What the Goldman BaaS Stories Missed
Plus: Unlicensed Crypto Banking, Financial Health Tweetstorm
Hey all, Jason here.
Another crazy week (though, in 2020, isn’t that every week?). This week’s newsletter went in a bit of a different direction than initially planned, but that’s OK!
This week also debuts a new logo, courtesy of Miami-based freelance graphic and web designer Juan Tauber (if you need contract design work, check out his site).
The Angle All the “Goldman does BaaS” Stories Missed
It’s been two weeks since news broke of Goldman’s launch of its transaction banking APIs. The launch has been covered as breathlessly as you might expect, given it combines Goldman (always newsworthy) with fintech’s current red-hot trend: Banking-as-a-Service (though Goldman has been doing some elements of this through Marquee for a while).
While there has been plenty of coverage and analysis (for example here, here, here, here), the analysis has centered around threats to incumbents in transaction banking (JPMorgan Chase, Citigroup) and the product possibilities for corporate clients building on top of Goldman’s TxB APIs.
This is all well and good, and no need to rehash this analysis. The part missing is forward-looking analysis of what Goldman’s platform strategy is going foward -- in the consumer space.
While the publicly documented API functionality is limited, that it’s listed at all is an interesting signal.
Disclosure: I was part of the team that built and launched Marcus, Goldman’s consumer brand. The information in this article is from publicly available sources and news coverage.
Like its entry into the transaction banking market, Goldman has limited consumer business at risk of cannibalization by offering potential competitors the ability to build their own consumer products on top of Goldman’s APIs (unlike, say, JPMC or BAML).
Goldman has already shown a willingness to play second fiddle by providing infrastructure and services, by letting a partner own the customer-facing experience (see: Apple Card.)
While Goldman is certainly highly protective of its brand and reputation, if it can generate attractive risk-adjusted returns (Return on Assets / Return on Equity) by providing the services and letting a partner own the UX, it will.
And it shouldn’t be a surprise -- Goldman has quite clearly telegraphed two strategies that align with this: growing business lines that have stable revenue that aren’t correlated with volatile trading and underwriting, and building scalable ‘platform’ businesses.
If you think ahead to what other consumer products are in Goldman’s pipeline -- checking and wealth management (not to mention its BNPL-style product, live with JetBlue, and SMB products, like the already live line of credit) -- and imagine the underlying functionality offered as APIs, you start to see a picture of a full suite of “Marcus”-branded consumer and small business products AND that same underlying functionality offered via partner products built on top of Goldman APIs.
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Bankrupt Crypto Startup Cred Was Basically Running an Unlicensed Bank
I’m by no means an expert in the crypto space, but this story by Nate DiCamillo on Coindesk delving into the backstory of Cred’s bankruptcy piqued my interest.
The piece details a number of questionable alleged practices and deals that may have led to the bankruptcy; the part that got my attention was how Cred was operating as a defacto (unlicensed, unregulated) bank.
Cred offered a product, Cred Earn, whereby users would park their cryptocurrency with Cred in return for “interest” (the article quotes 6-10% -- high in a fiat dollar world, but not uncommon in the crypto space).
Cred, in turn, would use these assets (deposits, basically) to make loans and investments.
It turns out, some of these crypto deposits were converted to yuan and funnelled to a Chinese microlending platform, moKredit, where they were used to fund small loans to Chinese borrowers at rates around 40% (that lender was run by a Cred co-founder, which is a whole different conflict of interest problem).
So, functionally Cred was operating as a defacto (unlicensed, unregulated) bank, accepting ‘crypto deposits’ and using them to fund a warehouse line of credit to a company offering consumer loans, whereby Cred would pay its ‘depositors’ ~10% and keep a ~10% return for itself.
As a business model, it seemed to be working well enough -- until COVID-19 and its associated economic disruptions struck, causing moKredit to have difficulties making payments to Cred and, ultimately, contributing to Cred’s bankruptcy.
A Lagging Crypto Regulatory Environment - For Now
The regulatory environment inevitably lags market developments. Consumers exchanging fiat currency for crypto assets should have an understanding of the speculative and volatile nature of these investments.
But, as far as I’m aware, turning a dollar into a bitcoin (or Ethereum, Litecoin, or any other crypto) does not absolve a company from the need to comply with relevant financial laws and regulation.
There are companies operating in this space that have or are seeking the proper licenses for the activities they are engaging with (eg, BlockFi).
I expect both that we will see more stories like this and, with them, increased regulatory attention on the companies offering banking-like services through cryptocurrencies.
Accidental Financial Health Tweetstorm
I didn’t intend to start an occasionally heated Twitter thread when I posted this on Friday, but I seem to have hit a nerve:
If you’re interested in the conversation around consumer financial services and financial health, the conversation is worth a read.
I’m including it here so I can clarify some points about my position.
I’m referring to consumers (though you could extend that to small businesses), where there is an information and sophistication asymmetry between parties.
There’s a reason there is far more regulation around consumer finance than corporate -- it’s not a ‘fair fight’ when it’s an individual consumer vs. JPMorgan Chase or Bank of America (especially with binding arbitration clauses).
The kinds of products and business practices I am referring to are things like:
the types of ARM and interest-only mortgages that helped drive the 2008 financial crisis
subprime auto loans, especially where the loan-to-value is >100% and the loans outlast the car
personal loans for debt consolidation, where many end up worse off than they started
credit card ‘double cycle’ billing
credit card rewards that incentivize spending
credit card 0% and balance transfer offers (often targeting higher risk borrowers)
‘fee harvester’ cards targeted to subprime borrowers
bank account transaction reordering (high to low, to cause overdrafts)
“Startups” and “challengers” aren’t immune; Robinhood’s entire business model is premised on payment for order flow, and they use cognitive behavioral techniques to encourage their users to actively trade single stocks (MUCH worse investment outcome vs ETF) in order to drive its own revenue.
I’m not saying every financial product is structured this way. Several people in the thread gave examples of:
fee-for-service financial advice
investment management based on % of AUM
Startup Brigit (my example), which is functionally a flat fee advance (business model does not incentivize borrowing larger amounts or more frequently)
I would add to that list credit unions (in principle, at least) -- which, interestingly, are member-owned.
Several people argued my logic, if extended, would suggest that doctors keep their patients sick because it is more profitable. Well… if you’re familiar with analysis on ‘fee-for-service’ reimbursement models, when looking at a healthcare system in aggregate, that isn’t too far from the truth.
For more on the idea of selling “financial health,” I suggest you read David Birch’s recent article on the topic.