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Date: February 9, 2017
Assessing risk strategies against a new Installment Loan product from Goldman Sachs
How should risk management assess risk strategies for new competitive products? I will suggest some approaches in this blog. It’s been roughly 3 months since the full launch of the Goldman Sachs
Marcus™ installment loan platform. If you are sitting in either a traditional bank with a large credit card business like Chase, Bank of American and Citibank, or a predominantly credit card company like American Express, Discover or Capital One, you might be asking how the Goldman Sachs’ installment loan offering could change the competitive environment or impact your risk strategies. In my years running an enterprise risk management group that reviewed new competitive products, I provided early assessments as part of emerging risks to management and the Board until performance data could be analyzed. Is that approach sufficient?
Before I provide some comments, let me try to summarize in the paragraph below the “Marcus by Goldman Sachs” Installment Product (MGS) based on reference material cited below. Please check the MGS website for yourself as it does a thorough job explaining the product (Goldman Sachs).
MGS Trademark: “Debt Happens. It’s how you get out that counts.”
Active Acquisition strategy: Target prime credit card customers with 660+ FICO and interest rates higher than Marcus using a prescreened process that provides an invitation code.
Passive Acquisition through Website: The MGS website is open to all but Maryland residents. APR: Fixed rate from 5.99% to 22.99% with a positively sloped interest rate term structure.
Term: 24 months to 72 months
Amount: $3,500 to $30,000
Fees: Amazing but true! No late fees. No origination fee. No prepayment fee.
Default Pricing: Given the documentation, I see no ability to increase interest rates without calling the first loan in default and then issuing a second installment loan. Missed payments generate more interest which is payable at maturity.
Default reporting: Credit Bureau reporting is the major stick to encourage repayment.
Multiple Loans: No information provided on limits on multiple installment loans to the same borrower. Payments due: Within 16 days of statement but higher paydowns shorten duration. This is a clever benefit of the product that early paydown enables a higher effective yield relative to the duration of their liabilities.
One approach to monitor the early success of a competitive product is to review the customer commentary on social media as well as the regulatory complaint filings. This provides insights into the execution of the product launch. As of January 2017, there was limited customer feedback for MGS on the internet. One very small sampling of customer feedback from “www.supermoney.com”, shows that customers that get approved are relatively satisfied with the MGS process, and those that do not get approved are unhappy if they received a letter with the invitation code to apply (SuperMoney). The application process without the invitation code was simple and straight forward. Under certain conditions, MGS may require a copy of the driver’s license, W-2’s, or recent bank statements, which can be uploaded seamlessly. Overall, the initial launch website is well-designed and effective and supports a good, albeit not great, customer experience. My assessment is an opinion given that many existing retail banking, credit card companies, and fintech companies have additional information both in time and depth of consumer relationships and data sources that MGS may not have built as a new entrant into retail banking. Are the customer experience differences important enough to include in your assessment?
Another risk assessment approach looks at the technology platform and financial strength compared to the legacy platforms and funding sources in retail banking. What is the potential financial impact of a new entry into the market? The MGS platform was impressive as a cloud-based system with phone support and a customer-driven payment structure informing a narrow range of installment loan parameters. There is no question that MGS will have the funding and securitization strength to continue to grow and their expertise will improve. My assessment is that the launch of Goldman Sachs’
Installment product and acquisition strategy will cannibalize the credit card industry customers and force lower credit card interest rates for consumers with prime credit. This will lower the yield and net interest margin for all of retail banking. In addition, the use of 0% balance transfers and low teaser rates will become much less profitable for traditional credit card issuers. I also think that MGS is well-suited to absorb loans at a discount when poorly funded fintech companies face a recession and want to unload debt. This risk assessment approach speaks to the sustainability of the competitive and risk management threats of a new competitive product. The MGS installment loan product has a long tail of competitive implications.
We have already talked about MGS internal acquisition strategies for organic growth. Another approach is to assess the competitive threat for external acquisition. Goldman Sachs has already shown its ability to provide financing for fintech companies, and it is reasonable to assume they may acquire some of the fintech technologies to accelerate their growth. When a well-capitalized competitor has an appetite to make external acquisitions, it lowers the growth options for existing retail banking companies.
Finally, I have one last suggestion for a risk assessment approach for new competitive products. What would be the pre-mortem risk assessment of the new product in a macro-economic recession or under stress conditions? I am assuming the existing regulatory environment given that the Trump changes are uncertain. My experience spans commercial, small business and consumer lending through the Great Recession of 2008, the small business/internet recession of 2001, and the S&L interest rate driven recession of 1990-1991. Given the MGS structure and lack of restructuring options disclosed today, I assume that the MGS installment loans have a consumer-friendly prepayment advantage over credit card loans given that installment payments stay fixed given there are no late fees and default interest rates. However, the loss rates in recessions also reflect the rate of growth of balances just before the recession. Therefore, companies with very predictive customer credit models may encourage customer paydowns funded through balance transfers out to competitor installment loans or other products. My experience is that installment loans usually have higher default rates than the customer’s primary revolving credit facilities since the latter provides ongoing customer funding. There is an adage attributable to small business owners’ view of repayment during recessions, “a dollar borrowed is a dollar earned, and a dollar repaid is a dollar lost.” The credit card companies provide ongoing liquidity and funding with revolving credit and they can decide based on the probability of a borrower credit default to provide further funding or work with the customer using their recovery products approved within regulatory guidelines. During recessions, the consumer chooses whom to pay when she/he cannot pay all bills. My experience is that some lenders lose to other competitors based upon the competitor’s commitment for ongoing funding support, which today is untested at MGS.
This blog reflects personal views, opinions and positions associated with my role in RiskDirector, LLC. and those providing comments on this blog are theirs alone, and do not necessarily reflect the views, opinions or positions of the companies discussed, current or former employer companies, nor of the authors in the works cited. I make no representations as to accuracy, completeness, timeliness, suitability or validity of any information presented and/or commenters on my blogs and will not be liable for any errors, omissions, or delays in this information or any losses, injuries or damages arising from its display or use.
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