Boring, mundane, routine. These are all words that I’ve heard to describe dependable transaction services.
Given the number of fintechs now encroaching on banks’ transaction businesses this is hardly true. Fintechs have been paving a new way for transaction services and there is a buzz around the business.
The competition between banks and fintechs is intensifying, and I have argued in the past that banks could become irrelevant in transaction services. But there is one bank that could buck this trend: Goldman Sachs. Its foray into cash management could change the game.
Euromoney’s Report Cards, published in January, explored Goldman’s plans to roll out cash management services in late 2019 or 2020. Officially, little has been said about the bank’s move into cash.
According to Reuters, the bank will leverage its existing foreign exchange business to start offering corporate clients a greater return on deposits if they sign up for the bank’s cash management services. Goldman Sachs will become its own first client by moving the bank’s own deposits from others onto its cash management platform.
It’s a sensible move. Since the financial crisis, banks have seen the benefits of expanding into reliable and steady businesses such as trade finance and cash management. According to data compiled by Oliver Wyman, in 2017, wholesale payments and cash management generated $246 billion in revenue. This is set to rise to $312 billion by 2022.
It’s a simple argument: cash management is a profitable business, Goldman Sachs has the capital to invest in it and building out a cash management business will help the bank meet its five-year target to grow revenue by $5 billion by 2022.
However, some argue that it’s too little too late for a bank like Goldman – or any other bank for that matter – to enter the cash management space. Corporate clients are in the process of consolidating their bank partners and will likely stick with their relationship banks. But, given the evolving cash management landscape and Goldman Sachs’ own track record, it should be able to gain market share.
Cash management has traditionally been dominated by the top tier commercial banks, which some consider a barrier to entry for Goldman Sachs. However, the bank now has a captive audience via its consumer banking business, Marcus, which launched in the US in 2016 and in the UK last year.
Offering highly competitive deposit rates, Marcus had signed up 100,000 customers within just over a month of launching in the UK, and has accumulated more than $7 billion in deposits.
Building a cash management business on the back of a strong commercial banking base is no longer necessary. The rise of fintechs, open banking and crypto currencies is changing the game. Goldman can attract the best talent in the business: in May 2018, the bank hired Hari Moorthy, previously at JP Morgan, to support the bank in its development of commercial banking technology, including new cash management products.
Goldman will also avoid the huge expense of maintaining legacy cash management and managing the transition to up-to-date systems. One banker I spoke to suggests that north of 80% of banks’ IT and innovation budgets is eaten up by keeping old systems running. As a new entrant, Goldman’s cash management business will be much more akin to a fintech – a lean, tech-based business that could present a significant threat to the competition.
It boils down to whether clients will trust their cash with a brand new fintech or an established bank. For treasurers who realize the need for change, but remain quite risk averse, I have no doubt that caution will prevail.
But, given the bank’s many competitive strengths, while Goldman is late to the cash management party, it could end up hosting it.