Entrepreneurs take note‚ when a visit to the dentist is considered more worthwhile than a consultation at the bank, there might be a market opportunity.
Customer experience is chief among the areas where traditional financial institutions have fallen short, said Harit Talwar, CEO of Marcus by Goldman Sachs, speaking with the New York Times’ Nathaniel Popper at CB Insights’ Future of Fintech conference. Somewhat tongue in cheek, Talwar cited a statistic showing that 70% of millennials would rather visit their dentists than listen to their banks.
Launched in October 2016, Goldman Sachs’ Marcus product is the financial institution’s personal finance business, which originally entered the space offering to refinance high-interest credit card debt, and has since passed $1B in originated loans. Additionally, Marcus has seen $5B growth in a US online deposits platform that it purchased from GE Capital Bank in 2015.
Using the word “maniacal” to describe Marcus’ commitment to producing an unmatched banking experience for customers, Talwar emphasized that a lack of traditional legacy systems and processes for consumer banking allowed Goldman Sachs to build a tech-first personal lending and deposits platform from the ground up.
Talwar sees the shift toward digital banking and the fact that Marcus is addressing consumer pain points that have gone unnoticed, especially in managed checking, as a big opportunity for the financial institution. And, while Talwar acknowledged that other fintech companies have failed in the personal loans business, and noted the incoming competition from large technology firms in other sectors (e.g. Amazon), he claimed to be concerned. “The market is large, and the more players that enter, the better off consumers will be.”
Transcript
Nathaniel: I’ve been looking forward to talking to Harit Talwar, who I…actually is a bigger deal than I thought. I knew you ran Marcus at Goldman Sachs, the new lending effort, but from reading your bio, I learned that you are actually the head of digital finance at Goldman. So you’re also overseeing these new savings accounts that Goldman has rolled out. Maybe the first question is, you work at Goldman, but you work at a start-up. How do you decide what to wear?
Harit: Well, I’m very dressed up today.
Nathaniel: This is dressed up? Okay.
Harit: This is dressed up.
Nathaniel: I wasn’t sure if this is dressing down or dressing up.
Harit: No, this is dressed up. Most people on our floor are casual, and we’ve embraced the spirit of a start-up inside a 147-year-old firm. People are wearing jeans. They’re casual.
Nathaniel: You can get through security with that?
Harit: Flip-flops, I think, is out.
Nathaniel: Okay. That’s still fine.
Harit: So we’ve drawn the line at no flip-flops.
Nathaniel: Okay. But what’s your normal outfit on…what’s your uniform on a normal day?
Harit: Depending on the weather. But it’s normally slacks or jeans and a shirt.
Nathaniel: Okay.
Harit: And I’m, even on the floor, a little dressed up.
Nathaniel: Okay. You’re the stodgy old guy.
Harit: I’m the stodgy old guy. Most of us…my team members are in their 30s or younger, and very bright. But, you know, casual in dress, not in attitude. Very bright and hard-working.
Nathaniel: Okay. So maybe let’s start by breaking it down, what exactly Goldman is doing in this area, what exactly you’re overseeing. How big is it at this point?
Harit: Sure. So we launched what is called Marcus by Goldman Sachs, our online lending platform, around seven months ago. Customer-centricity is at the core of everything we are doing over there. And we are very, very focused on helping creditworthy Americans manage their high interest credit card debt. And we are quite thrilled that last week we crossed a billion dollars in originations serving thousands of customers. Our average loan size is around $14,000, but I think what we are more thrilled about is how we got to the billion dollars. We’ve been very careful, very deliberate, and slow, initially. We started with a direct mail only channel. Then as we got more confidence, we expanded into aggregators like Credit Karma and Lending Tree. Then we got more confident, we opened it up, overall the site is open.
