The ability to capture a stable source of revenue with relatively low costs and investments, combined with the value these business bring both in terms of customers for cross-sell and cheap financing make Main Street extremely attractive to these Wall Street giants.
Remember Bob Dylan's song, The Times They Are a-Changin'? The recent changes Wall Street is going through can add to its lyrics. Two pure-play wall street giants, Goldman Sachs and Morgan Stanley, which have been happy dealing with the ultra rich and institutional clients for decades unlike their more diverse competitors on Wall Street, are finally entering Main Street to meet the masses. As they foray into consumer business through Marcus and E-trade respectively, they mark a changing paradigm in Wall Street.
In today's post, we will briefly touch upon how these firms are entering the new space, try to decode the reasons driving this fundamental shift, and what it means for the consumer financials landscape.
The Path to the Main Street
After staying immune to the consumer-facing businesses for decades of their history, both these banks rushed to quickly register themselves as bank holding companies during the financial crisis, to be eligible for bailouts. This formally gave them the licence to start catering to the masses by means of deposits and other retail services.
However, it was not until very recently that these two started entering the main street not by opening branches at the corners, but my means of FinTech.
While Goldman Sachs is paving its path with its in-house developed digital-only bank Marcus, released in late 2016, Morgan Stanley started its journey a few days back, by announcing the acquisition of E-trade, an app-based trading company.
Three years into the game, Marcus currently provides deposit and loan services through its app for US and UK markets, which according to CEO David Solomon, plans to diversify offering other traditional consumer services like checking accounts, payment solutions, credit cards, mortgages and auto loans, and insurance products, all through its app. It also plans to introduce more co-branded products on the lines of its first credit card with Apple. On the other hand, in addition to providing Morgan Stanley access to its close to $56 billion deposits, E-trade comes with nearly $360 billion of wealth to manage from 5.2 million mass young affluent clients.
Why are these Wall Street giants entering Main Street?
Firstly the retail market makes for a fairly reliable revenue source. The major factor seems to be the search of these firms for fresh stable revenues to support their traditional unpredictable ones like trading and investment banking fees. As Morgan Stanley CEO, James Gorman puts it in his acquisition call, that his firm was seeking a "durable source of revenue"; in the aftermath of the financial crisis, this has been one of the concerns for Goldman Sachs too, because of its heavy reliance on unpredictable trading revenues compared to its competitors. With online app based model set to contain costs that comes with traditional branches, Goldman Sachs' Marcus seems set to continue offering the highest deposit rates to retain the growth momentum in the US market, further supported by its deep pockets.
While durable revenue is one direct benefit for these firms, there are significant synergies too that exist here. Forming one of the cheapest and sticky sources of funds for these firms, deposits can stay for long helping them enhance their growing lending business to institutional and corporate clients. This assumes importance, as some restrictions pertaining to taking short term lending after the financial crisis has put little cost pressure on these firms from the sourcing side. Also, these channels are set to offer more clients on the wealth management side for both of these players, which again is a relatively stable revenue source compared to trading and investment banking. However, clients here might be mostly affluent masses rather than high net worth individuals they are currently catering to.
Implications for the consumer financial landscape
The entry of these global behemoths with deep pockets and strong financial expertise into the consumer market is certainly a positive for the customers. There are numerous tech heavy players who are also doing quite well for themselves in the space, that we will try to cover in a future piece. For these Wall Street giants, while all these remains good signs from the financial side, it is to be seen, how the highly competitive workforce which takes pride in catering to high end clients change themselves to collaborate and cater to the masses at large competing with players with sometimes vastly superior Tech stacks.
About the Author: The post is written by our EZPP partner Venkata Devarapalli. Venkata is a graduate from IIM Calcutta currently working with Crisil. He writes about Macroeconomic policy & BFSI at ZappChai.