Goldman Sachs: The Quest for Eternal Youth

Hey friends,

Why write about Goldman Sachs?

Quite simply: it is the most interesting “intrapreneurship” case study of the past five years or so. No company – at the very least in the banking sector – has taken quite as big a swing at technological transformation. Goldman has invested more than $5 billion into a string of consumer products, including personal loans, a high-yield savings account, and a robo-advisor. It released the Apple Card with the Cupertino company and is partnering with Amazon on an initiative it refers to as “the Financial Cloud.” In an industry often characterized as slow-moving, Goldman Sachs has been a flurry of activity.

The reasons why the firm has taken these steps and the output of its efforts merit closer inspection. In today’s piece, we’ll dig into the catalysts, successes, and failures of Goldman’s attempt to bring a little Silicon Valley to Wall Street.

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Goldman Sachs: The Quest for Eternal Youth

Actionable insights

If you only have a couple of minutes to spare, here's what investors, operators, and founders should know about Goldman Sachs.

• A pivotal moment. Goldman’s investment in technology has come under increasing pressure. The firm’s price-to-book value lags competitors like Morgan Stanley. Some have argued that Goldman’s heavy investments in technology have dragged down its stock price.
• The impact of the financial crisis. The roots of Goldman’s consumer tech efforts can be traced back to the 2008 financial crisis. To survive, the firm turned itself from an investment bank into a bank holding company. Though this shift came with new responsibilities, it also opened the door to different products.
• The cost of consumers. The high-level figures suggest Goldman has succeeded in building a meaningful consumer business. It boasts 14 million users with $110 billion in deposits, interacting with a range of products. Such growth has come at a cost.
• Becoming a platform. Goldman’s most promising tech initiatives treat the firm as a platform for others to build upon. Its Transaction Banking (TxB) service seems to be growing rapidly with this approach.
• The challenge of cultural change. Succeeding as a builder of technology has required Goldman to change its culture. Though it has made headway attracting engineering talent, it still has a way to go.

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Banks are the tortoises of the business world. Through war and peace, poverty and prosperity, stagnation and innovation, financial institutions survive. Not all, of course – only the lucky, hardy few. But those that do can live to a ripe old age. Consider Banca Monte Dei Paschi di Siena, founded in 1472, in time for twenty-year-old Leonardo da Vinci to solicit its services should he have found himself fifty miles south of Florence. Despite being more than half a millennia old, “BMPS” still counts nearly 4 million customers and a few billion euros in revenue.
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By those standards, Goldman Sachs is a fresh-faced adolescent. Founded by former shopkeeper Marcus Goldman in 1869, the eponymous bank has developed into one of the world’s mightiest countinghouses. By assets under management, its $1.2 trillion is enough to rank fifth in the U.S., behind only JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. Net revenue totaled $59.34 billion in 2021.

Nature tends toward decay, however. Though Goldman may seem in reasonable health, it cannot expect to maintain it without effort. As Jeff Bezos wrote in his final annual letter, “Staving off death is a thing you have to work at.”

To its credit, Goldman recognized its mortality earlier than many of its peers. In 2014, the Manhattan-based firm started investing heavily in technology, mindful of its disruptive power. In the years since, it has built out a suite of consumer and enterprise tech products spanning savings, lending, credit, and investment banking. In the process, it has allied itself with modern trailblazers like Apple and Stripe.

At first glance, such initiatives appear impressive – a sign of positive momentum, rejuvenation in motion. A closer look, however, encourages a more cautious appraisal. While Goldman has successfully shipped fintech products, it's unclear whether they have repaid the firm’s effort and investment. The result is a storied institution that seems stalled between its past and future, with pressure rising. Goldman is estimated to have spent $5 billion on its consumer banking efforts, an expense many believe has dragged down its stock price. With earnings potentially dropping as much as 35% this year, such profligacy is under fire.

In today’s piece, we’ll discuss:

• Catalysts. What led Goldman to embrace technology – particularly products geared toward consumers? The answer involves the financial crisis, Occupy Wall Street movement, and the advent of fintech.
• Goldman’s tech efforts. Of its digital products, the bank is best-known for its high-earning savings account. As it turns out, Goldman has built many other products, including those geared towards the enterprise.
• The return on investment. Have Goldman’s tech initiatives produced the desired results? Amidst disappointments, there are also signs of promise.
• Where next? If Goldman is to successfully transform into a tech business, it will need to make adjustments across its product suite. That may entail downsizing existing efforts and changing its culture.

In a meme

​​​​​​​​For the pictorially inclined, here's the whole piece — all 5,700 words — in a single meme.

Puzzler

​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

Ross D hopped his way up to top spot last time around, edging out Chana B, Lindsay G, Jaey C, Joshua K, Jo E, Sashi C, Rishabh T, Michael D, Saahill D, Tushar J, Michael W, and Ankit J. All solved the mystery of the macropod.

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The answer? A kangaroo. Other good guesses included a frog and a pogo stick. Well played to all of you. Wishing you a lovely day, wherever you are in the world.
Until next time,

Mario