Because for us, this is a long play, we are very, very maniacally focused on customer experience and doing it right. And therefore, we view the billion dollar more as an outcome rather than anything that we were chasing, but we are feeling pretty good. And we are also feeling pretty good about the credit quality. I’m not going to discuss the details here, but, you know, if you take FICO as a measure, and it’s just one measure, the average FICO on our portfolio is higher than what we expected. So we’ve been pretty happy. We’ve been pretty happy about the resonance of the Goldman Sachs…Marcus by Goldman Sachs brand in the retail space. Similarly, this was the lending side which we organically built. We purchased from GE last year, a year ago, the online deposit platform. And, again, we are very thrilled. Just yesterday, we crossed the $5 billion mark and growth of that platform.
Nathaniel: So $5 billion in deposits.
Harit: Five billion dollars growth in the deposits since we purchased it a little over a year ago. And again, there we are very thrilled that most of the money has come through organic search. So it is the pull the brand. Our interest rate is very attractive. In fact, we raised it a week before the Fed raised rates to 1.2%. So if you want to open an account at gsbank.com, you can.
Nathaniel: I’ve noticed.
Harit: So I thought I’ll try five seconds of a commercial plug. But I think, in both areas, what the firm is trying to do is a couple of things. One, to use the cliché, consumers are using digital delivery channels for consuming all kinds of services. And we are trying to build a consumer digital financial services platform. On their saving side, we are giving them deposits, which have significantly higher interest rate, online savings accounts. No fees, $1 minimum opening account, and significantly higher interest rate then they get from their traditional banks. And on the lending side, we are giving them loans with 3% to 5% lower interest rate than on their credit cards, and again, no fees, and both in a very transparent and convenient fashion. And we can do that because we don’t have any legacy costs. So that’s really what we’re trying to do.
Nathaniel: Yeah, so these are both areas that Goldman Sachs is sort of famous for having avoided in the past. I mean, Goldman is a Wall Street bank. it’s focused on corporate customers. Suddenly, just in the last three years, you guys for the first time are having these, you know ordinary folks of retail customers. What was the thinking behind this big push into a whole new area after, you know, 150 years of focusing on something totally different?
Harit: So I’ll give you my view. You know, I’ve been there for two years. I think a couple of things. One is that we did become a bank in 2008. We weren’t a bank before that. Two…
Nathaniel: What happened in 2008?
Harit: I think…
Nathaniel: Right, right, right.
Harit: You saw that I referred to the year, not to the event.
Nathaniel: Right. Okay. Sorry about that.
Harit: We did become a bank. We weren’t a bank before that. Lloyd has a strategic vision on how we use the bank. Number two is we constantly evaluate trends happening in the economy. And I think there are two or three very important trends. One, you know, and I’m not an intellectual like the previous speaker who talked about all the 10 trends. But one is that everything to use the cliché, is going digital, and therefore you need not have brick-and-mortar branches. In fact, our surveys show that 70% of the Millennials would rather visit a dentist than visit a bank branch.
Nathaniel: I thought you’re gonna say they’d rather visit a dentist online than visit a dentist in person. I would too.
Harit: Maybe that too, one day.
Nathaniel: Yeah.
Harit: The second is that there are real consumer pain points, especially when it comes to manage debt. And the third is that, while a lot is happening, we are uniquely positioned that we don’t have any legacy businesses in the consumer area or legacy ways of doing business, and yet because we are a bank, we have our own balance sheet technology and risk management is in our DNA, and therefore we can bring the firms trends looking at the macro trends to solve real consumer needs. So that’s really the thinking which has gone into this. And we are very excited about it and very committed to it.
Nathaniel: I mean, I think I remember the sort of public response when Goldman started talking about these retail things. So a lot of surprise, a lot of sense of, can they really pull this off? You know, they don’t know anything about this whole business area. I guess, for you, what were the concerns that had to be addressed before you took the job? What were your concerns going in?
Harit: So, you know, as the story goes, I wasn’t returning calls, and I was not keen to meet because I was very happy where I was, and I wasn’t sure about the commitment. But when they tracked me down at a dinner in Washington D.C. for the first meeting, and within eight weeks, I had joined. And, you know, I was at Discover. That’s a great company. I was very happy over there. But when I met the senior management at Goldman, I was very struck by how thoughtful and deliberate the firm had been in evaluating before getting into this business, and the commitment that it had. And, you know, the thought of a startup inside 147-year-old firm was very tantalizing. And if you step back, there has to be better ways of helping Americans manage debt and manage savings. And, you know, the lure of that was too much to give up.
