It's not often that you hear about a multi-billion dollar failed business venture by a Wall Street Mega bank. It's even rarer for one as dominant as Goldman Sachs to get manhandled by another company in its own backyard. But that's the story that Goldman Sachs Consumer Banking Venture is becoming Goldman Sachs Entered the consumer banking business for the first time just seven years ago, and in 2019, they scored a huge Victory by partnering with Apple to issue the Apple credit card. But despite their 150 year history as the Master of Financial Engineering and Risk Management, they just reported a two billion dollar pre-tax net loss on their consumer-facing segment for 2022..

that brings their total losses on their consumer banking business close to 4 billion dollars over the past three years. It's starting to look like the mighty Investment Bank lost its footing as soon as it stepped into the world of banking for the masses. Several of its more experienced consumer banking peers including Citigroup JP Morgan and Barclays were smart enough to steer clear of the Apple card deal. So how did this happen? How Goldman Sachs The Undefeated heavyweight of Wall Street get humiliated by Apple A complete newcomer to Consumer Finance Goldman Sachs is a global Investment Bank that provides a wide range of financial services to clients around the world.

The company was founded in 1869 by Marcus Goldman and has since grown to become one of the most prominent and influential financial institutions in the world. As a premier, Investment Bank on Wall Street Goldman's main businesses have historically been Investment Banking and Trading and Wealth and Asset management. Its investment making business focuses primarily on institutional clients such as companies looking to raise money by selling bonds or listing on the stock exchange. For example, Goldman Sachs underwrote the biggest IPO in world history as of the end of 2021, the gigantic 30 billion IPO of Coinbase in April That year.

Without top-tier investment bankers, Coinbase couldn't have been able to raise nearly as much money as they did. Goldman's role here is to match companies looking to sell Equity or debt to investors interested in investing in that Equity or debt. Goldman's trading operations primarily focus on hedge funds, corporations, and high net worth individuals. They provide execution and Market making services to Traders looking to make large, multi-million dollar trades.

For example, imagine that McDonald's is worried about the price of potatoes. Over the next number of years they could go to Goldman and ask them to engineer a strategy to hedge the risk of potato prices for their french fries. Goldman would then use their network of clients and try to find a Speculator willing to engage in and trade with McDonald's McDonald's would give up some expected return on the Hedge to the Speculator and the Speculator would in turn take on the price risk of the potatoes in Goldman Sachs we collect these from both of them. The wealth and asset management businesses focus on investing the money of Institutions and high net worth clients.

Historically, Goldman has only offered any of their services to institutions in the Super Rich giving them their Elite status. obviously their Investment Banking only deals with corporations and other Wall Street firms like private Equity shops they're trading in Prime brokerage Services only service hedge funds and high rollers and wealth and asset management only has clients with millions of dollars to invest. With Goldman's tenacious culture and industry-leading Technology they were able to Reign Atop The Investment Banking World Foreign While ambitious graduates from schools like Wharton and Stanford have long viewed Goldman Sachs as one of the top few destinations to land a job at. There has always been one area where Goldman fell short of its peers.

Consumer Banking or Banking for the Masses has never been a focus of theirs. that was on purpose because Goldman's entire image is based on serving the super rich and the Wall Street Elite. But in many ways, consumer banking is more lucrative, a bigger market, and just a better business. In general, it doesn't have the same cyclicality as the M A business.

It doesn't lose trading commission income when stock markets go down and it isn't levered to the state of capital markets and IBO pipelines instead by taking deposits from individuals and lending out a portion of those deposits to credit card holders, home buyers and businesses. Consumer Banking is a more consistent business with a much bigger total addressable. Market That's why the biggest banks all have significant consumer facing businesses such as JPMorgan Chase Bank of America and Citigroup Frustrated with missing out on the massive consumer banking business Goldman Sachs Launched Marcus in 2016. Marcus is a digital consumer banking platform named after Marcus Goldman a founder of the company Marcus offered a range of financial products and services to individuals, including savings accounts, personal loans, and credit cards.

The platform was designed to provide customers with a simple and transparent banking experience with no fees or minimum deposits. In the first year of operation, Marcus focused on offering personal loans to Consumers with good credit scores. These loans were designed to be simple and easy to understand with no hidden fees or charges. The loans were also offered at competitive interest rates, which helped to attract a large number of customers.

In 2017, Marcus expanded its offering to include high-yield savings accounts. These accounts offered customers a higher interest rate than traditional savings accounts with no fees or minimum deposits. The launch of the savings accounts was well received by customers and helped to establish Marcus as a credible player in the consumer banking. Market But their biggest bet of all would come in 2019 with the Apple card in 2019.

