The Future of Payments with Hogan Lovells and Goldman Sachs

With the growth of fully digital neobanks like Revolut and the ever-burgeoning impact of the battle for deposits, it was near foreseen that the investment banking colossus that is Goldman Sachs would launch its own retail banking arm (aptly called Marcus, in honour of Marcus Goldman, the firm’s founder) in October 2016.

On October 21, KCL Blockchain received the opportunity to hear from two key figures involved in the launch and development of Marcus: Kyle Williams, head of the EMEA Treasury and Consumer Finance Legal Group, previously an associate at Davis Polk & Wardwell, and Jonathan Chertkow, partner at Hogan Lovells’ Payments, Banking and Lending team.

It is no novelty for an investment bank to open up a retail branch, especially since the market crash of 2008. Marcus, however, is unique compared to JPMorgan Chase, Citi, and Morgan Stanley in its use of open banking APIs, non-reliance on legacy tech as well as the rapid and successive acquisitions of fintech startups which helped facilitate growth in terms of their customer base. Examples include Clarity Money (a personal-finance app) and Honest Dollar (a digital retirement savings tool).

In 2018, Marcus expanded to the UK (with Hogan Lovells and Ashurst advising on its entry), entering a developing market already occupied by challenger banks such as Starling and Monzo. On admission, it offered a no-fee service, liquid certificates of deposit, fixed-rate personal loans and high-interest rate savings accounts, much like aforementioned challenger banks and neobanks. In less than eight months, Marcus had acquired 250,000 customers. Monzo, one of the most prominent players in the neobank industry, had approximately 590,000 at the time. Although these figures aren’t too disparate considering Marcus’ relative novelty in the UK market, there is a stark difference in the total value of customer deposits, of which Marcus has a whopping $8 billion, compared to Monzo’s $91 million.

The panellists talked about the rationale behind the launch, which, on Goldman’s part, was based on the fact that the investment bank had seen drop-offs in ROI and profit margins due to the volatility of the bank’s focus on fixed-income securities. In contrast, consumer banks had proven to be a reliable and continual source of income. It was believed that Goldman’s household name recognition and industrial renown would, along with fintech acquisitions, attract a larger customer base. The launch was the emanation of a wider shift on Goldman’s part towards a consumer-focused business branch, also evident in the company’s role in the launch of the Apple Card, which the panellists also mentioned.

The downside to Marcus, as Kyle pointed out, is the fact that it has no mobile app of its own, which disadvantages it against neobanks like Monzo, though this has done little to curtail its success. Marcus has, despite this, been a successful venture on Goldman’s part, having already accrued over $50 billion in deposits after just three years on the market.

After the initial panel discussion, a Q&A section followed, in which the panellists were asked questions in turn both by audience members as well as the KCL Blockchain representatives on the stage.

After being asked about why Marcus was not operative in the entire EMEA region, Kyle went on to mention that Marcus’ expansion to certain markets was limited by factors that made it untenable. Germany, for instance, has been seeing a decline in bank activity as a potential recession approaches. Germans in general also tend not to take out loans very often, rendering new consumer banking launches in Germany more or less pointless at this stage. Moreover, a shift in the consumer direction is a new move for Goldman and expanding this new model even to trusted markets where the company has a solid foundation is best done cautiously (it took Marcus 2 years to reach the UK).

Ending on a high note, the last questions raised related to the regulatory impact on fintech companies and particularly on developing payment service providers such as WePay and AliPay, as well as the future of further IoT integration into payment systems.

The panel was a realisation of KCL Blockchain’s vision, bringing together all three strands that make up the society. Along with the business aspect of banking, the underlying tech and the regulatory legal concerns came the broad implications of a developing industry that stands to shape the future of banking as we know it.