Goldman Sachs launched its new US transaction banking offering in June.
Following the launch of its consumer brand, Marcus, in 2016, the move is the latest of the firm’s new initiatives to target big pools of revenue in markets where it does not need to capture commanding share to grow a profitable business quickly.
This is all part of a drive to attract operating deposits to lower the bank’s own cost of funds.
Goldman has been working on the initiative for some time. It had taken roughly $500 billion of its own operational flows and brought them onto its own platform by the end of 2019.
It stated at the end of last year that the expectation was to have third-party customers and clients of the firm on the platform in 2020.
By June, all clients signed up so far were existing Goldman customers.
“We started working on this two years ago. There was clearly an opportunity for a new entrant, but what form would it take?” explains Eduardo Vergara, global head of product and sales for transaction banking, who joined Goldman from California-based Silicon Valley Bank.
It is quite clear, he says, why the business had room for a new competitor.
“When we talked to clients, we heard a lot of dissatisfaction with existing offerings,” he claims. “The large players had been formed through growth by acquisition, which means the legacy offerings have been cobbled together on mainframes built on 1970s and 1980s technology. There was a really poor client experience.”
The top 10 players in the market, which are currently led by firms such as Citi, JPMorgan and HSBC, made combined revenues of more than $26 billion last year. So, what advantages does Goldman bring?
Being a latecomer might work in Goldman’s favour, given that it can approach the market with a very different cloud-native proposition that is built on application programming interfaces (APIs). It has invested heavily in a tech stack that will offer 99.5% availability to clients and very fast transaction times.
“We did a lot of research going into this,” Mark Smith, global head of liquidity products in investment banking, tells Euromoney. “We are talking to corporates with revenues of $500 million and above, and one quarter of them were looking to change something.
“Transaction services is a sticky business, but there is now constant churn and turnover, so we were confident that there was sufficient demand out there for moving away from existing providers.”
We can solve problems that traditional banks can’t. Then, over time, we will look to gain share of wallet- Eduardo Vergara, Goldman Sachs
For the time being, however, Vergara insists that Goldman is looking to act just as an extra transaction services bank for clients rather than hoping to immediately take the incumbents head on.
“Large corporates have multiple banks, and we are trying to come in as an additional bank,” he says. “We can solve problems that traditional banks can’t. Then, over time, we will look to gain share of wallet.”
The bank’s transaction services programmes will all be API-driven in real time, which Vergara and Smith describe as the powerful engine at the heart of the business.
The bank is looking to roll out virtual accounts, which segregate accounts into a series of digital accounts in different currencies and countries.
In this way a client could potentially have one million accounts as one single, virtual account.
This is an approach that other leading transaction services banks, like JPMorgan, are already taking.
More common in Europe and Asia, Goldman aims to make this product a foundational part of its US offering.
If Goldman’s tech prowess allows it to take on the incumbents in this market, what about the non-banks?
“Fintechs have taken market share by giving a better experience but most of them are targeted at consumers and SMEs,” Vergara points out. “It is very difficult to scale a new business focused on large corporates. We have the balance sheet that fintechs can’t have – we can disrupt.”
Having established itself in the US, Goldman will launch in the UK in the first half of next year and in broader Europe and Japan in the second half of 2021.
The extraordinary events of this year must, however, have impacted its plans?
“The last few months have accelerated the opportunity,” Vergara says. “We have 175 clients and $20 billion deposits, which has exceeded expectations.
“We have seen a flight to quality. Large corporates with multiple banks have been disrupted and have hit their credit limits. Now we have seen treasurers and corporates look to drive efficiency.”
The strategy that Goldman took with Marcus was to drive corporate deposits by simply paying more for them than the competition, and there have been suggestions that it will take the same approach in this market as well.
Pressed on the kind of rates it will be paying, Vergara confirms levels of between 10 basis points and 35bp for overnight deposit accounts, saying that Goldman aims to be very competitive at the top end of the range.
Smith adds: “There is a lot of cash in the corporate system looking for a home, and clients are looking to diversify. They have run up against their counterparty limits.
“As a new entrant we have the capability to take on deposits – and it is a very friendly environment for deposits.”