The Journal. - Why Goldman Sachs and Apple Weren't Happily Ever After

Episode Date: December 6, 2023

Apple has filed for divorce from its partnership with Goldman Sachs.. It also marks a swift about-face for a partnership that, just last year, was extended through 2029. WSJ’s AnnaMaria Andriotis discusses the messy details she’s learned about the breakup. Further Reading and Watching: - A Divorce With Apple, Internal Strife: How Goldman’s Main Street Bet Failed  - Apple Pulls Plug on Goldman Credit-Card Partnership  - How Goldman Sachs Fumbled Its Consumer Business  Further Listening: -The War Inside Goldman Sachs  Learn more about your ad choices. Visit megaphone.fm/adchoices

In 2019, Apple made a big announcement, and it didn't have anything to do with a new tablet or laptop. Today, we're introducing a brand new service, and we call it Apple Card. A credit card. They will have lower interest rates and no penalty interest fees. The card can be approved in minutes and begin using to pay via Apple Pay immediately. The credit card rolled out in 2019.

At the time, I was actually covering the credit card sector. That was my beat then. And I thought, oh, wow, this is a really big deal. That's our colleague, Anna Maria Andriotis. She says this credit card wasn't just a big deal for Apple. It was also a big deal for the bank that helped create it, Goldman Sachs. Goldman is an investment bank that caters mostly to the ultra-wealthy. But a deal with Apple gave the company a chance to win over everyday customers. Everybody knows Apple, right? And what better way to make it clear to consumers and your future competitors in the credit card space

that you are very serious about being a player in the credit card sector. But their relationship was messy. And just a few years after the two companies got together, Anna Maria broke the news that they were splitting up. When I heard that the partnership was moving in the direction of ending, it was difficult for me to initially believe because this partnership in many ways is still in its infancy. And it was only last year when Goldman Sachs said, only last year when Goldman Sachs said, we have extended our partnership with Apple to the end of the decade. It's like falling in love really quickly and then falling out of love really quickly. It's like someone asking to get divorced just a few months after renewing your vows.

Exactly. It's like somebody asking for divorce a few months after renewing their vows. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Wednesday, December 6th. Coming up on the show, inside Goldman Sachs' Failed Marriage with Apple. Put your hands together for Lady Raven. Dad, thank you. This is literally the best day of my life. On August 2nd...

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Trap, directed by M. Night Shyamalan, only in theaters August 2nd. So why did Apple want to launch this credit card? This wasn't just a credit card play. Apple has been pushing deeper and deeper into the payment space for a long time. For Apple, what this card has meant is helping to make it more ingrained, more central to people's payment habits. The end game here is to have more and more people using the Apple ecosystem for payments. Apple really wanted to just change the game. That's what this card is.

And a widely used credit card would help Apple bring in more revenue. When someone pays with a credit card, businesses have to pay a transaction fee, and Apple would get a cut of that. To get a new credit card off the ground, Apple needed a partner, but a lot of banks were wary. Banks have had a love-hate relationship with Apple, the ones in the consumer space,

who have looked at it with great suspicion and concern that this company wants to break up the typical payments model and replace us. And if it does, we have a big problem. On top of that, Apple had a long list of demands for its banking partner. They wanted a bunch of things. They wanted the bank to take a back seat in terms of marketing and for this really to just be known as an Apple card, period. They wanted pretty much everybody approved for credit cards, no matter what their credit score was. They wanted everybody to get their statements

at the same time to have this sort of clean customer service experience as they saw it that doesn't exist pretty much anywhere else in the credit card sector. And the list goes on and on. They've been described as a very demanding partner, which isn't surprising given who they are. The more powerful the partner, right, the more leverage they exert on the banks with whom they partner. This was enough to turn off most banks, but not Goldman Sachs. Goldman didn't have a credit card history,

a portfolio of accounts to defend. It was new and Apple wanted to kind of break the traditional credit card model. The other banks weren't willing to do that. So what those banks weren't willing to do was not a problem for the credit card team and the senior executives at Goldman back then to offer because they were also of the mindset, let's be the bank that enables different terms on credit cards and gets these great partners and in the process becomes this formidable competitor to the incumbents. It doesn't matter if we break the system because we don't have any skin in that game. We're not in that old system. Exactly.