Nathaniel: I guess, from the other side, you have the fact that the Goldman is not the only person trying to make loans online and deal with these debt issues. You know, by the time you guys opened up, this was a pretty crowded space. I guess, what made you think that Goldman could do something that Lending Club couldn’t. I guess, you know, I think there’s the obvious, which is that you have a balance sheet, and that is something that seems like a lot of these online lenders now realize they could really use. But putting aside the balance sheet, why did you think that Goldman, a firm that had never done anything in this area before could compete with these, you know, companies that had been built from the ground up to do exactly this?
Harit: Great question. First of all, as you said, balance sheet is a tremendous advantage, and I won’t undermine that. And not merely from the stability of the business model, but also because it allows you to offer products to the consumer which are more customizable and flexible. So I’ll go beyond the balance sheet, but just to give you one example. We spoke to 10,000 consumers, and we learnt a lot. And one of the insights was that most lenders talk in terms of a loan amount and interest rate. And that’s not how most consumers think of. They think of, “I have $350 a month which I can afford to pay. I want a $12,000 loan. What is the period of the loan that I can get?” So the period of the loan, whether it’s 33 months, or 41 months, or 49 months is more an output rather than the input. Now we alone currently are the ones doing that because we have two advantages. We have a balance sheet. We don’t have to securitize our loans. And number two, we have a modern technology system unlike some of the large banks which have legacy systems.
Another insight we heard was, it’s very important for consumers to decide which date of the month they would pay their monthly bill. A particular date is for credit card, a particular date is for the gym bill, a particular date is for the auto loan. This is the date that they want to pay for their installment loan. We give them the choice to select that date, again, because we have the technology and the balance sheet. So I think that’s very important. But going beyond that, for us, the competition, so to say, is not the other online lenders. I would also say it’s not just the credit card companies. But it is really consumer inertia. Because consumers are not aware that there are other options to borrow than on their credit card.
You know, the Fed study that if there is $400 of unexpected expenditure, half the country needs to borrow. And it’s not because they are being frivolous of going to Vegas or buying jewelry or something, but because life moments happen. You know, the roof has a lead, the washing machine breaks down, and then people borrow. And when they borrow, they borrow on a credit card. Now in the credit card industry, there are some customers who borrow and some who don’t. So those who borrow, they are very extraordinarily high interest rate because they are covering up the costs for the card company of those who don’t borrow. So, in my mind, borrowing on revolving credit perpetually and chronically is a little bit like eating mac and cheese and coke for lunch every day. You know, mac and cheese and coke is…I shouldn’t say coke, any soda, okay?
Nathaniel: It’s Goldman Sachs?
Harit: Yes. It can be very…
Nathaniel: Smart.
Harit: So, mac and cheese, soda, no brand names.
Nathaniel: RC Cola? Okay, no brand names at all.
Harit: They can all be clients.
Nathaniel: Just generic mac and cheese?
Harit: Yes.
Nathaniel: Good.
Harit: But it’s very satisfying. But you should have it in small portion. And those who don’t have it in small portion and get habituated to having that for a meal all the time, it leads to obesity. Similarly, borrowing on a revolving credit can be very convenient at that time, but if you keep on doing it, it leads to financial stress because you suddenly… There are tens of millions of Americans who are creditworthy, who have $5,000 to $25,000 of credit card debt, are paying around 18%, 20%, 22%, even higher interest rates. So in our mind, installment loans is like Greek yogurt.
Nathaniel: Like?
Harit: Greek yogurt.
Nathaniel: Greek yogurt.
Harit: Or like Weight Watchers. There are points you know how much you pay each month. There is a light at the end of the tunnel. You know when you would have paid up your loan. Even if you need another loan, there is a sense of discipline. That I think needs to be more pervasive in America. I think consumer inertia and lack of that awareness is the real competition. So the more players there are in the industry, the better it is.
