As technology has seeped its way into the depths of the financial system, banks large and small have realized that they will have to embrace technology and incorporate it into their business models if they want to achieve strong, sustainable long-term profits. A bank building a fintech has a lot of advantages over a start-up because the bank is likely profitable to begin with, has much more scale, and can offer deposits insured by the Federal Deposit Insurance Corp. (FDIC).
Still, most consumer-facing fintech companies have long struggled to achieve profitability and often come up short of expectations. This storied Wall Street bank is starting to learn just how difficult it can be to build a successful and profitable fintech company, even when you have the resources.
Losses pile up at Marcus
Goldman Sachs (GS 0.22%) is one of the largest, most highly coveted banks on Wall Street and has long been known as an investment banking powerhouse. But investors have not been the biggest fans of pure investment banks in recent years because their earnings can be volatile and hard to predict.
As a result, Goldman has been working to diversify further and create a much more steady stream of earnings. The bank has built out its asset and wealth management businesses. In 2016, it launched its consumer digital bank Marcus, which offers high-yield savings accounts, online investing, personal loans, and credit cards. The hope is that more durable earnings will lead to a rerating from the market.
Since its inception, many have considered Marcus to be a huge success. In early February, Goldman's CEO David Solomon provided an update on the business. He said Marcus has gathered more than $100 billion of deposits from more than 10 million customers since launch and generated $1.5 billion of revenue in 2021. By the end of 2024, Solomon said he hopes the business will be generating $4 billion in annual revenue.
But a recent report from Bloomberg, citing anonymous sources, said that Marcus has racked up about $4 billion of losses since the digital consumer bank launched in 2016. This doesn't include Goldman's purchase of the personal loan company GreenSky for more than $2 billion in late 2021, when tech valuations were nearing an all-time high.
Bloomberg is also reporting that Goldman executives are considering delaying the launch of Marcus checking accounts, as expenses weigh on the division, and focusing Marcus more on wealth management and less on consumer banking.
Some of these struggles are understandable because Goldman, like most Wall Street banks, has seen its investment banking business take a hit with the choppy public markets putting initial public offerings and other issuances at a standstill this year. In the second quarter of the year, Goldman's investment banking revenue fell 41% year over year, and the bank's returns have fallen off this year after a stellar performance in 2021.
Investors are placing a greater emphasis on profitability over growth right now -- not that Goldman isn't profitable -- and seeing the losses in Marcus pile up may not be so appealing. The shift to wealth management over consumer banking would also be less capital-intensive and can likely generate higher returns, at least in the near term.
A fintech conundrum
Like many other fintech companies right now, Goldman is deciding whether to continue to chase growth or take a step back and cut marketing expenses to focus on profitability. It's interesting that even in such a large, well-established, and profitable Wall Street bank, executives are grappling with a similar situation to many start-ups. The slowdown in investment banking has not helped the matter. Running and growing a consumer fintech company is certainly not easy.
But at this point, diversifying and stabilizing earnings are a key part of Goldman's strategic vision. So whether the bank leans more into the wealth side or continues to pursue growth, it will need to figure out a solution, because Marcus has been a core part of the strategy to reach more consistent earnings.