Because Goldman didn't have a credit card business and it wasn't worried that Apple was coming for its business. So what Apple found in Goldman was a massive bank willing to help it break the traditional credit card system. Why though? Goldman has been one of the most profitable banks serving high net worth clients for such a long time. Why would a bank like that, that's been so historically successful, want to get into the consumer business? Just everyday people? It needed to diversify its revenue stream. Investment banking and trading are very volatile businesses. The highs are high and the lows are low, and they're prone to big swings. What Goldman leaders had realized was something else is needed to offset the lulls in dealmaking

and trading, and they placed their bets on consumer. It was just as simple as that. Another revenue stream that would offset bad years in trading and or investment banking. The card Apple and Goldman launched was a hit with consumers. It was sleek, just like a lot of other Apple products. So now this flashy card rolls out with a super simplistic design, like nothing that was out there from an appearance standpoint. Yeah, it was like a hard piece of metal. I remember it would like clang on the table. Yes, they tapped into what at the time was a growing trend in the credit card space, that the most premium, quote-unquote, special credit cards were made of metal,

that, you know, you felt hefty, you know, like this card looked pretty. The card was integrated into Apple's Wallet app, and if cardholders used it on Apple Pay, they'd get 2% cash back. And if cardholders used it on Apple Pay, they'd get 2% cash back. The easy process has basically made me use the Apple Card as my default Apple Pay option, which is great because that's how you get the maximum of the 2% rewards. And I could walk into Target or a gas station and use that card as my Apple Pay, and I would use it immediately.

After the Apple Card came out, Anna Maria says she asked other banks how they felt about losing out on the partnership. So there were a number of banks that were bidding on this. And you know, when they lost, I remember some of my sources telling me at the time, again, I was on the credit card beat. I wasn't covering Goldman yet. And they were saying to me, oh, you know what? The economics on that deal were just horrible. Goldman got a really bad deal. And I discounted that. I downplayed it internally because every time a bank loses out on a co-branded deal, because those are very competitive, they'll say, well, we don't really care for it because the financial arrangement that the partner wanted was so bad.

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Air Mile. Goldman's partnership with Apple had issues from the get-go. When the card first rolled out, there was an ad that ran in which it said something along the lines of a credit card designed by Apple, not by a bank. But there were many people at Goldman who I spoke to who were livid about it, who were livid about, like, we did all this work. And are you kidding me? They're going out with an ad that says not a bank? And are you kidding me? They're going out with an ad that says not a bank? Apple has wanted all along as many people as possible to get approved for this credit card. Well, who takes the credit risk? Who holds the balances? Who deals with loan losses and having to set money aside to cover for future loan losses? That's the bank. And that long list of Apple demands that Goldman had agreed to was also causing headaches. One example that has had a pretty big impact on Goldman has been customer service. So most banks, when they send out their credit card statements to people,

we don't get our statements on the same day. not like let's say you and i have the same exact credit card from the same exact bank you and i probably aren't going to get our statements sent to us on the same day yeah my credit cards always seem to close on some like random you know the 13th or whatever and so why does that happen because imagine if everybody who had a particular type of credit card got their bill on the same day, saw, oh, I have a fraudulent charge. Oh, I don't recognize that charge. What is everybody doing? They're all going to contact customer service. That's what's been playing out with the Apple credit card. Apple insisted that all cardholders get their billing statements at the very beginning of the month. So that has flooded Goldman's customer service department.