Apple Introduced the Apple card, the first credit card offered by Apple. The credit card was launched in partnership with Goldman Sachs who served as a credit card issuer. The value proposition for consumers was that the Apple cart integrates seamlessly with the iPhone experience. It includes all The same features of other major credit cards including cashback and spending breakdowns by Merchant type, but also integrates with the already popular Apple pay.

Instead of having to access those things through a Chase Bank app or Bank of America app. it's all done with a seamless user experience that iPhone users come to expect. Apple wanted to leverage their loyal customer base to get their own piece of the Consumer Finance industry. Goldman Sachs likewise was desperate to cash in on their wall Street Prestige to beef up their brand new consumer banking.

Venture So a partnership between the two companies seemed like a match made in heaven. Foreign. However, the Apple card Arrangement between Apple and Goldman Sachs was much more one-sided than it at first appeared. The original agreements between the two companies were such that the Apple card would approve as many iPhone users as possible.

The card also had no fees and low interest rates. These terms massively benefited Apple which wanted to offer the best experience possible for iPhone users. But for Goldman Sachs that meant two things that a bank never wants to hear in the same sentence: high risk, low reward. In fact, the credit profile of Goldman Sachs a consumer banking business is significantly worse than those of its megabank competitors like Bank of America and JP Morgan CNBC reported that the Apple card had a charge off rate of almost 3 percent.

A charge off is when a credit card holder is at least six months behind on their payments. In comparison, Bank of America and JP Morgan each have charge off rates only around half of that amount. And unlike some of its competitors cards, the Apple card charges no fees and Carries low interest rates, so there is a smaller income stream to compensate. Goldman Sachs for the highly risky borrowers.

Apple just wants the best user experience for its customers so they can sell more iPhones and gain market share. It doesn't care if the actual financials of the Apple card are viable since Goldman is the one on the hook, and since they have such a large user base of loyal iPhone users, they have the upper hand in negotiations. so they essentially cornered Goldman into picking up nickels in front of a steamroller. In fact, Apple's terms were so unfavorable that multiple other Banks declined to partner with Apple on the Apple card, including consumer banking heavyweights JP Morgan City and Barclays But when you're desperate, sometimes you're willing to do things that others aren't.

The net result of all of this is massive and expanding losses. In 2022, Goldman reported a pre-tax loss of almost 2 billion dollars for its platform segments which is primarily made up of Apple card. That's up from a one billion loss in 2021 and an 800 million dollar loss in 2020. For comparison, Goldman's total net income in 2022 was about 11 billion dollars.

So the pre-tax loss from the Apple Cart is in the ballpark of about 20 percent of that. Thank you foreign. The failure of Goldman's consumer banking business to make money is a major black eye to the Wall Street Titan known for its risk management prowess. In early 2023, CEO David Solomon announced a partial Retreat from Consumer Banking Marcus is no longer planning to offer checking accounts to Consumers and is stopping offering unsecured personal loans.

It is also renegotiated its deal with Apple to make the Apple card less unfavorable to Gold Newton. But perhaps the biggest indictment on this multi-billion dollar failure is the company's reorganization in the fourth quarter of 2022. The consumer Banking Venture used to be grouped together with Wilton Asset Management which was traditionally focused on institutional clients in high net worth individuals. lumping in their Mass Market business as well was a move made under David Solomon CEO since 2018., starting in the fourth quarter of 2022, the Apple card has been moved into a separate reporting segment called Platform Solutions.

Analysts and high-level Executives at Goldman have criticized Solomon for his leadership since heading the bank before Solomon Marcus operate it almost like an independent fintech startup except with the Firepower of one of Wall Street's biggest investment Banks backing it up when Solomon took over, he clashed with Marcus's execs over leadership decisions, leading to some high-profile departures in his high-profile DJing hobby also didn't help Marcus was run with much heavier supervision and became less agile and able to make its own business decisions. Now, with the Apple card being reorganized into a separate part of the company again, it seems like Solomon is finally coming around to this reality. The losses on the Apple card and consumer Banking Venture of Goldman Sachs showed that just because a firm has been successful in the past, doesn't mean that it will automatically be successful in new businesses. Goldman has dominated the investment banking world for decades, advising some of the highest profile IPOs and printing money with his trading and management businesses, but for some reason they became obsessed with the idea of becoming everyone's Bank rather than sticking to their Elite clientele.

Investors were never enthusiastic about the consumer banking Venture and likely we'll be happy to see the bank cutting its losses on it. Goldman will continue to be one of the best run investment banks on Wall Street and make billions of dollars in profits every year, but they should probably stick to what they do best. All right guys, that wraps it up for this video. What do you think about Goldman's consumer banking? Ventures Do you think they got taken advantage of by Apple? Let us know in the comments section Below In the meantime, thank you so much for watching and we'll see you in the next video.

Wall Street Millennial Signing out.