Nathaniel: I guess is that that sort of cycle of debt, that was something that you hear people getting into now also with online lenders. So people will take an online loan, and then they’ll take another online loan to pay off the previous online loan, and this, I mean, this seems particularly sort of dangerous for Goldman because, you know, the potential reputational damage there. So how do you ensure, or are you taking steps to ensure that customers don’t get into the same thing with this sort of personal loan?
Harit: So we take our role as…of being a responsible lender very seriously. We therefore are very focused on making sure people have the ability to pay the loan. We are also very for… What we do is that even though they are taking the loan as a stated reason to repay their credit card, we factor in the loan that we are giving in addition to the existing debt that they have, to see whether they have the ability to pay. Because the ability to pay is not just good for us from a lending and, you know, credit quality perspective. I think it’s very important from being a responsible lender perspective. So we are doing that.
Nathaniel: When you began building this, how much could you build with existing technology from Goldman Sachs? How much did you have to buy from the outside? And how much did you have to build from scratch?
Harit: Well, we built our entire platform new. And we are particularly proud of the technology platform that we’ve built. So our architecture is, there’s a front-end, there’s a back-end, and there’s a middleware in between, which is like the conductor, you know, at an orchestra. We have built our IP around the front-end in terms of customer experience where we’ve co-created the site with consumers rather than just doing usability testing. We had a lab twice a week. We would be sitting with actual consumers. They guided us as to how to make the site. We’ve built IP into a data architecture so that we have built the ability to ingest multiple sources of data into one. Our analytics between marketing analytics, operational analytics, risk analytics, financial analytics are all into one. And more importantly, make that data available to various decision-makers in a democratized, online, real-time fashion.
The third thing we did was we built the middleware ourselves, which is a micro services API architecture. And once we did that, a lot of best-in-class modules, we purchased from the outside. So there are around 17 different modules which we’ve purchased from outside, which work through a middleware layer, delivering the great customer experience. So while we are very proud of this technology architecture, what’s very important is that, how do you use it for empowering customers to give more customizable solutions? And those are the examples I mentioned earlier. Plus, we are very focused that we’ve built this. Very new, modern, we are very thrilled with it. But we don’t want to be in a situation where 5 years out, 10 years out, we’ve built our own technical debt. So we’ve used an agile methodology. We have Sprints. We release new product functionality, which sometimes may not be obvious to the customer every two weeks. And every two weeks we reserve a certain amount of resourcing to continuously alleviate the technology architecture.
Nathaniel: When you…
Harit: I hope that wasn’t too nerdy a response.
Nathaniel: It’s hard to come up with a follow-up to the whole middleware thing. But I’m just thinking back to Silicon Valley, and thinking if my knowledge from there allows me to respond to this, the knowledge I’ve gained from HBO. But let’s, I mean, let’s talk about when you begin demoing this, first, when you demoed it to Lloyd Blankfein at Goldman Sachs, when you’ve demoed it for other executives there, were there any surprises? How did they respond? What did they think? And did they want demos, I guess, to start with?
Harit: Well, this is Goldman Sachs. Everybody wanted demos. So, yes. It was quite…The first time we demoed to Lloyd, we were very nervous whether the whole thing works. But it fortunately worked. There wasn’t any down time. He was very interested. He was very immersed into it. You know, he loved the page where we give consumers various loan options. We explain to them what is the implication of each loan option. So he was very impressed.
Nathaniel: He’s probably carrying a lot of credit card debt, I imagine.
Harit: I haven’t looked at his bill.
Nathaniel: Okay.
Harit: But the other thing I would say about, you asked about Lloyd, you know, he’s been calling our Marcus customers. So he’s making calls to our customers. He made recently, I was there, a call to this single mom in Ohio who had taken a $12,000 loan. He called her to say, “I’m Lloyd Blankfein, the CEO of Goldman Sachs. I wanted to thank you for being a customer.” And the response was overwhelming.
Nathaniel: Did she know who Lloyd Blankfein was?
