NEW YORK: Imagine a big bank that could, at a stroke, get rid of all but its richest customers, its highest-quality loans, and its latest high-tech systems. That's essentially what Goldman Sachs is trying to create from scratch. Its launch this year of a credit card alongside smartphone giant Apple, reported by the Wall Street Journal on Thursday, is the latest bid to cherry-pick the best bits of consumer lending. It's smart, if vulnerable to hubris.
Credit cards are among the most profitable bits of banking. The after-tax return on assets averages around 2.6 percent, according to Accenture, compared with just over 1 percent for JPMorgan and Goldman as a whole. The extra profitability comes with challenges - notably stiff competition. Card balances have risen by roughly one-third over five years, and issuers like JPMorgan and Citi have piled into a rewards war, offering various incentives to win customers.
David Solomon's bank wades into battle with some advantages. First, technology. Goldman's retail bank, Marcus, is digital, so lacks the fixed-cost baggage of older lenders. Then there's the Apple connection. Every bank is hurling apps at its customers, but designing one alongside the company that makes the iPhone ought to make for a slick customer experience, reducing the value of the cash back or points the card would also have to promise.
Moreover, Goldman can be selective with its borrowers because it has no particular need to be all things to all people. The flipside of that is that it's hard to make much of an impact. Say Goldman can hit an average-beating 4 percent after-tax return on assets. It would need to make $25 billion of loans - equivalent to around 3 percent of the US market - just to add $1 billion to its roughly $10 billion of earnings.
Overconfidence is the main danger. Goldman is a pro at weighing risk, and Harit Talwar, the head of Marcus, came from card company Discover. But managing consumer plastic, which has the highest delinquency rate of US borrowing after student loans, is hardly in the firm's backstory. The other risk is that all goes swimmingly, and rivals just ratchet up competition. The supply of millennials is finite; Wall Street's desire to attract them seemingly isn't.
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