is what we call BaaS, banking-as-a-service, where we embed our product capabilities into some of the largest ecosystems and the strongest ecosystems in the water. So Apple Card is one example.

Another is, that just a few weeks ago, we have started doing seller refinancing on the Amazon platform. And we are very delighted with that partnership too, it's just a few weeks ago. Given the environment, we are both going very cautiously and slowly on it, but this is an example of -- and that's the benefit we get by having Marcus being owned and inside Goldman Sachs, because we also have some of the best relationships because of being an investment bank for so many decades.

Frankel: So the Amazon partnership is up and running now, it's not just, kind of, you know, in prelaunch mode, it's active at the moment, correct?

Talwar: Yes. We've launched it a few weeks ago, but we have said publicly, both of us, that we intend to go very slowly, to learn more, and cautiously, and it will scale over time.

Frankel: Right, because that seems to be a very young high-potential area of the business, especially leveraged through Amazon. The small-business lending space is getting more and more competitive over time, especially in terms of the digital models, like, you know, Square Capital is an example of a digital small business lending platform. Is the Amazon brand the big advantage? Is it Marcus' customer service, for example, that's a big advantage? How are you differentiating that from the other business lending initiatives?

Talwar: So I would not characterize ourselves as entering into small-business lending, because we are not doing direct small-business lending. And we don't have plans to do that, at least for now. What I would characterize what we are doing is seller financing on a large e-commerce platform. And, yes, Amazon is a great e-commerce platform, and the opportunity and ability to work with them, providing to their sellers a financing option, is really what we are doing, and I think that is pretty unique and therefore very differentiated.

Frankel: So speaking of unique, one thing I read that you did recently is the Path to the Apple Card. It's a program designed for people who get rejected for an Apple credit card to eventually get them unrejected, if you will, or to get them approved. So my first thought is that I thankfully haven't been rejected from a credit card for a while, but the last time I was, years ago, I remember getting a letter saying why I was rejected. So how does the Path to the Apple Card differ from the standard rejection letter that consumers get?

Talwar: Sure. And I like how you characterized the standard rejection letter consumers get, because that is more a regulatory requirement. The Path to Apple Card, in our mind, is another example of customer-centric innovation. Coming from Marcus, which is housed inside Goldman Sachs, which has deep credit risk management experience and a focus on being a responsible lender. So we worked with Apple. And, you know, I should also preface this by saying that we are initially starting small, because we want to learn. When consumers get declined, we want to give them actionable, easy-to-understand steps and make it transparent that if they did these two or three things over the next couple of months or next few months, then they can improve their credit and get accepted for the card.

So you know, if you have been late on payments, if you can become punctual and make payments on time, or if your debt is too high, if you can manage your debt a little better, then it is good for the consumer and it is good for us. And so, what we're really doing is we're using data and engineering and design to provide easy-to-understand actionable steps for customers.

Frankel: Okay. So instead of saying "You were rejected because your debts are too high," you might say something like, "If you were to repay this amount of your debt over the next several months then you'd have a better chance of being approved."

Talwar: Exactly.

Frankel: It's definitely a differentiator. I know Marcus has always been very consumer-centric. The one thing that I still remember from our original conversation right after you launched Marcus is that I could call the Marcus phone number at any time and have somebody pick up the phone, which was a big differentiator at the time. So is that still true today? I know that was originally true. Is that still true as you're scaling?

Talwar: So that is still true in our loans business, where we launched that initially. But I think we have gone a step further as to, you know, continuously learning as to why people need to call, and can we eliminate the reason to call by empowering them to use self-service tools on our digital platform. And then with Apple Card, we've also introduced chat facilities, which we are now expanding into other products; we had it in our deposits product.

So yes, that particular feature is [laughs] there, you remember well, in our loans product, but I think we've evolved further to seeing what are the various options customers would need? And the first option is, can we provide them information in a manner that they don't need to call? And then, can we give them multiple avenues on how they can interact with us?

