By Ryan Weeks on Monday 16 April 2018
Goldman Sachs’ online lending operation has got itself another million or so customers through the acquisition of Clarity Money.
Banking giant Goldman Sachs has acquired another weapon for its burgeoning fintech arsenal. Today we learn that US personal finance manager Clarity Money and its one million-plus customers will become part of the Marcus by Goldman machine – which currently offers online loans and savings products to US consumers.
Look, I hate to say I told you so, but: Why money management apps are doomed to fail or be bought.
Credit is not a fundamentally bad thing. Indeed, for many businesses and individuals it is an entirely necessary thing. What I feel is perhaps a worse thing, and what causes me a pang of discomfort, is dressing lending – some types of lending more so than others – up as something saintly.
I am reminded of a column once written by my colleague David Tuckwell, editor of ETF Stream, entitled Payday wolves in fintech clothing, which looked at how short-term, high cost consumer lenders are increasingly dressing themselves up as fintech firms first and foremost. In many cases, it is not technically incorrect, but it is arguably misleading. I see a similar thing happening in financial wellbeing.
Finding the right balance between making money and providing customer value is a central question in fintech. I recently penned a column about Tandem’s attempts to walk this tightrope. The neo-bank launched credit cards (brightly-coloured, of course) carrying APRs of 18.9 per cent in February. But the newly-licenced bank said that it would not encourage customers to spend beyond their means (thus incurring fees). It painted the ability to borrow as a useful tool – but not one that should be depended on.
Of course, this position feels counter-intuitive. Why launch a product that you don’t want people to use? Ricky Knox, Tandem’s charismatic CEO, addressed this question in an entertaining presentation at the AltFi Summit in March. His basic premise was that a bank – even a digital bank – has no alternative but to make money the old-fashioned way: by taking deposits in and lending them out. All the bells and whistles, the marketplaces, and so on, are there to drive customer benefit – but the need to lend remains. Tandem, incidentally, acquired money management app Pariti in March.
I do not believe that every digital bank will get the balancing act right. Some will lose sight of their ethos, others will forget to make money. But some of them will get it right – and it’s these baby-banks that are going to be fintech’s biggest success stories.
Goldman Sachs is not a baby-bank. Unlike Tandem and friends, Goldman Sachs does not need to get the balance right in order to survive. Unlike Tandem and friends, Marcus was not founded for egalitarian reasons, in my opinion. Let’s be honest: Marcus was conceived to capitalise on an opportunity. The so-called vampire squid did not earn its name lightly.
On the other hand, Marcus is a new brand, doing new things. The platform offers no-fee, fixed-rate personal loans for debt consolidation, home improvement, weddings, moving and relocations and holidays. Rates range from 6.99 per cent to 24.99 per cent APR with terms ranging from 36 to 72 months.
Through the acquisition of Clarity Money, Marcus will begin to offer its customers a means of controlling their finances, “harnessing the power of machine learning and intuitive design to provide actionable insights”.
A message from Clarity CEO Adam Dell announcing the acquisition included the following: “Our commitment to financial transparency and helping consumers make smart financial choices remains the same.”
I suppose my key question is this: can it really stay the same? As I’ve written before, online lenders have a terrible track record of buying and killing personal finance managers. See, for example: Prosper and BillGuard (dead), Avant and ReadyForZero (dead) and SoFi and Zenbanx (dead).
What must be understood is that personal finance management tools do not exist simply for the benefit of the customer; they can also serve as a valuable origination channel for a lender. Imagine that you were saddled with expensive credit card debt, or your business was facing an impending cash-flow crisis. Financial health tools can identify these things and suggest loan options for improving your position.
This is a good thing – but especially so if the tool in question is a standalone service, free to push products from a menu of options. When the tool is owned by a lender, there is only one option. That option may nevertheless represent an improvement in a borrower’s financial standing, but is it really the best solution for the customer? Or is it good business for the lender? Whatever the reason, integrations between online lenders and personal financial managers simply have not worked – and it feels that a fundamental and frankly obvious disconnect between their incentives is the reason.
Goldman is piling resources into financial wellbeing. In addition to the whole Marcus project and the Clarity acquisition, it led a £115m debt and equity fundraise for consumer lender Neyber in September 2017. Neyber is a platform that inserts itself into the fabric of the workplace to offer loans as an employee benefit, with repayments deducted automatically as a proportion of its borrowers’ salaries. A great idea, sure. A good thing for consumers? Quite possibly. A means of making money? Absolutely.
At last year’s Barclays Financial Services Conference, Harvey M. Schwartz, president and co-chief operating officer at Goldman, singled out online lending initiatives as the bank’s single biggest revenue driver over the next three years. By 2020, Goldman expects to have made more than $2bn in net revenues from its lending and financing efforts. Of these efforts, its consumer lending and deposit platform, Marcus, is the most significant.
If there’s a point to this article, it’s that Goldman fundamentally sees financial wellbeing as an opportunity – and that we shouldn’t lose sight of that fact amidst all this talk of transparency, empowerment and consumer-centricity.
To quote Stephen Scherr, CEO of Goldman Sachs Bank and head of its consumer and commercial banking division: “Clarity Money has pioneered a consumer-centric approach to personal finance that will help Marcus continue to put power in the hands of consumers.” We shall see.