Goldman Sachs’ Modern Approach to Banking
On July 31st, Publicis Sapient, a company well-known for collaborating with its clients to allow them to digitize their business and client services, partnered with Goldman Sachs to announce the launch of Goldman’s new transactional banking platform (Team). At Goldman, the mission of their transactional banking department is simple: “provide a global transaction banking platform that is nimble, secure, and easy for clients to use and for partners to connect to”. The concept behind their new virtual transaction platform remains the same as this central mission. But what exactly is this platform and how will it affect the future of banking at Goldman Sachs? Despite gearing up late to modernize this sector of banking, the 150 year old institution is “banking” on their credibility in the industry to match up to the rest of the banks in the technology race. This new transactional banking platform is expected to result in a larger clientele at the firm and higher reported earrings in the future years as it offers services through more advanced and easy-to-use technology from a consumer perspective.
To recognize how this online platform will benefit the bank, we first need to understand what transactional banking really is. Transaction Banking is the movement of money in a secure manner from one place to another (Transactional). On a very simple scale, transactional banking includes checks, withdrawals, and deposits. Some of the world’s largest transaction banks include Citigroup, HSBC, JP Morgan, and Bank of America (Sibos). Another competitor of traditional baking methods are FinTech companies. These companies focus primarily on consumer experience and bring modern solutions to address traditional banking constraints (FinTech). From the perspective of a consumer, this digitized platform is a more convenient and user-friendly way to interact with their banks to make transactions. Goldman’s version of this type of banking is called Marcus by Goldamn Sachs, an online platform that offers loans and online savings accounts. But with Goldman's new platform, the transactional banking services offered online will include liquidity management, payments, and escrow services, all through “API-enabled and fully integrated solutions”. Essentially, this description means that the firm will be ensuring that corporations are well financed in order to successfully continue their business operations and acting as a third party in order to facilitate transactions between two parties. All of this will be done with API services which allow the users to interact with the program and retrieve or change data within the program. This new cutting-edge API technology is what makes the firm stand out against its competitors as it is more interactive and can set them apart from their competitors despite having a late start.
Moreover, the pandemic has pushed the US economy to the edge of a recession, raising unemployment rates to the roof and dropping interest rates to the ground. Many small businesses and even large firms have been affected by this pandemic, forcing them to lay off workers and reduce the duration of internships. As of July, employment rates have fallen to 10.2% due to the pandemic (Davidson). This transition to interactive virtual banking will support the future success of the bank as it will be on the same playing field as its competitors. Currently, our economy is slowly moving from a recession to a depression, due to the uncertainty of finding a cure for the coronavirus and the rising number of cases. In order to combat this, banks need to create a long term plan in order to ensure that they continue to effectively provide the services that they had offered before the impact of COVID-19. By introducing this new platform, Goldman hopes that the firm will bring in more revenue as virtual transactional banking is the “next growth area” for banks to incorporate into their business for steadier performances in the future as existing and new clients will continue to use this convenient platform over a long period of time. Although the pandemic has resulted in the Wall Street Giant reporting strong earnings in Q2 due to the refocus on trading and investment banking as retail banking declines, through this department, Goldman will be able to continue to generate more revenue in order to prepare for future declines in the US economy. Most banks previously mentioned generate a 6% - 7% return on their market value through their transactional banking as the sector gains popularity, but Goldman is only aiming for a 1% target, smaller but still valuable. The firm has decided to target a smaller percent of revenue in order to cushion the blow that may result from its launch during the pandemic. This newly introduced sector can also help the company increase their equity through the “lower funding costs as a result of deposit gathering”. This improvement means that since the firm would have a higher deposit rate due to the launch, it will have more money to fund loans and generate further profit from these loans.
By providing this automated service, Goldman will be able to provide its clients with a much more convenient and safe means to move their money. These services are currently offered only to commercial pre-existing and prospective clients of Marcus by Goldman Sachs, a brand dedicated to commercial banking at Goldman Sachs. This brand is dedicated to its consumers, focused on user experience and providing products that are simple and effective in use. With the launch of Marcus, Goldman Sachs brought in over 4 million new consumers with over $50 billion in deposits and $5 billion in consumer loan balances. With the rising fame of Marcus and the additional services provided by the new transactional banking platform, Goldman expects to attract more consumers and continue to provide their services to pre-existing services.
Throughout the last few years, the rise of fintech companies around the world has become a concern for banks as they are growing to become their competitors, but are not labeled as banks. Previously, these fintech companies did not pose a threat to the traditional banking giants that existed on Wall Street, but due to a mix of social distancing rules and the desire for convenience, many consumers prefer their transactions to happen quickly and safely on online platforms. Also, due to the rise in popularity of Marcus by Goldman Sachs, right now would be the most ideal time to make the shift to transactional banking and provide its clients with the most convenient and secure experience. In 2019, the revenue generated by the Investment Banking sector reduced by 7% while the revenue from digital banking, Marcus, increased 41%. This increase in revenue also propelled the shift to online transactional banking in 2020.
In conclusion, the effects of this pandemic and the previous launch of Marcus by Goldman Sachs in 2016 have created the perfect economic environment for Goldman Sachs to launch their new transitional banking platform. With high reported earnings in Q2 of 2020, they expect to continue to expand their banking services in hopes for a larger return on their current investment.
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Thakor, Anjan V. “Fintech and Banking: What Do We Know?” Journal of Financial Intermediation, vol. 41, Elsevier BV, 2020, p. 100833–, doi:10.1016/j.jfi.2019.100833.
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