They got inundated. These customer service issues with Apple's credit card have also drawn regulatory scrutiny. 2022 was not a good year on the regulatory front for Goldman Sachs. It disclosed in the summer of 22 that the Consumer Financial Protection Bureau was investigating its credit card practices, including how it resolved billing disputes and refunded cardholders. That probe continues. Goldman has disclosed the investigation and said it's cooperating. Despite these issues, Goldman forged ahead with Apple. In October of last year, Goldman said its Apple partnership was being extended through the end of the decade, and the two companies launched a savings account together. But partnering with Apple wasn't the

only thing Goldman was doing to grow its consumer division. By the time the Apple card came out, Goldman had taken several steps into the consumer sector. It offered high-interest savings accounts and personal loans. It spent a lot of time trying to launch a checking account, which never got off the ground. And it paid nearly $2 billion on a lending company called Green Sky. And it paid nearly $2 billion on a lending company called GreenSky. All these moves to expand the consumer division, especially the GreenSky acquisition, raised concerns among some Goldman executives, who brought it up to the company's CEO, David Solomon.

There were partners at Goldman that said to David that they didn't think this was the right acquisition. They listed a number of reasons also overlapping this time period as they're looking at launching a checking account. Some partners in the consumer business said to David, we really don't think we should do this. We need to remain focused on a certain number of products and not keep branching out at least at this pace. In 2022, the company decided to review its nascent consumer division. So this review happens, and what senior leaders conclude from it is that they did not have the confidence that consumer would produce the returns that they would have wanted to see, the returns that they expect in the near term.

Investment banking, trading, asset management, wealth management to produce the other pieces of Goldman. The review was pretty unequivocal. The consumer business was not doing well. And it's continued to suffer. From 2020 to the third quarter of 2023, Goldman has lost roughly $5.6 billion on a pre-tax basis on a big chunk of its consumer lending business. The figure includes money that the bank set aside to cover for potential future losses

if people don't pay their bills. So you have a business that's not profitable, losing billions of dollars, regulatory scrutiny, angst internally, that's getting louder and louder about what are we doing? Why are we throwing, this is what's been shared with me, why are we throwing good money after bad for every dollar that you're putting into this business? You could be putting into making us an even bigger powerhouse in investment banking and trading, etc. All this turmoil led Goldman to start considering a breakup.

Early this year, Goldman had told Apple that it was planning on pulling back from consumer lending and indicated that that could include the Apple credit card. Goldman had started talking with American Express to gauge its interest in whether it would want to take over the Goldman program, the entire partnership. Everything I knew up until that point in covering Goldman was Goldman wanted out and what I thought was really interesting about the way this all played out is that Apple knew that Goldman wanted a divorce and Apple basically said you're not going to divorce me I'm going to divorce you and sent the proposal. It kind of reminds me of when I was in the eighth grade

and I was too cowardish to break up with my girlfriend. So I just started telegraphing to everybody that I didn't want to date anymore. And then she broke up with me when she heard about it. Oh, God. Apple wants out of the partnership in roughly the next 12 to 15 months. Meanwhile, Anna Maria says that many employees in the consumer division at Goldman, particularly those who work on credit cards, have been leaving.

Apple was the centerpiece to Goldman's consumer business. It was the crown jewel. It was the most well-known program, the biggest program, the most coveted one. And the decision for Apple to pull the plug means that Goldman's time in the consumer lending space is pretty much over. Well, that's it. I mean, that's a wrap, basically. I mean, that's a wrap, basically. Why didn't this work out for Goldman Sachs? It didn't work out for several reasons. They tried to do too much too quickly. This isn't deal-making where it's, get me a credit card deal every year or every other year.

This takes time and it's get me a credit card deal every year or every other year. This takes time and it's costly and there's regulatory overhang here. I don't think that was actually fully understood. Certainly not at the pace they were moving at. Was this breakup inevitable? I mean, this really is a love story that started out, you know, with the highest of highs, you know, best of intentions. And that is reflective of the evolution of Goldman's stance on how big or small it wanted to be in consumer lending. And I would say it's something that started out like a really great story and is ending in what looks to be a very That's all for today. Wednesday, December 6th. The Journal is a co-production of Spotify and The Wall Street Journal.

And to my 8th grade girlfriend, if you're listening, I'm sorry. Thanks for listening. See you tomorrow.