In the dynamic landscape of finance and technology, the merging of Wall Street and Silicon Valley has long been a captivating narrative. The alliance between traditional financial powerhouses and tech giants promises a synergy of expertise, resources, and market access. This convergence represents a profound blending of cultures, ideologies, and methodologies combining Wall Street's established financial acumen and Silicon Valley's innovative spirit. But in practice has this worked? This article will explore examples to determine the relationship between Wall Steet and Big Tech.
Apple and Goldman Sachs – A Cautionary Tale?
In 2019, giants Goldman Sachs and Apple partnered to create the Apple Card - a unique, titanium credit card that promised to combine the Wall Street prowess of Goldman Sachs with the trademark sleek functionality and ease of use of Apple hardware and software. The Apple Card partnership, whilst seeming like a winner for both companies when the deal was struck, has turned out to be disastrous for Goldman Sachs.
The key issue that Goldman has faced is Apple’s extremely consumer-friendly demands for the credit card. Goldman’s main priority would naturally be the profitability of the product, but as a small cog in the well-greased Apple machine, the card has held a very different position in Apple’s eyes; they have not needed it to be profitable in and of itself, so long as it effectively serves as a means to tempt more people into their product ecosystem and keep them there. Apple’s usage maximisation strategy includes a lack of annual, over-the-limit, foreign-transaction, or late fees as well as the inclusion of 3% unlimited cashback on Apple Pay, interest minimisation and much more. Furthermore, Earlier this year, Apple announced Apple Pay Later, competing with companies such as Klarna and Afterpay, all propped up by Goldman Sachs as the issuer. These features disregard profit maximisation, instead acting as a funnel to Apples ecosystem, of which you have to be a part of to enjoy the benefits.
This disregard for profitability in favour of consumer-friendly features, Goldman Sachs has had to endure billions of dollars of losses. Goldman’s ‘Platform Solutions’ division, encompassing the Apple Card as well as other fintech businesses such as Marcus (their consumer focused bank providing high-yield savings accounts), suffered a loss of $4 billion from 2020 to January 2023, with the Apple Card making up $1 billion of that. What’s more, the losses have all seemingly been in vain, as Goldman has solely handled the back-end of the Card, meaning they have not gained public awareness through the partnership - users likely don’t even know the Apple Card is backed by Goldman Sachs.
As a result of these huge losses, and how difficult it has been to “combine Apple's West Coast tech approach with Goldman's New York-style banking culture”, reports have suggested that Goldman Sachs is looking to exit its financial relationship with Apple. They are also reportedly in talks with American Express to offload the Apple Card and other ventures to them. It’s clear that Goldman’s ambitions to use the Apple Card to bolster its efforts to expand into consumer banking have been a dramatic failure, and the scaling back of Marcus - including scrapping plans for offering current accounts - only serves to emphasise this.
Why enter consumer banking?
Wall Street firms are attracted to the consumer banking space as it has many advantages over traditional investment banking:
It doesn’t suffer from the same cyclicality as the M&A business,
It doesn’t lose income from trading commissions when stock markets go down,
It isn’t levered to the extent of the capital markets business.
Instead, by taking deposits from individuals and lending out a portion of those deposits to credit card holders, homebuyers and businesses, consumer banking is a much more consistent business with a significantly larger Total Addressable Market. This is immediately clear from looking at the largest banks in the US. The top four banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) have all historically had a considerable consumer and retail presence alongside the investment banks that they operate. This differs from Goldman Sachs, fifth on the list, without an established consumer banking division.
All of Apple’s highly consumer-friendly and profit averse demands meant that other banks failed to strike a deal with them, including Citibank who were in advanced negotiations but pulled out amid doubts that it could earn an acceptable profit from the partnership. However, Goldman Sachs’ desire to enter the consumer banking space in line with its competitors meant that they agreed to a partnership with Apple. This symbolised a change in the bank’s philosophy, particularly after David Solomon was appointed CEO in 2018, with a pledge to diversify profit streams.
The Goldman Sachs and Apple partnership was not the first of its kind. A few of the more well-established banks mentioned above have also struck deals with FAANG, including the largest of them all, JPMorgan Chase. JPMorgan Chase, with over two centuries of history in the American financial sector, has embarked on an innovative venture with Amazon. This partnership was initiated in 2017 along with a co-branded credit card. It catered to a consumer trend that leads towards online shopping increasingly – a domain where Amazon has established significant dominance with over 300 million active users in 2022. This strategic collaboration positions JPMorgan Chase to effectively access Amazon’s extensive customer base. The co-branded card has offered great tailored rewards for Amazon purchases, with the shopping preferences of a substantial segment of the population. In 2018, online shopping constituted 14.3% of the US retail sales, underscoring the growing relevance of e-commerce in the contemporary retail landscape. In the ever-evolving financial world, where convenience and comprehensive services are key, JPMorgan Chase's partnership with Amazon strikes us as a particularly savvy move. Teaming up with Amazon, a company we all know for top-notch customer service, JPMorgan Chase isn’t just diversifying what it offers; it’s also seriously upping its game online. This is incredibly relevant today, as millennials and Gen Z, prefer online banking. But the joint credit card is more than a tool for expenses; it is a bridge linking traditional banking to our digital lives. It makes dealing with money smoother, fitting perfectly into how we operate daily. For JPMorgan Chase, venturing into everyday banking is quite the shift. It seems like it’s not only about chasing profits but also about remaining a key player in a world where tech and finance are merging rapidly.
In a parallel development, Citigroup with a wide presence and approximately 200 million account holders, announced a ground-breaking project with Google. “Cache: which launched in 2019, integrated banking services within the Google pat ecosystem, a platform servicing over 150 million users monthly. Through this alliance, Citigroup amalgamates its banking expertise with Google’s technological infrastructure, enhancing the consumer banking experience. This partnership is a testament to Citigroup’s commitment to adapting the digital preferences of modern consumers, offering a more integrated and user-friendly approach to managing financial activities.
Additionally, Citigroup teaming up with Google to start "Cache" in 2019 shows how banks are changing. They are using Google's tech knowledge to make banking easier and more modern. By adding banking services to Google Pay, Citigroup isn't just making transactions easier; they're also using Google's large number of users to attract more people. This shows that Citigroup is thinking ahead, understanding that more people now want their banking to be digital, quick, and easy to use. This partnership is a big step in making banking fit better with how we use technology every day. It shows that banks and tech companies working together is becoming really important, pointing to a future where handling our money is a seamless part of our everyday online activities.
In the intricate interplay between Wall Street and Silicon Valley, the alliances formed between financial juggernauts and tech titans epitomise both the promise and complexity of their convergence. The cautionary tale of Apple and Goldman Sachs’ rushed foray underscores the clash between profit-centric finance and tech's ecosystem-driven ethos, revealing the challenges when divergent cultures amalgamate. However, amidst these challenges emerge success stories - partnerships like JPMorgan Chase with Amazon and Citigroup with Google exemplify the potential synergy between finance and tech. These collaborations leverage tech giants' vast user bases to reimagine financial products for a digitally inclined audience. They signify not isolated incidents but herald a broader trend where financial institutions recognise the need to integrate with technology, adapting strategies to meet evolving consumer needs. These alliances symbolise not just an industry convergence but a paradigm shift, marking the trajectory towards a future where the seamless integration of financial expertise and technological innovation reshapes how we interact with and manage money in the digital era.