Harit: I don’t know. But she realized that it’s the CEO. I told Lloyd, “She may or may not know you, okay? So you’ve got to say you’re CEO of Goldman Sachs.” But she was so touched that the CEO of a large bank had called her to thank her for doing business with us. She said, “It’s never happened to me.” So Lloyd is doing many such calls. And, you know, we are really very proud of that.
Nathaniel: I guess the other flip side of that, though, is that the Goldman, coming out of 2008 and whatever happened there, did not necessarily have the greatest public reputation. Has that, in your focus groups, did that come up? I mean, did you… How did you decide, “Do we want to push the Goldman Sachs name out there? Is that going to be something that helps us or is that going to be something that could hurt us?”
Harit: So we did very extensive research for everything including the brand. And the Marcus by Goldman Sachs brand resonated very strongly. Now, as you know, Marcus, we picked that because Marcus Goldman is also a founder. Not that we expect people to know that he is a founder, but a first name brand denoted a certain amount of humanity, and personalization, and freshness, and energy. And “by Goldman Sachs” provided the gravity. And our research showed that the name Marcus by Goldman Sachs makes people do…want to do business with us because they know we’ve been there 147 years, and especially in the online digital world where you are giving your social security number and your other details online, dealing with somebody who you know has been around for a long time has been very helpful. We are seeing that even in our direct mail. Our response rates are better than, you know, it varies by campaign but are better than industry averages. And, again, I think there’s a resonance of the name.
Nathaniel: So the Goldman, it sounds like you decided, Goldman Sachs was not something you wanted to hide.
Harit: No, we are not hiding.
Nathaniel: That was not something that put people off.
Harit: Yes. We are very proud of serving retail customers, and we’re not hiding at all.
Nathaniel: So where does this whole thing go from here? I mean, I think, right now, I’m thinking particularly, given that, you know, the kind of pressure on Wall Street that I think led a lot of banks to look for…look into new areas of business like this has I think been taken off somewhat with the Trump administration. And is this still something that is a major…I mean, how big a priority is this at Goldman? At its current size it’s, you know, a drop in the bucket, how big is the vision for making this? And, you know, is that still there?
Harit: So the firm is very committed to this business. As you said, we’ve started only recently. It’s a small business. It’s early days. We want to be deliberate. But our commitment and vision is long-term. We started with the loan product. We purchased the deposit platform. Both are in their early days and both are growing very well. And for both, we are very maniacally focused on customer experience. That is the core. We must offer outstanding customer experience. And so, as we are becoming more confident about this, we are looking at other areas where there are consumer pain points and where we have unique competitive advantages to address those pain points. And with time, we will expand. But the core of our expansion strategy is going to be customer experience and our ability to deliver better value to the customer.
Nathaniel: So has there been any discussion at this point of what comes next? Is it, you know, small business loans? I remember hearing this from another Goldman executive at some point. You know, how quickly, and where do you look next?
Harit: So we are evaluating various opportunities. I’m not going to share them over here as to what is our next product. But I think, suffice it to say, that we are feeling good and confident about what we have done in the law 6 to 12 months, which is giving us now the ability to look beyond. And over the, you know, next couple of years, I would imagine we would introduce more products.
Nathaniel: Do you anticipate that…I guess, let me put it this way. If you anticipate people following you from other sort of big companies, would you expect it more likely to come from other big banks doing something similar to this or big tech companies like Amazon doing this? Who do you anticipate being your competitors?
Harit: I think there will be players from both sides coming in. I think the market is very large. The consumer pain points are very many. We think evolving financial services to the next phase of serving consumers conveniently, digitally, addressing their pain points, challenging previous business models, previous branch constructs, is what it’s going to be. The consumers really deserve more transparency, more value. That, I think, is the changing landscape. I think there will be some banks, some technology companies, some startups. I don’t think it’s a matter of which industry sector will do better. I think there’ll be good players and not-so-good players in each sector. But the market is large. And we actually welcome a lot of people entering because the more people who enter, the better the consumer is, and the better the market is.
Nathaniel: Great. Well, thanks. Thanks, Harit. Thanks everybody.
Harit: Thank you.
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