Because you are right that, you know, customer-centricity is what is important, because it is the lack of customer-centricity and lack of transparency where, you know, surveys show that 60% of the consumers don't trust their bank or credit card company. A majority of consumers don't know what is the interest rate that they're getting on their savings account or more than 70% of millennials, and now beyond millennials, would rather visit their dentist than visit their bank branch.

So embracing customer-centricity and providing good value. And you know, that's one of the reasons why during this pandemic and even otherwise, our deposits business, our savings business, has just done spectacularly. There has been a strong flight to quality. You know, we mentioned in our earnings release at the end of first quarter that our deposits grew by $12 billion. We will be announcing our second-quarter earnings release next week, so I will not get into the exact numbers. But I can tell you that this momentum has continued to be very strong in the second quarter too. And therefore, it has really grown well.

And, you know, we make the claim that our interest rates are at least 4 times the national average. And so we're giving value, and we can give value because we have a digital business model where our cost of running the business is lower than these banks with thousands of branches. And so that helps us to put money in the consumers' pocket rather than in landlords' pockets, because we do believe, and you know as I said in the beginning, that branches are a dinosaur and a thing of the past.

Frankel: It's really interesting, when I saw the American savings rate, in general, has really skyrocketed since the pandemic started, which makes sense. There have been the stimulus checks; if you don't need the stimulus check, you might stick it in the bank. People have less to spend money on right now to add to that. So my question is, how much of the increased savings that we're seeing right now is sustainable? In other words, do you think people are scared into saving more on a more permanent basis, or do you think this is kind of like a temporary uptick?

Talwar: So during every crisis, there are some trends which accelerate and decelerate and then they sort of settle down. Generally during a crisis, savings rates go up, people become cautious. There are also, as you said, less spending opportunities. But it's hard to predict, but some part of the increase, sort of, remains as a longer-term habit, but it will probably come down from the very elevated levels, because there will also be a surge of spending.

But similarly, we saw during the '08 crisis, consumers started focusing more on value. So even some of the most prestigious brands, like, let's say, a Mercedes [Daimler AG] or an Audi or a BMW, they were no longer selling themselves on the basis of prestige, they were selling themselves on the basis of strong engineering, value. Similarly, I think what we're seeing in the last few weeks is acceleration of certain trends. One, as I spoke earlier, is the acceleration of digitization; that has been a strong trend. You know, I thought I could say, five years ago, that everything is going digital, and it would have been true, but it has been fascinating how the acceleration has happened in the last few months. And I think that will stay.

The other thing is what I would call the social ethos of a brand. I think, increasingly, customers will want to know the social personality of a brand when they make their purchase decision. Of course, they will look at the products, services, quality, value, price, etc., but they will want to know how brands and organizations treat their employees, how they participate in their community, what is their voice in these issues? And I think that's, again, a trend which is going to perhaps accelerate. And therefore, we have been very focused on not just serving our customers and clients but keeping our employees safe and working in communities, in cities around the world, whether it is on the racial injustice issues, where we've launched a fund; whether it is on the healthcare; whether it is on financial literacy; whether it is with small businesses; our urban investment group is working. So that is becoming very important.

Frankel: I recently did an article actually about your racial justice fund. One thing Marcus has done really well since launch is really not only differentiating itself from Goldman Sachs as its own brand but is really building up a great reputation, if you will, among Main Street savers, Main Street borrowers. And can you just build on what you're doing for your social responsibility, like, the financial literacy efforts you were talking about -- could you talk a little bit more about that?

Talwar: Sure. So you know, we are very fortunate and we are very proud with a brand which is Marcus by Goldman Sachs, because "Marcus" denotes the freshness, new energy, vigor; and "by Goldman Sachs" denotes the trust and organization and social responsibility of a 150-year-old brand.

So a lot of our efforts in the social arena are the same, and it is by the mother brand. So we have been doing various things. So we have worked with front-line healthcare professionals in cities around the world in the last few months, providing financial assistance, physical assistance. We had inventories of masks and other equipment built as contingency plans, which we have made available to hospitals around the world. We have provided -- we did not deliberately participate in the PPP loans, because we're not in the small business, but we have worked through the CDFIs [community development financial institutions] in providing assistance to businesses which are really small and don't have access to the large banks. We spent, I forget the exact number, over $500 million to help the CDFIs to get access to capital and to enhance their systems. We have been working in our Urban Investment Group with some of the inner cities to help develop, in a public-private partnership, the employment capabilities and rejuvenation of the inner cities.

So as a firm, we are doing a lot and we are making sure that there is a -- especially, we produce a lot of content which is expert comment content, and we have been translating it into small, understandable pieces of information which the Main Street can understand and not just the corporate treasures of the world.

Frankel: We've pretty much covered all I wanted to talk about, except one last thing. You mentioned that Marcus' big differentiator on the deposit side, one of the big differentiators, is that you pay at least 4 times the industry's average interest rate. Interest rates have gone down quite a bit this year and over the past year and a half or so. Has that affected people's appetite for high-yield savings platforms, if you will?

Talwar: Our high-yield savings product continues to do very well. And, yes, interest rates went up [laughs] as the Fed rates went up; interest rates went down as the Fed rates went down. We can't control the monetary [laughs] policy and the Fed fund rate, and, you know, that does have an impact on the interest rates we provide. But all through that period, whether the interest rates were going up or down, our promise was that we would pay at least 4 times the national average. And we've done that.

But I think the more equally important thing, Matt, is that we've made it very simple, easy, and transparent. So you can open an online savings account in a couple of minutes, in a few minutes, and more than 90% of our account opening is completely digitized and does not involve any human interaction. The consumer feels very empowered. You know, for some instances, they call up the call center to get some assistance, but well north of 90% of it happens just online in a simple and easy fashion. Because, you know, for getting the extra interest rates, if you have to go through cumbersome hoops, then people will say "forget it." So interest rates are important, but not sufficient for this to be a successful customer-centric franchise.

Frankel: Well, thank you so much for taking the time out with me; I won't take up any more of your time, unless there's anything specific you would like our listeners to know about what's going on at Marcus and what you're doing right now.

Talwar: No, I think we would just say that it is our mission to help millions of consumers. We want to put a bank on a phone. And we think we all need to, as an industry, understand that consumers want and expect themselves to be put first, and physical branches are a dinosaur, and digital banking is here to stay.

Frankel: And I know Marcus -- they had some pretty serious growth plans. Are you guys in wait-and-see mode right now with what's going on, or are you planning on getting back to growth mode?

Talwar: We are very prudent lenders, so we are watching from a credit perspective the environment very cautiously and diligently. But our business vision is much broader, and we continue to have tailwinds. As I said, we launched the Amazon partnership in the last couple of weeks, we expanded the product offerings with Apple in the last few weeks, we introduced the Marcus app in the first quarter of this year, we introduced the Android version of it at the end of first quarter, during the pandemic. Our Marcus app is rated 4.9 on the App Store; I believe that is a higher rating than any other financial services app if I'm not mistaken.

So no, we feel very confident about the long-term targets which the firm laid out during the investor day for our business, and we are tracking those.

Frankel: Well, thank you so much for joining me, once again, and I look forward to talking to you again soon. I'm always excited to see how Marcus and Goldman's consumer banking has changed, because every time I talk to somebody from Goldman, it's a lot of new things going on.

Talwar: Thank you so very much, Matt.

Frankel: All right. Take care.

Talwar: And please do keep safe.

Frankel: All right, you do the same.

Talwar: Thank you.

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Moser: And that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at [email protected].

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

A big thanks to Tim Sparks for making us all sound so good each week. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.